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Since 1993, welfare recipients have been leaving the welfare rolls for work in record numbers. From January 1993 to January 1998, welfare caseloads declined by 33 percent nationally, and several studies have estimated that over half of the adults who have left welfare have entered the labor market.(7) The inflow of welfare recipients into the labor market can be attributed to two basic factors: welfare reform and the strong economy. Welfare reform is widely perceived to have begun with the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in mid-1996, which increased the number of welfare recipients who were required to seek work. But even prior to this legislation, many states were reshaping their Aid to Families with Dependent Children (AFDC) programs under waivers, which likely increased the number of welfare recipients entering the labor force in at least some of these states. In addition, the strong economy from 1993 to 1998 increased the availability of low-skill jobs and undoubtedly lured many welfare recipients into the low-skill labor market.
Several other factors may have contributed to changes in labor market participation of welfare recipients and are worth mentioning. First, the federal government expanded the Earned Income Tax Credit (EITC) for working low-income families in the early- and mid-1990s, which most likely encouraged some welfare recipients to enter the labor force. Second, the minimum wage increased in 1997, which could have offset downward wage pressure from the entry of welfare recipients into the labor force. Third, some regions of the country experienced significant changes in population, which reduced or increased the number of low-skill workers in these areas. Finally, the recession of the early 1990s created a pool of unemployed low-skill workers who were available to take new jobs when the economy began to recover.
Policy-makers have been concerned about whether enough jobs will be available to employ the additional welfare recipients entering the labor market as a result of welfare reform. If a surplus of jobs is not available in particular areas, welfare recipients’ entry into the labor force might reduce low-skill wages and displace some workers. Policy-makers are especially concerned about the impact of welfare reform on rural and small metropolitan labor markets, because these markets might be less able to absorb the inflow of welfare recipients than urban labor markets.
The Assistant Secretary for Planning and Evaluation (ASPE) in the Department of Health and Human Services (DHHS) contracted with The Lewin Group to examine how well rural and small metropolitan labor markets can absorb welfare recipients, and to the extent feasible, estimate the impact of welfare reform on rural and small-metropolitan regions since 1993. This study uses an economic model to estimate the impact of welfare reform and improvements in the economy on the low-skill labor market, where most welfare recipients seek work.
A major challenge facing researchers in this area is to distinguish between entry due to reforms (“welfare push”) and entry due to the strong economy (“demand pull”). This decomposition is necessary if we are to anticipate future conditions in the low-skill labor market, when the economy might not be so strong. We attempted such a decomposition in this report.
We selected 12 regions for this study, which include a mix of rural and small metropolitan areas (the latter are defined as having fewer than 200,000 residents). The regions vary widely in population characteristics and labor market conditions and implemented a wide range of welfare policies. The study regions are listed below (Chapter 3 provides detailed information on each region).
| Decatur and Florence, Alabama | Central Oregon |
|---|---|
|
Rural Mississippi |
Medford-Ashland, Oregon |
|
Joplin, Missouri |
Florence, South Carolina |
|
Southeast Missouri |
State of Vermont |
|
Jamestown, New York |
Eau Claire, Wisconsin |
|
North Country, New York |
Wausau, Wisconsin |
States began implementing significant reforms to their welfare programs in the past 10 years, many of which were designed to move welfare recipients into employment more rapidly. This section describes the types of welfare waivers approved between 1993 and 1996 and the major provisions of PRWORA.
A. 1993 to 1996: Welfare Waivers
Prior to the enactment of PRWORA in mid-1996, the Family Support Act of 1988 (FSA) required a certain portion of AFDC recipients to participate in the Job Opportunity and Basic Skills Training (JOBS) program. States could apply for waivers to the AFDC/JOBS program to test new strategies. Waivers were granted to more than 40 states, many of which were statewide reforms. The waivers can be categorized by whether they were restrictive (i.e., made receipt more difficult or penalized welfare recipients for noncompliance) or liberalizing changes (made receipt easier or enabled recipients to combine work and welfare):(8)
Restrictive Changes
Liberalizing Changes
The Council of Economic Advisors (CEA) estimated that about 12 to 15 percent of the decline in welfare caseloads during the 1993 to 1996 period was due to waivers, particularly those that authorized more stringent JOBS sanctions.(9) Presumably many of those who left the rolls entered the labor market. In addition to increasing the number of welfare recipients who left the rolls, waivers that enhanced the earnings disregards and expanded eligibility for UP families allowed more individuals to combine work and welfare.
