In 1996, the US federal government passed welfare reform legislation. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) altered greatly the circumstances under which families can receive public assistance, limiting receipt to 5 years, requiring work after 24 months, and allowing states to impose sanctions and other requirements such as family caps (Greenberg, 1999). Because many countries reforming their social welfare system look to the USA as one possible model, analyses of the effects of US welfare policy on children are of relevance internationally. We find that the population receiving welfare in the USA is highly diverse and that background differences and early experiences explain most of the associations between welfare and poverty and children's outcomes. After taking account of these background differences, we find that children who experienced stable albeit disadvantaged economic conditions did not have worse outcomes than children who were never poor. Nor were children whose families' economic fortunes improved at higher risk for poor outcomes. However, children in families whose financial circumstances declined or fluctuated were more at risk for behavioural problems and scored lower on reading tests than were children who had never been poor.