How Well Have Rural and Small Metropolitan Labor Markets Absorbed Welfare Recipients?. Projecting the Effect of a Recession

04/01/2001

Welfare reform happened at a propitious time. In 1996, the economy was in the midst of the longest peacetime expansion in American history, and in September 2000 the unemployment rate reached a 30-year low of 3.9 percent. Based on our analysis, we found that the strong economy was able to absorb the inflow of welfare recipients into the low-skill labor market with negligible adverse effects. In fact, welfare reform might have helped ease the shortage of low-skill workers in the labor force, and hence might have helped sustain a high rate of economic growth by easing the inflationary pressure on low-skill wages.

The next economic downturn will be a significant test of welfare reform. Will there be a higher increase in unemployment and a higher decrease in wages during a recession as a result of the increased number of welfare recipients in the labor force? Will rural and small metropolitan areas be more adversely affected by welfare reform when the economy slows than urban areas?

We projected the wage and employment effects of a recession both under the status quo and in the absence of welfare reform. In these projections, we assumed that a recession would cause the demand curve to shift back by the same percentage as it shifted out in the 1993 to 1996 period.(48) In 1993, the economy was beginning to recover from the 1991 recession, so we assumed that the shift in the demand curve in this period was representative of the amount the economy would contract in a recession. This estimate was likely an overstatement of the demand shift in a recession, because the 1993 to 1996 demand shift likely included both a recovery from the recession and growth in the economy.

To simulate the 1998 low-skill labor market conditions in the absence of welfare reform, we shifted the supply curve back by the same percentage as the maximum outward shift attributable to welfare reform in the 1996 to 1998 period. Because PRWORA passed in 1996, we assumed that the decline in welfare caseloads represented the maximum impact of welfare reform on the supply curve in this period. We took the equilibrium wage and employment resulting from this shift as the equilibrium if welfare reform had not happened.

If, as we have assumed throughout, the demand and supply curves are linear on the log scale, the effect of a demand shift (i.e., a fixed percent reduction in demand) on wages and employment is the same in percentage terms regardless of the starting equilibrium point. The percentage impacts on both wages and employment, under both the status quo and in the absence of welfare reform, are shown in Exhibit 5.10. These figures assume that wages adjust downward. The effect of a recession on the economy is substantial, with an average decrease of 5 percent in employment and 13 percent in wages across the 12 regions, slightly worse than for the U.S. as a whole.

Exhibit 5.10
Percentage Effect of a Recession on Employment and Wages
Region Shift In Demand (%) Change in Employment (%) Change in Wages (%)

Decatur and Florence, Alabama

-9.0 -5.1 -12.8

Rural Mississippi

-13.8 -7.9 -19.7

Joplin, Missouri

-12.8 -7.3 -18.2

Southeast Missouri

-9.4 -5.4 -13.4

Jamestown, New York

-1.0 -0.6 -1.5

North Country, New York

0.4 0.2 0.6

Medford-Ashland, Oregon

-12.2 -7.0 -17.5

Central Oregon

-12.9 -7.4 -18.4

Florence, South Carolina

-8.0 -4.6 -11.4

Vermont

-6.8 -3.9 -9.8

Eau Claire, Wisconsin

-15.0 -8.6 -21.5

Wausau, Wisconsin

-8.9 -5.1 -12.8

Average

-9.1 -5.2 -13.0

United States

-8.7 -5.0 -12.5

Source: Lewin calculations using ES-202, NISP, BLS education and training requirements data, and data provided by state welfare agencies.

While the model implies that the percent change in employment in wages is the same under the two scenarios, the change in the levels of employment and wages differ because equilibrium wage and employment levels under any demand scenario are affected by the presence or absence of welfare reform. In the absence of welfare reform, wages would be higher and employment would be lower. Hence, if the percentage shift in the demand curve associated with a recession was the same with or without welfare reform in place, as we assumed, the changes in the levels of employment and wages are different. The simulated recession reduces employment somewhat more under the status quo welfare system than in the absence of welfare reform because welfare reform resulted in higher employment in 1998. The level of employment in the recession, nonetheless, was higher under the status quo welfare system than under the no reform scenario. Conversely, the recession reduced wages somewhat less under the status quo welfare system than in the absence of welfare reform because welfare reform depressed wages somewhat in 1998. The level of wages in the recession, however, is somewhat lower under the status quo welfare system than under the no reform scenario. Exhibit 5.11 presents the employment effect of a recession under the two scenarios. Exhibit 5.12 presents the wage effect.

