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The Income Volatility See-Saw: Implications for School Lunch
Constance Newman
Economic Research Report No. (ERR-23), August 2006
USDA food assistance programs aim to provide a safety net for
low-income families in times of need. Income volatility challenges
the functioning of that safety net. Low-income families are
often on a see-saw of income changes that make it difficult
for program administrators to accurately target benefits and
to define sensible eligibility periods. Which families are low-income
and for how long are important issues for program policy, and
income volatility directly affects those policy decisions. Also,
flexible food assistance that smoothes household food consumption
over the ups and downs of labor force participation is important
in providing assistance to the working poor.
What Is the Issue?
Understanding the implications of income volatility for food
assistance program eligibility is particularly important if
the programs are to effectively serve the needy. Questions that
must be answered include how often does program eligibility
for low-income families change within a year? How does income
volatility compare across income groups? What are the labor
force participation and household changes most associated with
short-term income changes? We answer these questions using nationally
representative household survey data.
We also looked at how income volatility affected eligibility
for free and reduced- price lunches in the National School Lunch
Program (NSLP). USDA had been concerned about “overcertification”—where
local school food authorities erroneously certify that children
are eligible to receive free or reduced-price lunches. New rules
in the Child Nutrition and WIC Reauthorization Act of 2004 redefined
eligibility so that income volatility has become less relevant
as a source of the erroneous certification. However, understanding
the past role of income volatility in the NSLP is important
because income volatility can affect policy changes for other
food assistance programs that aim to support working families
in times of need.
What Did the Project Find?
Our study found that the lower a household’s income,
the more likely it is to face volatile swings in monthly income.
Such income volatility meant that, before the recent rule changes,
the children in these households moved back and forth across
the eligibility threshold for the NSLP. Changes in total household
hours worked and in the share of adults working were the primary
causes of the changes in monthly income.
Income Volatility Dynamics
We measured monthly income changes across the threshold that
marks income eligibility for a reduced-price school lunch. That
threshold is found by first comparing income to the poverty
line that applies to the household’s size. When income
is at or below 185 “percent of poverty,” a student
is eligible for a reduced- price lunch. We found that, for households
with income below 185 percent of poverty in at least 1 month
of the year, two-thirds (65 percent) had income above that threshold
in at least 1 other month in the same year. Households with
average monthly income between 130 and 240 percent of poverty
were particularly affected by volatility, crossing the eligibility
line five times per year on average.
The most important factors associated with exit from or entry
into program eligibility (an increase or decrease in income
relative to 185 percent of poverty) were similar. In both cases,
changes in total household hours worked and in the share of
adults working were the most likely to lead to exit or entry.
The results point to the importance of the labor market participation
of all household members as a source of short-term income volatility.
Households were grouped into six income-to-poverty categories.
Income volatility was found to be successively higher for each
lower income-to-poverty group. The monthly income variation
for households below 75 percent of annual poverty was double
that of households above 300 percent of annual poverty.
Effects of Income Volatility on NSLP Error Rates
Month-to-month income changes could feasibly explain a large
portion of estimated overcertification rates. In the 3 school
years examined, an average of 27 percent of households that
were income eligible for either a free or reduced-price lunch
in August were no longer income eligible for the same lunch
benefit by December of each year. This estimate accounts for
much, or all, of previous overcertification estimates, which
range from 12 percent to 33 percent. But, because we do not
also estimate the extent of the other sources of error, this
estimate must be qualified. Other studies have found that misreporting
and administrative error also contribute to overcertification.
Furthermore, this estimate does not take into account participation
behavior of eligible households.
How Was the Project Conducted?
We used 1996 panel data from the Survey of Income and Program
Participation on households with children and several other
methodological approaches to understand income volatility and
how it affects eligibility dynamics. We used three complete
school years from the panel: 1996-97, 1997-98, and 1998-99.
We compared coefficients of variation of monthly income across
income groups. We examined changes in income eligibility for
NSLP within the school year for different subpopulations.
We used a hazard model to estimate the causes of income changes
in eligibility. Our analysis was conducted twice to analyze
separately the factors that could lead to decreases or increases
in income across the threshold of 185 percent of poverty. A
rich set of events that might trigger an increase or decrease
in income-to-poverty status was tested while also controlling
for unchanging demographic and labor market participation characteristics.
Under the old NSLP rules, by December, a sample of families
was asked to provide documentation of their current income to
verify their continued eligibility. In the survey data, we traced
monthly income changes from the beginning of the school year
to December. This exercise provides an estimate of the effect
of income volatility on overcertification errors. We also examined
the effects of using annual income as a hypothetical eligibility
criterion versus the criterion of 1 month of income.
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