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

04/01/2001

The economic model presented here provides a framework for studying the entry of large numbers of welfare recipients into the low-skill labor market as a result of (1) the pull of the economy, and (2) the push of welfare reform.

The pull of the economy refers to an increase in the labor demanded by firms at any given wage level, and the entry of welfare recipients into the low-skill labor market in response to better job opportunities. These welfare recipients would have entered the labor force even in the absence of welfare reform. The push of welfare reform refers to an increase in the number of persons willing to work at any given wage level as a direct result of welfare reform, and the consequent entry of welfare recipients into the labor market. These welfare recipients would not have entered the labor force in the absence of welfare reform.

The discussion of the model in the next section is divided into four subsections. Subsection A discusses the economic model. Subsection B stresses the importance of elasticities on the effect of welfare reform. Subsection C discusses unemployment. Subsection D discusses the effect of downward wage rigidities on unemployment.