PRWORA ended the entitlement to individual families and gave states the flexibility to design their own programs, although attached conditions to the TANF block grant. Some of the more important conditions include:
While economic conditions vary by region, the U.S. economy has had continued growth since 1993. From January 1993 to January 1999, employment increased by 18 million jobs nationally, the unemployment rate declined from 7.3 percent to 4.3 percent, and average inflation adjusted earnings increased from $12.41 per hour to $13.11 per hour.(10)
The additional jobs at higher hourly wages enticed some welfare recipients into the labor market. The CEA study estimated that between 1993 and 1996, about 26 to 36 percent of the welfare caseload decline was due to the economic expansion, and between 1996 and 1998, about 8 to 10 percent of the decline was due to the improved economy.(11) Several other studies have focused on the earlier pre-1996 period and found that economic factors explain somewhere between 25 and 50 percent of the change in caseloads.(12)
Factors other than the economy and welfare reform undoubtedly changed labor supply and demand. The EITC and increases in the minimum wage may have increased the incentive for work among low-income individuals, although the full extent of the effect of these two factors is largely unknown. Increasing the minimum wage could also result in a loss of jobs if employers are unwilling to pay the higher wage. In addition, changes in the population resulted in shifts of the supply curve. Finally, the recession in the early 1990s affected unemployment due to the fact that wages were slow to respond to the decline in the demand for labor. Each factor is discussed in more detail below.
The federal EITC, which was created in 1975, reduces taxes and supplements wages for working low — income taxpayers. The Omnibus Budget Reconciliation Act (OBRA) of 1992 increased the EITC by over 50 percent, phased in over three years, effective in 1994.(13) Previously, the OBRA of 1990 expanded the EITC (beginning in 1991) and also excluded the EITC in determining eligibility or benefit amounts for most federal means-tested programs (AFDC, Medicaid, Supplemental Security Income, food stamps, and low-income housing). In 1993, about 15 million taxpayers claimed the federal tax credit; by 1998, just under 19 million did so.(14)
In addition, 14 states(15) and the District of Columbia offer state EITCs that supplement the federal credit. These states use the federal eligibility rules, and offer an additional state credit that is a percentage of the federal credit. New Jersey limits the credit to families with incomes below $20,000.(16)
We believe the expansion primarily affected labor markets in the 1993 to 1996 period. A recent study separated the effect of EITC expansions from the effect of welfare policies and local labor market conditions, and found that EITC expansions have a large positive effect on employment of adults from welfare families.(17)
The federal minimum wage was $4.25 an hour from 1991 to 1997. In 1997, it increased to $5.15, where it has remained. In addition, some states have imposed minimum wages that exceed the federal rate. Among our study states, these include Oregon ($6.50 per hour) and Vermont ($5.75 an hour).
Economists have long debated the effect of minimum wage laws on employment. Some argue that it results in job loss; others argue that the minimum wage was well below the equilibrium rate in 1997, and increasing it had no effect on labor demand.
Growth in population shifts the labor supply curve outward, while a decline in population shifts the labor supply curve inward. Nationally, the number of individuals age 16 and over has been increasing about 1 percent annually, from 198 million in 1993, to 204 million in 1996, and to 208 million in 1998.
In 1993, the economy had just started to recover from a recession. In the presence of downward wage rigidity, we have reason to believe that the economy was not at equilibrium. The recession created an excess supply of individuals who were willing to work at the prevailing wage, but who were unemployed because wages did not adjust downward. When the economy began to recover, employers began to demand more labor. The presence of unemployed workers in the low-skill labor market would have allowed an increase in employment without an increase in wages.
A number of studies attempted to measure the impact of welfare reform on labor markets. Most studies focused on employment effects of welfare reform. These studies projected the number of welfare recipients who would leave welfare to enter the labor force and the number of low-skill job openings that would be available to welfare recipients. If there were more low-skill job openings than welfare recipients entering the labor market, then the conclusion was that the labor market would be able to absorb welfare recipients.
A study by Lerman, Loprest, and Ratcliffe(18) compared the growth of low-skill employment with the number of welfare recipients who entered the labor force between 1997 and 1998 in 20 metropolitan areas across the country. They found that, due to the growth in low-skill employment, only four metropolitan areas (Baltimore, New York City, St. Louis, and the District of Columbia) may have experienced an increase in unemployment due to welfare reform. A similar study by Leete and Bania(19) for the Cleveland-Akron metropolitan area found that welfare recipients would have to claim 34 to 61 percent of all low-skill job openings to be fully employed in the initial year of impact, meaning there would be enough jobs for welfare recipients. Most studies concentrated on large metropolitan areas, primarily because of data availability. Few studies to date have examined the impact of welfare reform on labor markets in rural or small metropolitan areas.
