The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Can the Labor Market Absorb Three Million Welfare Recipients?. Introduction


Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act in August 1996.  The law changed the nature of a crucial part of the U.S. safety net by ending individual entitlement to benefits.  Under new state programs, poor children may no longer be automatically entitled to cash benefits. Although the 1996 law gives states more program flexibility in many areas, it also imposes tough new federal requirements.  Each state must now ensure that a rising percentage of its adult aid recipients is engaged in approved work.  The head of each family on welfare is required to work within two years after assistance payments begin.  Work-hour requirements are stringent, states will face increasingly harsh penalties for failing to meet them, and states will not be permitted to use the federal grant to pay for cash benefits that last longer than 60 months for a particular family.  Although exceptions can be made for some hardship cases, Congress's clear intention is to limit benefits for the great majority of families to no more than five years.  States may adopt even tighter restrictions on the length of benefit payments.  Almost two dozen states have already decided to impose time limits shorter than 60 months.

This paper considers an important question about the new limits on benefits:  Is the labor market capable of providing enough jobs so that welfare recipients leaving the rolls will be able to find employment?  Because the employment rate of public aid recipients has historically been very low, it is reasonable to expect states to significantly boost the percentage of recipients who hold jobs.  It is also realistic to expect that the great majority of new jobs will be unsubsidized jobs in the private labor market.  The U.S. labor market has enormous capacity to produce private-sector jobs, even for unskilled workers, if an ample supply of workers is available to fill these jobs. Unfortunately, aid recipients have such limited education and skills that few of them qualify for well-paying jobs.  Most will have a tough time finding jobs quickly, and many who find jobs will lose them within a few months to a year.  The evidence suggests that the overwhelming majority of assistance recipients will earn between $5.25 and $7.50 per hour if they are successful in finding jobs.  The trend in wages over the past two decades  though not over the most recent five years  has been adverse for workers with limited skills.  If welfare reform forces millions of aid recipients to find jobs, the added supply of unskilled workers could reinforce the long-term trend toward lower wages.

The critical question remains:  "Will aid recipients succeed in landing a job, however low the wage?"  Evidence through 1998 suggests that for most recipients the answer is "yes."  Between 1994 and March 1998 the welfare caseload fell 36 percent, or about 1.8 million cases.  Over the same period unpublished Bureau of Labor Statistics tabulations show that the number of separated, divorced, and never-married mothers who hold jobs increased almost 1 million (18 percent).  It is likely that many of the mothers who found new jobs would have been collecting public assistance if they had not been working.  Whether the U.S.  labor market can continue to absorb such large numbers of single mothers remains an open question.  The women who have left the rolls so far probably have job qualifications that on average are better than those of parents who continue to collect benefits.  Mothers who are still dependent will probably find it harder to land jobs.  In addition, the surge in employment has been helped by extraordinarily high employer demand, reflected in the lowest unemployment rate in a quarter century.  When employer demand weakens, low-skilled and less experienced workers (such as most single mothers on welfare) will face tougher obstacles in finding and keeping jobs.  It is also plain, however, that the surge in single mothers' employment can continue. Many states, including some of the largest ones, have not fully implemented a comprehensive welfare-to-work strategy.  When they do, we should expect to see further drops in their rolls and increases in the proportion of single mothers who look for and hold jobs.  These jobs will typically be poorly paid, however, and the net family incomes of these women may not improve.