Overall, we found that between 1993 and 1996, welfare reform had a minimal impact on job displacement and wage reduction. It could have more adversely affected labor markets after 1996, when PRWORA was enacted, but even during this period, the strong economy helped rural and small metropolitan labor markets absorb the inflow of welfare recipients. Even regions that experienced dramatic declines in caseloads, such as the Wisconsin regions, experienced no adverse effects. In a less robust economy, welfare reform likely would have depressed low-skill wage growth and displaced some low-skill workers who were not welfare recipients. The size of these effects, however, appears to be small relative to the effects of other factors whose fluctuations affect low-skill labor markets such as population growth and the business cycle because welfare recipients who enter the labor market are a fairly small share of the low-skill labor force in each area.
Several limitations of this study deserve mention:
- The magnitude of the estimated effects of welfare reform and the economy are dependent on the estimates of the elasticity of labor demand and labor supply. Only national-level estimates are available, and even among these there is a significant range. Differences in elasticities across rural and urban areas may exist. We conducted a sensitivity analysis (incrementing and decrementing the elasticities by 0.1) and found that our basic findings are not affected much by reasonable changes in the elasticities as a result of the small size of the increase in employment due to welfare reform relative to the low-skill labor market.
- The estimates of welfare recipients who entered the labor market relied on estimates obtained from a national leaver study. If differences in the percent of leavers who entered the labor market differ between rural and urban areas, then the maximum effect of welfare reform on employment and wages could differ from the ones presented.
- We cannot account for the effect of the EITC in our estimates. We believe the expansion primarily affected the 1993 to 1996 period, and may have affected some of the unexplained shift in the supply curve during this period. A recent study separated the effect of EITC expansions from the effect of welfare policies and local labor market conditions, and found that EITC expansions have a large positive effect on employment of adults from welfare families.(50)
- We allocated industry payroll to low-skill, medium-skill, and high-skill occupations in each of the three years based on the payroll distribution of occupations within industries in 1998; distributions for earlier years did not exist. The extent to which the percent distribution differed between 1993 and 1998 affects our low-skill wage estimates, but not the employment estimates.
- We found that welfare reform did not significantly affect the market for low-skill labor because the market is large relative to the number of welfare recipients entering it. Because we defined the low-skill market narrowly assuming that welfare recipients sought jobs that required little education or on-the-job training we believe we might be over-estimating, and not under-estimating, the effect of welfare reform on labor markets.
Future studies could augment this study by collecting additional information and using other data sources not available to us at the time of this study. In addition, more will be learned about the effect of time limits on reducing caseloads and the effect of welfare reform during periods of slow economic growth. Future studies could address the following:
- In the next few years, as more welfare recipients reach time limits and as the economy slows and, perhaps, enters a recession, will welfare recipients begin to displace low-skill workers and affect wage levels? Will they be more or less vulnerable to job loss than other low-skill workers? To conduct future analysis, researchers will be able to rely on the Occupational Employment Statistics survey, which began collecting wage information starting in 1996. This survey is also a better source for employment information by occupation. Finally, some of the confounding factors we encountered such as the EITC and the effects of the earlier recession will not have as large an effect on the estimates going forward.
- Are welfare leavers in rural areas more or less likely to enter the labor force than their counterparts in urban areas? To date, leaver studies have focused primarily on urban areas and offer little information on the labor force participation of welfare leavers living in more rural areas. An analysis of national data sets, such as the National Survey of Americas Families, focusing on welfare recipients living in rural areas could supplement this study. In addition, some leaver studies include an adequate sample size of individuals residing in rural areas; future research could analyze these subsamples in more detail.
- Are welfare offices in rural areas able to offer the job search and job training assistance available in urban areas? What percent of the welfare population in rural areas are exempt from time limits and work participation requirements because of the lack of services? Field research or phone surveys targeting these study regions could provide useful information on the issues facing welfare offices in rural labor markets, and provide context for some of the findings from this study.
- What types of jobs are welfare recipients taking? Did we narrow the field to the correct set of occupations? Are these jobs likely to evaporate during a downturn? Field research conducted in some of these study regions would supplement the analysis from this study.
(44) Some individuals who would have become welfare recipients in the absence of welfare reform might have been diverted from entering welfare as a result of welfare reform. As discussed in Chapter 4, caseload declines capture the decrease in both the stock and the flow of welfare recipients. Therefore, welfare diversion is accounted for in our estimate of caseload declines, although it is not possible to separate out its effect. [Back To Text]
(47) Decatur and Florence, Alabama had an unemployment rate of 11.7 percent in 1986 compared to 8.3 percent in 1989; and rural Mississippi had an unemployment rate of 12.9 percent in 1986 compared to 8.3 percent in 1989. [Back To Text]
(49) One could argue that welfare reform had an impact on the automatic stabilizer feature of transfer programs. In general, these programs pump more government money into the hands of consumers when they lose earnings during recessions, dampening the reduction in demand. Because it might be harder for a given family to get assistance under TANF if a breadwinner loses a job than it was under AFDC, the automatic stabilizer feature of this transfer program could have been weakened. At the same time, however, under TANF a larger share of those who lose jobs because of a recession might be in TANFs target population and able to obtain benefits. Further, a larger share of those who are in TANFs target population might qualify for Unemployment Insurance benefits, another automatic stabilizer, than would have in the absence of welfare reform. [Back To Text]
(50) Hotz, J. H., Mullin, C. H., and Scholz, J. K. (2000). The Earned Income Tax Credit and Labor Market Participation of Families on Welfare. Paper for the Joint Center for Poverty Research Conference on Means-Tested Transfers, December 7-8, 2000. [Back To Text]