Past studies noted that low-skill wages might have to fall to employ all welfare recipients entering the labor market and that the fall in wages might cause other low-skill workers to lose their jobs (be displaced). Bartik(20) studied the wage and displacement effects of welfare reform using a model of labor demand and labor supply and elasticity assumptions. Based on policy simulations, this study predicted that wages would fall for workers with characteristics similar to welfare recipients. Despite theoretical discussions, we know of no study that has measured the actual impact of welfare reform on wages.
Our approach began by comparing estimates of the number of welfare recipients entering the labor market to changes in the low-skill labor force in each of the regions. Were there enough jobs to absorb the increase of welfare recipients who left for work or who combined welfare and work?
We then attempted to estimate the effect of the welfare push on employment and wages in each of the regions. As discussed above, distinguishing between the effects of welfare push and demand pull is difficult for several reasons. One is that, for the most part, the economies of our 12 study regions still had not recovered fully from the 1991 recession (e.g., they had historically high unemployment rates in 1993). Hence, they could be reasonably characterized as having an excess supply of labor at going wage rates, which makes application of the demand/supply analysis problematic. In addition, factors other than welfare reform and economic expansion had impacts on some of these areas’ low-skill labor markets during this period. As noted above, three such factors are the expansion of the EITC, population growth, and increases in the minimum wage.
The report is organized as follows:
(7) From P. Loprest and S. Brauner (1999). Where Are They Now? What States’ Studies of People Who Left Welfare Tell Us. The Urban Institute. Washington, DC: A survey of state leaver studies found that employment rates ranged from 55 to 75 percent for continuous leavers who were surveyed at a point in time after leaving. [Back To Text]
(8) 1998 Green Book. Committee on Ways and Means of the U.S. House of Representatives. Washington, DC. [Back To Text]
(9) Council of Economic Advisors (1999). The Effects of Welfare Policy and the Economic Expansion on Welfare Caseloads: An Update. Washington, DC. This revises estimates from a 1997 CEA report that attributed about 30 percent of the caseload decline to welfare waivers. [Back To Text]
(10) U.S. Department of Labor, Bureau of Labor Statistics. Employment is total non-farm payroll employment (seasonally adjusted); unemployment is the adjusted unemployment rate for the civilian labor force; and hourly rates are average hourly earnings of production workers (not seasonally adjusted). [Back To Text]
(11) Council of Economic Advisors (1999). [Back To Text]
(12) Blank, R (2000). Declining Caseloads/Increased Work: What Can We Conclude About the Effects of Welfare Reform? Paper prepared for the conference “Welfare Reform Four Years Later: Progress and Prospects” at the Federal Reserve Bank of New York. [Back To Text]
(13) Meyer, B. and D. Rosenbaum (2000). Making Single Mothers Work: Recent Tax and Welfare Policy and Its Effects. National Bureau of Economic Research Working Paper 7491. Cambridge, MA. [Back To Text]
(14) 1998 Green Book. [Back To Text]
(15) Colorado, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Wisconsin. [Back To Text]
(16) Johnson, N. (2000). A Hand Up. How State Earned Income Tax Credits Help Working Families Escape Poverty in 2000: An Overview. Center on Budget and Policy Priorities. Washington, DC. [Back To Text]
(17) Hotz, J. H., Mullin, C. H., and Scholz, J. K. (2000). The Earned Income Tax Credit and Labor Market Participation of Families on Welfare. Paper for the Joint Center for Poverty Research Conference on Means-Tested Transfers, December 7-8, 2000. [Back To Text]
(18) Lerman, R. I., P. Loprest, and C. Ratcliffe (1999). How Well Can Urban Labor Markets Absorb Welfare Recipients? The Urban Institute New Federalism Number A-33. Washington DC. [Back To Text]
(19) Leete, L. and N. Bania (1999). The Impact of Welfare Reform on Local Labor Markets. Journal of Policy Analysis and Management (18) 1. [Back To Text]
(20) Bartik, T. (1999). Will Welfare Reform Cause Displacement? W.E. Upjohn Institute for Employment Research. Kalamazoo, MI. [Back To Text]
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