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

Chapter 5:
Findings

[ Main Page of Report | Contents of Report ]

Contents

1. Change in Employment, Wages, and Welfare Caseloads between 1993 and 1998
   1. Employment and Wages
      1. Low-Skill Employment and Wages: 1993 to 1996
      2. Low-Skill Employment and Wages: 1996 to 1998
      3. Changes by Other Skill Levels
   2. Welfare Recipients' Participation in the Labor Force
2. Decomposing the Effect of Welfare Reform and Economic Expansion
   1. Demand and Supply Shifts
   2. Analysis of Supply Shifts and the Maximum Impact of Welfare Reform
      1. Increase of Welfare Recipients in the Labor Force
      2. Reduction of Excess Supply of Labor
      3. Population Growth
      4. Other Factors
   3. Employment and Wages
   4. Displacement
3. Projecting the Effect of a Recession
4. Summary and Implications for Further Research

Endnotes

In this chapter, we first provide a descriptive account of changes in low-skill employment, low-skill wages, and welfare caseloads between 1993 and 1998 in our 12 regions. We then decompose the changes into supply-induced or demand-induced changes generated by the economic model. We further decompose the supply-induced changes into several factors including welfare reform, reduction of excess supply of labor, and population growth. In addition, we provide an upper bound estimate on the effect welfare reform could have had on employment, wages, and displacement in the low-skill labor market. Finally, we summarize the findings and discuss the implications for further research.

I. Change in Employment, Wages, and Welfare Caseloads Between 1993 and 1998

In this section, we provide a descriptive account of changes in employment and wages in low-skill, medium-skill, and high-skill labor markets in our 12 regions. The descriptive analysis gives an overview of how employment and wages were changing in the selected regions over the time period being studied. We also provide a descriptive account of changes in the number of welfare recipients in the labor force. In addition, we compare the increase in the number of welfare recipients in the labor force to the increase in low-skill employment. This comparison is the first step in determining whether the low-skill labor market in each region was able to absorb the increase in the number of welfare recipients in the labor force.

A. Employment and Wages

1. Low-Skill Employment and Wages: 1993 to 1996

Exhibit 5.1 presents the percentage change in employment and wages by skill level between 1993 and 1996. As this exhibit shows, there was a sizeable increase in low-skill employment in all regions except the New York regions between 1993 and 1996, which experienced a decline in population between these two years. Five of the 12 regions experienced a low-skill employment increase of more than 10 percent, and 10 of the 12 regions experienced a low-skill employment increase of more than 5 percent. The largest employment increase was in Eau Claire, Wisconsin at 15.5 percent; low-skill employment declined by 0.3 percent in North County, New York. The average increase in low-skill employment for the 12 regions was 9.2 percent, compared to a national average of 8.7 percent.

However, low-skill wages (in 1998 dollars) declined in 8 of the 12 regions between 1993 and 1996. The biggest decline was in Central Oregon at 3.8 percent. The average decrease in low-skill wages for the 12 regions was 0.4 percent, compared to a national average of 0.1 percent. Changes in employment were not closely related to changes in wages. For example, low-skill employment increased by roughly the same amount in Alabama and Southeast Missouri (9.2 and 9.3 percent, respectively), but low-skill wages declined by 0.8 percent in Alabama and increased by 0.4 percent in Southeast Missouri. We think this was due to the variation in the supply and demand forces that were responsible for the changes across regions.

2.Low-Skill Employment and Wages: 1996 to 1998

Exhibit 5.2 presents the percentage change in employment and wages by skill level between 1996 and 1998. While low-skill employment increased in all regions between 1996 and 1998, the increases were generally less pronounced than between 1993 and 1996 in most regions. None of the 12 regions experienced a low-skill employment increase of more than 10 percent. Seven of the 12 regions experienced low-skill employment increases of more than 5 percent. The largest employment increase was in Medford-Ashland, Oregon (8.1 percent) and the smallest increases were in Jamestown, New York and Decatur and Florence, Alabama (2.5 percent each). The average increase in low-skill employment for the 12 regions was 5.7 percent, compared to a national average of 7.1 percent.

