The economic model presented here provides a framework for analyzing the entry of large numbers of welfare recipients into the low-skill labor market. Better job opportunities and welfare reform are the two main reasons for this phenomenon.
The economic model is an equilibrium model of low-skill labor demand and labor supply. In the economic model, a shift in labor demand represents the increase in job opportunities and a shift in labor supply represents the increase in labor market entry of welfare recipients due to work requirements and time limits. Both of these changes increase employment, but have opposite impacts on prevailing wages.
If the equilibrium wage falls, some former workers will be displaced; i.e., their employers will replace them with welfare recipients who have entered the labor market and are willing to work for lower wages. This is likely to result in short-term unemployment, as those displaced continue to seek work at a higher wage. In the long-term some of these individuals are likely to become discouraged and leave the labor force, mitigating the impact on the unemployment rate.