How Well Have Rural and Small Metropolitan Labor Markets Absorbed Welfare Recipients?. Displacement

04/01/2001

Based on the estimate of the maximum impact of welfare reform on the supply shift, from the analysis of caseload data, we also estimated the maximum percentage of workers displaced by welfare reform in each period. We present two estimates for each region (see Exhibit 5.9). The gross displacement estimate is an estimate of what the maximum displacement due to welfare reform would have been in the absence of any other shift in the demand or supply curves. The net displacement estimate is the amount of displacement that occurred after the effects of other factors that shifted the demand and supply curves. A negative value for net displacement means that workers other than welfare recipients were induced to accept jobs by wage growth.

In the 1993 to 1996 period, we estimated that, in the absence of any other change, welfare reform would have displaced no more than 1.0 percent of workers in any one region, with an average maximum of 0.5 percent in the 12 regions. The average is just slightly higher than the U.S. maximum for this period of 0.3 percent. Net displacement was smaller than the maximum gross displacement in six of the regions, indicating that other factors generally offset any displacement due to welfare reform. In four of these regions, net displacement was negative, indicating that other low-skill workers were induced to enter employment. In five of the other six regions, displacement was essentially the same as the maximum due to welfare reform, or just slightly higher, after considering all supply and demand factors. In Central Oregon, displacement was much higher after considering all factors, reflecting the high rate of growth of the regions population.

In the 1996 to 1998 period, welfare reform by itself would have displaced no more than 1.7 percent of workers in any region, with an average of 0.8 percent  slightly below the national average of 1.0 percent. The potential for displacement due to welfare reform was larger in the 1996 to 1998 period, because the decrease in caseloads was larger. During this period, however, demand growth was so large in every region that net displacement was negative. That is, the estimates imply that no displacement due to welfare reform actually occurred.

Exhibit 5.9
Percent of Labor Displaced
1993 - 1996 1996 - 1998
Region Welfare Reform Gross (max)a/ Netb/ Welfare Reform Gross (max)a/ Netb/

Decatur and Florence, Alabama

0.3 0.3 0.5 -0.4

Rural Mississippi

0.7 -0.5 1.7 -0.8

Joplin, Missouri

0.2 -2.7 0.8 -0.6

Southeast Missouri

1.0 -0.2 1.4 -0.3

Jamestown, New York

1.0 1.1 0.6 -1.2

North Country, New York

0.7 0.2 0.9 -0.9

Medford-Ashland, Oregon

0.5 0.7 0.7 -0.8

Central Oregon

0.3 1.5 0.3 -0.7

Florence, South Carolina

0.4 0.2 1.3 -0.3

Vermont

0.7 0.8 0.3 -1.0

Eau Claire, Wisconsin

0.4 0.6 0.4 -2.5

Wausau, Wisconsin

0.3 -0.4 0.4 -0.7

Average

0.5 0.1 0.8 -0.9

United States

0.3 0.0 1.0 -1.5

Source: Lewin calculations using ES-202, NISP, BLS education and training requirements data, and data provided by state welfare agencies.
a\ Maximum displacement due to welfare reform if other factors did not affect supply and demand.
b\Actual displacement as result of all factors affecting supply and demand. Negative values imply that low-skill workers outside of the welfare population were induced to work by wage increases.

The maximum displacement due to welfare reform in each region is small, even in the absence of other changes, because the maximum number of welfare recipients entering employment due to welfare reform is a small share of the low-skill labor market in each region. In addition, labor supply is fairly inelastic, so that the number of existing workers who leave employment as wages fall is small.

These estimates essentially assume that low-skill workers are perfectly substitutable across all low-skill jobs in the region, and that low-skill workers themselves are indifferent to which low-skill job they have, holding wages and benefits constant. This might be true in general, but violated in specific instances. For instance, workers displaced by welfare reform in one area of a region might not be the same workers who accept job openings in another area. Similarly, retail trade workers displaced by welfare reform might not be the same workers who accept unskilled job openings in construction. Thus, displacement could occur at a level that cannot be observed in the data. Nonetheless, the fact that displacement at the level we are able to observe is small, given our maximum estimate of employment increases due to welfare reform and no other changes, indicates that the low-skill labor markets in these areas are able to absorb welfare recipients with little negative impact on existing workers.