Lower Earnings: An Unintended Consequence of Section 8 Voucher Receipt
In 2008, over 2.2 million households containing over five million individuals used a Housing Choice Voucher – commonly referred to as a Section 8 voucher – to help pay the rent. With so much focus on the budget, every program will have to prove its effectiveness, including large and popular programs like Section 8.
As evidenced by its lengthy waiting lists and large number of recipients, the Section 8 voucher program is widely used and provides valuable assistance to millions of families annually. The program design, however, has some components that appear to result in short-term declines in recipient earnings. The good news is that slight changes to the program design have the potential to correct this problem and possibly lead to higher incomes for participants.
According to the Department of Housing and Urban Development (HUD), the Section 8 voucher program is primarily designed to enable “very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market.” Like most policies, however, the Section 8 voucher program has had some unintended consequences. One side effect is a reduction in earnings for people in the years immediately after receiving the vouchers. Using detailed data from the state of Wisconsin, my colleagues and I conducted a study comparing the earnings of Section 8 voucher recipients to the earnings of non-recipients with similar prior earnings histories, county of residence, demographic characteristics, and other measures.
The results of this research indicate that, on average, receipt of a Section 8 voucher reduces earnings by about ten percent in the initial year of receipt. These negative effects are most pronounced in the first year, but fade over time. After six years, there is no evidence of a difference in the annual earnings of recipients and non-recipients. This pattern has been confirmed by other studies of the program as well.
When looking at these data, there are several features of the Section 8 program design that can explain this initial and pronounced negative effect on recipient earnings.
First, the voucher program requires participants to contribute 30 percent of their income towards rent. This provision is intended to ensure that, to the extent possible, recipients contribute to their housing costs. Yet it also effectively acts as a 30 percent tax on their earnings. As any economist will tell you, taxes create a negative incentive to work.
Second, the rental subsidy provided by a Section 8 voucher increases recipients’ incomes, which may ultimately have a negative effect on recipient earnings. That’s because the increase in income may result in a phenomenon that economists refer to as “the income effect,” whereby voucher recipients choose to work fewer hours.
Third, to continue to receive a Section 8 voucher, individuals must fall below an income ceiling. Exceeding it by even a few dollars can jeopardize receipt of a voucher worth thousands of dollars annually. Voucher recipients are quite aware of this eligibility threshold, and may take steps to ensure they stay below it.
Finally, Section 8 voucher recipients often relocate when they first receive a voucher. Although this relocation may be beneficial in the long-term, it likely disrupts social and labor market networks in the short-term. These short-term disruptions may also help explain initial reductions in earnings, as recipients move and take time to find new jobs.
Although our research raises concerns about the short-term earnings effects of Section 8 vouchers, we also uncovered some evidence in a follow-up study that may help policymakers take steps to mitigate these negative impacts.
In this second study, we conducted an analysis in which we compared the earnings of voucher recipients to the earnings of public housing residents in Milwaukee, the majority of whom reside in Hope VI projects, a HUD program to “eradicate severely distressed public housing.”
Hope VI residents are subject to many of the same program design features as voucher recipients—they must contribute 30 percent of their income towards rent and then the Hope VI program pays the remainder of the rent due. Milwaukee Hope VI residents must also, however, sign a lease addendum that requires them to either be employed or actively taking steps to become employed.
When we compared the earnings of these two groups, we found that the residents of public housing – the majority living in Hope VI projects – earned about ten percent more than voucher recipients in the first year of receiving housing assistance. Because both groups are subject to similar program design features, this suggests that requiring residents to sign a lease addendum stipulating that they will be employed or looking for employment has the potential to mitigate the negative effect of voucher receipt on earnings.
Based on these results, policymakers should consider adjusting aspects of the Section 8 program to continue to help individuals secure safe, sanitary, and affordable housing without creating incentives for short-term reductions in earnings.
Deven Carlson is a Ph.D. candidate in the Department of Political Science at the University of Wisconsin-Madison, a graduate research fellow for the Wisconsin Center for Education Research, and a graduate assistant for the Institute for Research on Poverty.