How well low-income families have fared since the nation's welfare system was overhauled in August 1996 depends on whether they stayed on welfare, left, or avoided it altogether, says a new analysis from the nonpartisan Urban Institute.

Using the institute's National Survey of America's Families, researchers Pamela Loprest and Sheila Zedlewski found an improving picture between 1997 and 2002 for families on welfare, a relatively stagnant situation for those who left welfare, and deteriorating circumstances for families with no welfare experience. Their research is in " The Changing Role of Welfare in the Lives of Low-Income Families with Children ."

The percentage of welfare recipients with jobs increased dramatically during the period, while it declined among former recipients and those avoiding welfare. Average income improved for welfare recipients, but welfare leavers and the nonwelfare group saw little change.

Although most welfare families had incomes below the federal poverty level, fewer were stuck in deep poverty (living on less than half that amount). Families that left welfare had higher incomes and worked more than those on welfare, but a smaller slice of their income came from earnings in 2002 than in 1997. Their use of government disability benefits also grew between 1997 and 2002, along with such government work supports as child care, food stamps, and health insurance.

As for low-income households that had never been on welfare, fewer were working in 2002 than in 1997, and their incomes had stagnated. Of the families headed by single parents -- those most likely to have been on welfare under the old rules -- the number experiencing extreme poverty also grew.

"There's good news and not-so-good news for low-income families," says Loprest. "More single parents have jobs, including some on welfare and some dealing with poor health and limited education. However, the drop-off in employment among welfare leavers and nonwelfare families shows just how sensitive the low-wage labor market is to economic forces."

With the 1996 legislation, families with little or no income were no longer automatically entitled to welfare, and most states began to discourage welfare entry and require new beneficiaries to pursue paid work. States got incentives to encourage marriage and the formation of two-parent families and to reduce out-of-wedlock childbearing. The dramatic decline in the welfare caseload -- from 4.5 million families in 1996 to 2.1 million in 2002 -- was the most stunning outcome.

Among the study's key findings:

• Work increased among welfare recipients. The share of beneficiaries working or in a work-related activity increased from 20.9 percent in 1997 to 29.2 percent in 2002. Work declined among welfare leavers and nonwelfare families.
• Some groups gained income and some saw it fall. Among single parents living alone, deep poverty declined for welfare recipients from 69.3 percent to 52.6 percent between 1997 and 2002. For single parents living alone who had never received welfare, deep poverty increased from 19.5 to 25.8 percent.
• Some families seemed to have fallen through the cracks. In 2002, 20.8 percent of former welfare recipients lacked cash welfare or disability benefits, a job, or a working spouse. They were significantly more disadvantaged than others no longer on welfare, with lower income, more barriers to work, and a higher likelihood of food insecurity. Twelve percent of low-income families that had never received welfare were disconnected from assistance programs in 2002.

In their study, Loprest and Zedlewski discuss their findings in light of February's welfare reauthorization, which requires states to increase work participation by October or face financial penalties.

"The tougher work requirements will surely test states," says Zedlewski. "They must find a way to balance efforts to increase work among current participants, address the needs of the hardest to serve families in their caseloads, and provide work supports to welfare leavers and low-income families not on welfare."

"The Changing Role of Welfare in the Lives of Low-Income Families with Children," by Pamela Loprest and Sheila Zedlewski, is the latest study from the Urban Institute's Assessing the New Federalism project. Loprest is a principal research associate in the Urban Institute's Income and Benefits Policy Center. Zedlewski is the center's director. The study is available at http://www.urban.org/url.cfm?id=311357 .

The Assessing the New Federalism project, which analyzes the devolution of responsibility for social programs from the federal government to the states, is supported by The Annie E. Casey Foundation, The Robert Wood Johnson Foundation, The John D. and Catherine T. MacArthur Foundation, The California Endowment, and the Charles Stewart Mott Foundation.

The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance challenges facing the nation.