How Well Have Rural and Small Metropolitan Labor Markets Absorbed Welfare Recipients?. Demand and Supply Shifts

04/01/2001

Following the methodology presented in Section 4.1, we calculated the magnitude of the demand shift (% D demand) and the supply shift (% D supply) in each regions low-skill labor market over the 1993 to 1996 and 1996 to 1998 periods. The estimated demand shift presumably represents the impact of economic expansion on the labor market  increased demand for goods and services produced by industries employing low-skill labor increases the demand for low-skill labor at any wage rate. The supply shift presumably reflects any factor that shifts the supply curve, including welfare reform. Population growth, the EITC and possibly other factors could affect supply as well. This simple analysis ignores the possibility that, because of the earlier recession, there was an excess supply of labor in the regions at the beginning of the period; i.e., substantially more people wanted to have jobs at prevailing wages than were actually employed.

It is important to keep in mind that the demand and supply shifts represent shifts in the demand and supply curves, respectively; i.e., they indicate the change in demand or supply holding wages constant. While of some interest in themselves, they are intermediate results that are needed to decompose changes in employment and wages into changes due to each of the shifts. Employment increases with both a positive demand shift and a positive supply shift. Wages increase with a positive demand shift and decrease with a positive supply shift; if the demand shift is greater than the supply shift, then wages rise, and vice versa.

Exhibit 5.4 presents the magnitudes of the demand and supply shifts in the 1993 to 1996 and 1996 to 1998 time periods, relative to employment levels.(43)

Exhibit 5.4
Magnitudes of Demand and Supply Shifts
  1993-1996 1996-1998
Region Demand Shift Supply Shift Demand Shift Supply Shift

Decatur and Florence, Alabama

9.0 9.6 2.8 2.1

Rural Mississippi

13.8 13.0 7.4 6.1

Joplin, Missouri

12.8 8.1 8.4 7.4

Southeast Missouri

9.4 9.1 5.0 4.5

Jamestown, New York

1.0 3.0 3.4 1.3

North Country, New York

-0.4 -0.1 5.2 3.6

Medford-Ashland, Oregon

12.2 13.5 8.7 7.2

Central Oregon

12.9 15.5 8.0 6.8

Florence, South Carolina

8.0 8.3 6.6 6.1

Vermont

6.8 8.3 5.7 4.0

Eau Claire, Wisconsin

15.0 16.0 6.3 1.9

Wausau, Wisconsin

8.9 8.2 7.9 6.6

Average

9.1 9.4 6.3 4.8

United States

8.7 8.8 8.2 5.6

Source: Lewin calculations using ES-202, NISP, and BLS education and training requirements data.

In both periods, the estimated supply and demand shifts were large and comparable in magnitude. In the earlier period, the demand shifts were generally smaller than the supply shifts, which explains the wage declines observed in some areas. The opposite was true in the later period for all areas, as needed to explain wage increases.

The decomposition of employment changes due to supply and demand shifts appears in Exhibit 5.5. The economic expansion, which increased the demand for labor, played a much larger role in increasing low-skill employment than welfare reform or other supply factors. While the contribution of the demand shift to employment growth was larger than the contribution of the supply shift in both periods, the demand shift was more pronounced in the 1996 to 1998 period (64 percent, on average) than in the 1993 to 1996 period (57 percent).

Exhibit 5.5
Decomposition of Percent Change in Employment in Low-Skill Labor Markets
  1993-1996 1996-1998
Region Total Shift in Demand Shift in Supply Total Shift in Demand Shift in Supply

Decatur and Florence, Alabama

9.2 5.3 4.0 2.5 1.6 0.9

Rural Mississippi

13.5 7.7 5.8 6.8 4.2 2.6

Joplin, Missouri

10.8 6.2 4.6 7.9 4.8 3.2

Southeast Missouri

9.3 5.3 4.0 4.8 2.9 1.9

Jamestown, New York

1.9 1.1 0.8 2.5 1.9 0.6

North Country, New York

-0.3 -0.1 -0.1 4.5 3.0 1.6

Medford-Ashland, Oregon

12.8 7.3 5.5 8.1 5.0 3.1

Central Oregon

14.0 8.0 6.0 7.5 4.6 2.9

Florence, South Carolina

8.1 4.6 3.5 6.4 3.8 2.6

Vermont

7.4 4.3 3.2 5.0 3.3 1.7

Eau Claire, Wisconsin

15.5 8.8 6.6 4.4 3.6 0.8

Wausau, Wisconsin

8.6 4.9 3.7 7.4 4.5 2.8

Average

9.2 5.2 4.0 5.6 3.6 2.1

United States

8.7 5.0 3.7 7.1 4.7 2.4

Source: Lewin calculations using ES-202, NISP, and BLS education and training requirements data.

The decomposition of wage changes due to supply and demand shifts appears in Exhibit5.6. As this exhibit shows, the contribution of the supply shift to wage growth was almost as large or larger than the contribution of the demand shift in the earlier period, while the demand shift was substantially larger than the supply shift in the later period. This is a direct consequence of the essentially stagnant wage growth in the first period and the substantial positive wage growth in the second period. Further, in almost all regions, the magnitude of the supply effect was larger in the first period than in the second, while the reverse was true for the magnitude of the demand effect. This is contrary to what we expected for the impacts of both welfare reform and economic expansion. That is, we expected that the impact of welfare reform would be greater in the later period, after PRWORA was enacted, while the effect of economic expansion would be greater in the earlier period, on the heels of the recession. It seems likely, therefore, that the estimated supply shift in the earlier period generally overstated the real shift in supply because of excess labor supply at the beginning of the period. For the same reason, the estimated demand shift likely understated the effect of economic expansion. We consider the interpretation of the estimated supply shift further in the next section.

Exhibit 5.6
Decomposition of Percent Change in Wages in Low-Skill Labor Markets
  1993-1996 1996-1998
Region Total Shift in Demand Shift in Supply Total Shift in Demand Shift in Supply

Decatur and Florence, Alabama

-0.8 12.8 -13.7 1.1 4.1 -3.0

Rural Mississippi

1.2 19.7 -18.6 1.9 10.6 -8.7

Joplin, Missouri

6.6 18.2 -11.6 1.4 11.9 -10.5

Southeast Missouri

0.4 13.4 -13.0 0.8 7.2 -6.4

Jamestown, New York

-2.7 1.5 -4.2 3.0 4.8 -1.8

North Country, New York

-0.4 -0.6 0.1 2.3 7.5 -5.2

Medford-Ashland, Oregon

-1.8 17.5 -19.3 2.1 12.4 -10.3

Central Oregon

-3.8 18.4 -22.2 1.7 11.4 -9.8

Florence, South Carolina

-0.5 11.4 -11.9 0.6 9.4 -8.7

Vermont

-2.0 9.8 -11.8 2.5 8.2 -5.7

Eau Claire, Wisconsin

-1.5 21.5 -22.9 6.2 9.0 -2.8

Wausau, Wisconsin

1.0 12.8 -11.8 1.9 11.3 -9.5

Average

-0.4 13.0 -13.4 2.1 9.0 -6.9

United States

-0.1 12.5 -12.5 3.8 11.8 -7.9

Source: Lewin calculations using ES-202, NISP, and BLS education and training requirements data.