Low-skill wages increased in all 12 regions between 1996 and 1998. The largest increase was in Eau Claire, Wisconsin (6.2 percent). The average increase in wages was 2.1 percent, compared to a national average of 3.8 percent. Again, changes in wages and employment were not closely related. For example, Decatur and Florence, Alabama and Jamestown, New York had the same low-skill employment increases (2.5 percent), but very different low-skill wage increases (1.1 and 3.0 percent, respectively). It appears that the supply and demand forces behind the employment increases varied across the areas.

3.Changes by Other Skill Levels

Employment and wages in medium-skill and high-skill occupations followed the same trends as employment and wages in low-skill occupations. Over time, the increase in employment was higher in the 1993 to 1996 period than in the 1996 to 1998 period at all skill levels while the increase in wages was higher in the 1996 to 1998 period than in the 1993 to 1996 period at all skill levels.

Employment in low-skill occupations increased more than employment in medium-skill occupations in both the 1993 to 1996 and 1996 to 1998 periods and more than employment in high-skill occupations in the 1996 to 1998 period. Wages in low-skill occupations increased less than wages in medium-skill occupations in both the 1993 to 1996 and 1996 to 1998 periods, and less than wages in high-skill occupations while in the 1996 to 1998 period.

B. Welfare Recipients’ Participation in the Labor Force

We first estimated the number of current and former welfare recipients who entered the labor force between 1993 and 1996, and between 1996 and 1998, and then compared these estimates to the increase in low-skill employment presented in Section I.A above. A region where the number of welfare recipients entering the labor force is significantly smaller than the increase in low-skill employment implies that the growth in jobs could accommodate the inflow of welfare recipients. Note that welfare recipients may have entered the labor force because of welfare reform or the improved economy. Conversely, a large number of recipients entering the labor market relative to the increase in low-skill jobs would lead us to believe that unemployment would increase and/or wages would decline.

Using the estimates presented in Exhibit 5.3 and the methodology outlined in Chapter 4, we estimated the increase of welfare recipients in the labor force and compared them to the increase in low-skill employment. The increase of welfare recipients included former recipients and current recipients and netted out the number who were in the labor force in the earlier year. As Exhibit 5.3 shows, the increase in low-skill employment exceeded the increase in welfare recipients entering the labor force for all regions, except North Country in the 1993 to 1996 period. North Country experienced a reduction in low-skill employment in the 1993 to 1996 period, which coincided with a decline in the total population. Employed welfare recipients as a percent of new low-skill employment ranged from 2.5 percent in Joplin, Missouri to 89 percent in Jamestown, New York between 1993 and 1996 and from 8 percent in Central Oregon to 52 percent in Southeast Missouri between 1996 and 1998.

During the 1993 and 1996 period, the increase in low-skill employment dwarfed the increase of welfare recipients in the labor market in all but the New York regions. Thus, it appears that the low-skill labor market could absorb the inflow of welfare recipients during this period without a serious effect on employment or wages.

For most regions, the share of recipients as a percent of low-skill employment also increased in the 1996 and 1998 period. This was due, in part, to the fact that caseloads declined significantly during this period and a higher percent of welfare recipients were combining work and welfare than from 1993 to 1996. However, even between 1996 and 1998, welfare recipients accounted for only about one quarter of new low-skill employment. Coupled with the fact that unemployment declined in each of these regions between 1996 and 1998, it appears that the regions could accommodate the inflow of welfare recipients.

The average share of welfare recipients as a percent of low-skill employment in the 12 regions is slightly higher than the national average. This indicates that rural areas had a higher percentage of welfare recipients in the low-skill labor market than urban areas. However, it is not clear whether wages declined. Nor is it clear how the dual effects — welfare reform and the improved economy — impact the employment and wage results. These are discussed below.

II. Decomposing the Effect of Welfare Reform and Economic Expansion

In this section, we describe our estimates of the effect of welfare push on employment and wages in each of the regions. As discussed earlier, distinguishing between the effects of welfare push and demand pull is difficult, for several reasons. One is that, for the most part, these regions still had historically high unemployment rates in 1993, following the 1991 recession. Hence, their economies could be reasonably characterized as having an excess supply of labor at going wage rates, which makes application of the demand/supply analysis problematic. In addition, factors other than welfare reform and economic expansion had effects on some of these regions’ low-skill labor markets during this period. The EITC, population growth, and increases in the minimum wage were three such factors.

