The effect of lowering welfare payment ceilings on children's risk of out-of-home placement

•Little research identifies causal effects of changes in income on child maltreatment.•We use a Danish policy shock to estimate effects of changes in income on children's risk of being placed in out-of-home care.•We find very large effects, with the shock dramatically increasing out-of-home placements.•Because of the costs associated with out-of-home placement, some of the savings associated with the policy shock were undermined.

Although much research considers the relationship between family income and child maltreatment, contact with child protective services (CPS), and out-of-home placement, little research provides a strong causal test of these different relationships. And, as such, it remains unclear how increasing or decreasing the generosity of social welfare programs could affect children's risk of experiencing maltreatment, CPS contact, and out-of-home placement. In this article, we use Danish registry data and a 2004 policy shock to estimate the effect of a substantial decrease in welfare generosity-a monthly reduction in disposable income of 30% for those who were on a specific form of welfare for six consecutive months or more-on children's risk of out-of-home placement. Our results indicate that this decrease in welfare generosity increased children's risk of out-of-home placement by about 1.5 percentage points in any given year, representing an increase of about 25% in the annual risk of out-of-home placement. The results also indicate that in a similar group of welfare-dependent individuals who were not affected by the policy shock, there is only a negligible increase in the risk of out-of-home placement, further buttressing the case for causal effects. Taken together, this article shows that substantial changes in the economic conditions of the poorest families can have a substantial effect on the probability that their children will be placed in out-of-home care.