Family Welfare Improvement Act - Amends part A (Aid to Families with Dependent Children) of title IV of the Social Security Act to set forth a new formula for determining the amount of payments to a State under such part. Provides: (1) for an annual cost-of-living increase in such amount; and (2) that such amount shall be changed in accordance with a State's population increase or decrease. Directs the Secretary of the Treasury to pay to each State with an "excess unemployment percentage" greater than zero, as determined according to this Act, a supplemental grant based on a specified formula. Permits a State to require any individual whose needs are taken into account in determining AFDC eligibility to work as a condition of AFDC eligibility. Establishes a five year, eight State demonstration project in which payments made to participating States pursuant to the AFDC program may be used without regard to the requirements and limitations otherwise applicable under the AFDC program. Directs the Advisory Council on Intergovernmental Relations to report to the Secretary of Health, Education, and Welfare concerning such project.