We also present the results of the demand/supply decomposition described in Chapter 4. Interpretation of the findings from this analysis was problematic for the reasons described above, especially during the 1993 to 1996 period. More specifically, we found supply shifts that were much larger than could be credibly attributed to welfare reform. Hence, in the subsequent section we analyzed the possible explanations of the estimated supply shifts, and used our estimates of increases in employment for the welfare population to limit the contribution of welfare reform to supply shifts and, more importantly, employment and wage growth.

A. Demand and Supply Shifts

Following the methodology presented in Section 4.1, we calculated the magnitude of the demand shift (% D demand) and the supply shift (% D supply) in each region’s low-skill labor market over the 1993 to 1996 and 1996 to 1998 periods. The estimated demand shift presumably represents the impact of economic expansion on the labor market — increased demand for goods and services produced by industries employing low-skill labor increases the demand for low-skill labor at any wage rate. The supply shift presumably reflects any factor that shifts the supply curve, including welfare reform. Population growth, the EITC and possibly other factors could affect supply as well. This simple analysis ignores the possibility that, because of the earlier recession, there was an excess supply of labor in the regions at the beginning of the period; i.e., substantially more people wanted to have jobs at prevailing wages than were actually employed.

It is important to keep in mind that the demand and supply shifts represent shifts in the demand and supply curves, respectively; i.e., they indicate the change in demand or supply holding wages constant. While of some interest in themselves, they are intermediate results that are needed to decompose changes in employment and wages into changes due to each of the shifts. Employment increases with both a positive demand shift and a positive supply shift. Wages increase with a positive demand shift and decrease with a positive supply shift; if the demand shift is greater than the supply shift, then wages rise, and vice versa.

Exhibit 5.4 presents the magnitudes of the demand and supply shifts in the 1993 to 1996 and 1996 to 1998 time periods, relative to employment levels.⁽⁴³⁾

In both periods, the estimated supply and demand shifts were large and comparable in magnitude. In the earlier period, the demand shifts were generally smaller than the supply shifts, which explains the wage declines observed in some areas. The opposite was true in the later period for all areas, as needed to explain wage increases.

The decomposition of employment changes due to supply and demand shifts appears in Exhibit 5.5. The economic expansion, which increased the demand for labor, played a much larger role in increasing low-skill employment than welfare reform or other supply factors. While the contribution of the demand shift to employment growth was larger than the contribution of the supply shift in both periods, the demand shift was more pronounced in the 1996 to 1998 period (64 percent, on average) than in the 1993 to 1996 period (57 percent).

The decomposition of wage changes due to supply and demand shifts appears in Exhibit5.6. As this exhibit shows, the contribution of the supply shift to wage growth was almost as large or larger than the contribution of the demand shift in the earlier period, while the demand shift was substantially larger than the supply shift in the later period. This is a direct consequence of the essentially stagnant wage growth in the first period and the substantial positive wage growth in the second period. Further, in almost all regions, the magnitude of the supply effect was larger in the first period than in the second, while the reverse was true for the magnitude of the demand effect. This is contrary to what we expected for the impacts of both welfare reform and economic expansion. That is, we expected that the impact of welfare reform would be greater in the later period, after PRWORA was enacted, while the effect of economic expansion would be greater in the earlier period, on the heels of the recession. It seems likely, therefore, that the estimated supply shift in the earlier period generally overstated the real shift in supply because of excess labor supply at the beginning of the period. For the same reason, the estimated demand shift likely understated the effect of economic expansion. We consider the interpretation of the estimated supply shift further in the next section.

B. Analysis of Supply Shifts and the Maximum Impact of Welfare Reform

In this section we analyze the estimated supply shifts further and also produce estimates of the maximum impact that welfare reform could have had on employment and wages during both periods.

We begin by assessing the plausible magnitudes of three factors that could account for the estimated supply shifts: welfare reform, reduction of excess supply of labor following the 1991 recession; and population growth.

