How Well Have Rural and Small Metropolitan Labor Markets Absorbed Welfare Recipients?. Decomposing the Effect of Welfare Reform and Economic Expansion

04/01/2001

In this section, we describe our estimates of the effect of welfare push on employment and wages in each of the regions. As discussed earlier, distinguishing between the effects of welfare push and demand pull is difficult, for several reasons. One is that, for the most part, these regions still had historically high unemployment rates in 1993, following the 1991 recession. Hence, their economies 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 effects on some of these regions low-skill labor markets during this period. The EITC, population growth, and increases in the minimum wage were three such factors.

We also present the results of the demand/supply decomposition described in Chapter 4. Interpretation of the findings from this analysis was problematic for the reasons described above, especially during the 1993 to 1996 period. More specifically, we found supply shifts that were much larger than could be credibly attributed to welfare reform. Hence, in the subsequent section we analyzed the possible explanations of the estimated supply shifts, and used our estimates of increases in employment for the welfare population to limit the contribution of welfare reform to supply shifts and, more importantly, employment and wage growth.