56 PA R T I INTRODUCTION AND BACKGROUND

axis; the amount of hours worked in aggregate in the market (H) is on the
horizontal axis.
Unlike Figure 2-13, the demand for the good (the single mothers hours of
work) comes from firms, and the supply comes from individuals. Nevertheless,
as in Figure 2-13, the demand curve slopes downward (as wages rise, firms
demand fewer hours of work) and the supply curve slopes upward (as wages
rise, individuals are willing to supply more hours of workassuming that sub-
stitution effects are larger than income effects).
Suppose that, in the absence of the TANF program, there are no other gov-
ernment interventions that affect the labor market. In that case, without TANF,
labor supply, S1, intersects labor demand, D1, at point X, and the market is in
competitive equilibrium, maximizing social efficiency at hours of work H1.
When TANF is introduced, however, single mothers work fewer hours,
reducing the supply of labor at every wage, so that the supply curve shifts left
to S2. The labor market will reach a new equilibrium at point Y. Relative to
the original equilibrium, the number of hours worked has fallen from H1 to
H2. This reduction in hours worked causes a deadweight loss of the area A
B C D E. The difference between H1 to H2 represents hours of work
that the single mother would happily provide to the firm, and the firm would
happily demand from her, were it not for the TANF program. Social efficiency
has thus fallen.
If TANF benefits are cut, the labor supply of single mothers increases and
the supply curve shifts out to S3. At the new equilibrium Z, the single moth-
ers supply H3 hours of labor, and the deadweight loss has been reduced to
D E. That is, social efficiency has grown by the area A B C due to this
reduction in TANF benefits.
We can now quantify the social efficiency gain to lower TANF benefits:
area A B C is gained when single mothers increase their supply of labor.
If we know the slopes of these demand and supply curves, we can then meas-
ure this social efficiency gain. These slopes can be estimated using the types of
empirical methods we discuss in the next chapter.
Equity Given this large efficiency gain, why not cut TANF benefits? Indeed,
why have the TANF program at all? As just noted, governments have programs
such as TANF because their citizens care not only about efficiency but also about
equity, the fair distribution of resources in society. For many specifications of
social welfare, the competitive equilibrium, while being the social efficiency-
maximizing point, may not be the social welfare-maximizing point.
Currently, the share of single mothers living below the poverty line, a meas-
ure of the minimal income required to live in the United States, is 35.9%,
compared to only 10.2% for all families.6 Cutting TANF benefits would
therefore worsen outcomes for a population that is already one of the worst
off in society. Cutting TANF benefits could have dramatic equity costs that
offset the efficiency gains.

6
U.S. Bureau of the Census (2005b), Table 4.