1.Increase of Welfare Recipients in the Labor Force

The impact of welfare reform on the supply shift could be no larger than the change in employment in the welfare population. Both demand pull and welfare reform push contributed positively to this growth, so the impact of welfare reform could be no larger than the total change in employment. We calculated the increase of welfare recipients in the labor force based on caseload declines, estimates of the percentage of leavers in the labor force, and estimates of the percentage of welfare recipients combining work and welfare from caseload reports.⁽⁴⁴⁾

2.Reduction of Excess Supply of Labor

Because wages tend to be rigid downward, there was an increase in unemployment at the prevailing wage between 1989 and 1993.⁽⁴⁵⁾ When economic recovery began in 1993, these previously unemployed workers began to find employment at the prevailing wage. There was an increase in low-skill employment without an increase in low-skill wages. Because we did not model downward wage rigidity, this observation was interpreted as a supply shift in the economic model during this time period. We predicted that the economy would have completely recovered from the recession by 1996 in most regions.

To assess the possible contribution of reductions in the excess supply of labor following the 1991 recession, we estimated the difference between employment in the base year for each of the two periods (i.e., 1993 or 1996) and what employment would have been had the employment rate (employment divided by the adult population) in that year been the same as in 1989. We interpreted the latter as an estimate of pre-recession peak employment, adjusted for population growth. If the difference was positive, we interpreted it as the excess labor supply remaining in the base year as the result of the recession. If the difference was negative, we assumed that no excess labor supply remained. We calculated the percentages by dividing the difference by base-year employment. Note that these percentages applied to all skill levels, combined. We did not have the information needed to compute estimates by skill level. We suspect that relative excess labor supply for low-skill workers would be greater than for all workers combined, so these estimates likely understated the contribution of excess labor supply to the estimated supply shifts.

3.Population Growth

The final factor we considered explicitly was population growth. The contribution of population growth to supply shifts was estimated as the percentage increase in the entire population over each period. We assumed that the percent increase in the low-skill labor force due to population growth would be similar.⁽⁴⁶⁾

All regions, with the exception of the New York regions, experienced some population growth that contributed to the supply shift. In particular, the Oregon regions experienced significant growth during this period.

4.Other Factors

As indicated earlier, at least two other factors could have contributed to change in the supply curve over this period — the EITC and the increase in the minimum wage. The EITC would have shifted the supply curve out, and the increase in the minimum wage would have effectively made the supply curve more inelastic at wage rates near the minimum and generated excess supply.

Results of the analysis for 1993 to 1996 and 1996 to 1998 appear in the first four columns of Exhibits 5.7 and 5.8, respectively.

For the earlier period (Exhibit 5.7), the maximum that welfare reform could have contributed to the supply shift was well below the estimated supply shift in all but one region (North Country, New York). Population growth and excess supply helped explain the large estimated shifts in most areas, but if we used the values in the table to estimate the contributions of welfare reform, excess supply, and population growth to the estimated supply shift, there was a considerable residual in several areas. We do not have good explanations for all of these residuals. Those in Alabama and Mississippi could have reflected the fact that these areas’ economies had high unemployment rates throughout the 1980s, so our estimates might have substantially underestimated the size of excess supply in 1993.⁽⁴⁷⁾ The source of the exceptionally high residual for Eau Claire, Wisconsin is unknown. The EITC and minimum wage might explain some of the residual shift. Measurements errors and errors in the elasticity estimates could also have been contributing factors.

For the later period (Exhibit 5.8), the maximum that welfare reform could have contributed to the supply shift was below the estimated supply shift in all regions. There was excess labor supply from the recession in only 4 of 12 regions. The residuals were smaller than they were for the earlier period, but they were still not negligible.

It is apparent from this analysis that the estimated supply shift was a poor indicator of the impact of welfare reform on supply, with the possible exception of a few regions in the 1993 to 1996 period. The maximum estimate of the impact of welfare reform on the supply shift, which was based on analysis of caseload data, appears to be much more useful for our purposes. Based on this estimate, plus the estimated demand and supply elasticities, we also estimated the maximum impact of welfare reform on both employment and wages in each period. These estimates appear in columns seven of Exhibits 5.7 and 5.8. For comparison purposes, we also show the total change in employment and wages (columns six and nine), and the total that the supply and demand analysis attributed to supply shifts (columns eight and eleven).