Exhibit 5.11
Absolute Effect of a Recession on Employment
Status Quo Without Welfare Reform
Region Equilibrium Employment Reduction in Employment Resulting Employment Equilibrium Employment Reduction in Employment Resulting Employment

Decatur and Florence, Alabama

45,057 2,316 42,742 44,903 2,308 42,595

Rural Mississippi

328,993 25,979 303,014 325,046 25,667 299,378

Joplin, Missouri

34,672 2,529 32,142 34,493 2,516 31,977

Southeast Missouri

80,174 4,305 75,869 79,349 4,260 75,089

Jamestown, New York

24,171 145 24,026 24,057 144 23,913

North Country, New York

61,568 -136 61,705 61172 -135 61,308

Medford-Ashland, Oregon

32,803 2,295 30,509 32,634 2,283 30,352

Central Oregon

25,935 1,914 24,021 25,879 1,910 23,969

Florence, South Carolina

25,461 1,162 24,299 25,232 1,152 24,080

Vermont

120,398 4,698 115,700 119,675 4,670 115,006

Eau Claire, Wisconsin

31,818 2,730 29,088 31,668 2,718 28,950

Wausau, Wisconsin

26,625 1,359 25,266 26,488 1,352 25,136

Average

69,806 4,108 65,698 69,216 4,070 65,146

United States

52,450,640 2,612,898 49,837,742 52,270,810 2,603,940 49,666,870

Source: Lewin calculations using ES-202, NISP, BLS education and training requirements data, and data provided by state welfare agencies.

Exhibit 5.12
Absolute Effect of a Recession on Wages
Status Quo Without Welfare Reform
Region Equilibrium Wages Reduction in Wages Resulting Wages Equilibrium Wages Reduction in Wages Resulting Wages

Decatur and Florence, Alabama

16,405 2,108 14,297 16,593 2,132 14,461

Rural Mississippi

14,910 2,943 11,966 15,506 3,061 12,445

Joplin, Missouri

16,743 3,054 13,690 17,030 3,106 13,924

Southeast Missouri

13,617 1,828 11,790 14,084 1,891 12,194

Jamestown, New York

15,676 235 15,441 15,922 238 15,684

North Country, New York

15,810 -87 15,897 16,148 -89 16,238

Medford-Ashland, Oregon

16,087 2,813 13,274 16,363 2,861 13,501

Central Oregon

16,603 3,063 13,540 16,722 3,085 13,637

Florence, South Carolina

15,373 1,754 13,618 15,834 1,807 14,027

Vermont

16,528 1,612 14,916 16,858 1,644 15,214

Eau Claire, Wisconsin

15,442 3,313 12,130 15,685 3,365 12,320

Wausau, Wisconsin

16,912 2,158 14,754 17,202 2,195 15,007

Average

15,842 2,066 13,776 16,162 2,108 14,054

United States

19,380 2,414 16,967 19,602 2,441 17,161

Source: Lewin calculations using ES-202, NISP, BLS education and training requirements data, and data provided by state welfare agencies.
Note: Estimated annual wages per person.

The absolute differences between the wage and employment levels in a recession and under the status quo and in the absence of welfare reform are very small. This finding mirrors the results from the 1996 to 1998 period. Welfare recipients were a small percentage of the low-skill labor force, so their presence in the labor market does not lead to a big increase in employment or a big decrease in wages.

The assumptions of the model might be wrong. One might argue, for instance, that the magnitude of the percentage shift in the demand curve is dependent on welfare reform. We think that arguments could be made in either direction, and are not aware of a persuasive argument that would dominate in one direction or the other.(49) Welfare reform contributed somewhat to the growth in the economy over the period under study, by increasing the supply of low-skill labor. Now that the economy has adapted to welfare reform, there appears to be no obvious reason to think that contractions will be larger, in percentage terms, than they have been in the past.

Welfare reform might also have changed the elasticity of supply, but it is also difficult to determine the direction of change, if any. While the labor supply of a given low-income worker with a family might be less elastic than before welfare reform, because welfare benefits are more difficult to obtain, a larger share of low-income workers might be from families that would qualify for welfare benefits in the event of job loss.