C. Employment and Wages

In the 1993 to 1996 period, we estimated that, at the maximum, welfare reform could have accounted for employment growth of 0.1 to 0.8 percent, with an average of 0.4 percent. Presumably the contribution was generally less than the small maximums reported. Welfare reform could have reduced wage growth by as much 2.6 percent in one region, but the average estimate was only 1.4 percent. Again, in all likelihood the actual reductions in wage growth due to welfare reform were smaller.

In the 1996 to 1998 period, we estimated that, at the maximum, welfare reform could have accounted for employment growth of 0.5 percent to 2.8 percent, with an average of 1.3 percent. Welfare reform could also have reduced wage growth by as much 0.7 to 4.1 percent; the average estimate was only 2 percent. The actual increases in employment and reductions in wage growth due to welfare reform were presumably smaller than these maximum estimates.

D. Displacement

Based on the estimate of the maximum impact of welfare reform on the supply shift, from the analysis of caseload data, we also estimated the maximum percentage of workers displaced by welfare reform in each period. We present two estimates for each region (see Exhibit 5.9). The gross displacement estimate is an estimate of what the maximum displacement due to welfare reform would have been in the absence of any other shift in the demand or supply curves. The net displacement estimate is the amount of displacement that occurred after the effects of other factors that shifted the demand and supply curves. A negative value for net displacement means that workers other than welfare recipients were induced to accept jobs by wage growth.

In the 1993 to 1996 period, we estimated that, in the absence of any other change, welfare reform would have displaced no more than 1.0 percent of workers in any one region, with an average maximum of 0.5 percent in the 12 regions. The average is just slightly higher than the U.S. maximum for this period of 0.3 percent. Net displacement was smaller than the maximum gross displacement in six of the regions, indicating that other factors generally offset any displacement due to welfare reform. In four of these regions, net displacement was negative, indicating that other low-skill workers were induced to enter employment. In five of the other six regions, displacement was essentially the same as the maximum due to welfare reform, or just slightly higher, after considering all supply and demand factors. In Central Oregon, displacement was much higher after considering all factors, reflecting the high rate of growth of the region’s population.

In the 1996 to 1998 period, welfare reform by itself would have displaced no more than 1.7 percent of workers in any region, with an average of 0.8 percent — slightly below the national average of 1.0 percent. The potential for displacement due to welfare reform was larger in the 1996 to 1998 period, because the decrease in caseloads was larger. During this period, however, demand growth was so large in every region that net displacement was negative. That is, the estimates imply that no displacement due to welfare reform actually occurred.

The maximum displacement due to welfare reform in each region is small, even in the absence of other changes, because the maximum number of welfare recipients entering employment due to welfare reform is a small share of the low-skill labor market in each region. In addition, labor supply is fairly inelastic, so that the number of existing workers who leave employment as wages fall is small.

These estimates essentially assume that low-skill workers are perfectly substitutable across all low-skill jobs in the region, and that low-skill workers themselves are indifferent to which low-skill job they have, holding wages and benefits constant. This might be true in general, but violated in specific instances. For instance, workers displaced by welfare reform in one area of a region might not be the same workers who accept job openings in another area. Similarly, retail trade workers displaced by welfare reform might not be the same workers who accept unskilled job openings in construction. Thus, displacement could occur at a level that cannot be observed in the data. Nonetheless, the fact that displacement at the level we are able to observe is small, given our maximum estimate of employment increases due to welfare reform and no other changes, indicates that the low-skill labor markets in these areas are able to absorb welfare recipients with little negative impact on existing workers.

III. PROJECTING THE EFFECT OF A RECESSION

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.

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.

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.

IV. Summary and Implications for Further Research

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 America’s 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.

Endnotes

(43) The estimates presented are changes in natural logarithms over the relevant period, which can be interpreted as approximate percentages. [Back To Text]

(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]

(45) The unemployment rate rose in all regions except Decatur and Florence, Alabama and rural Mississippi between 1989 and 1993. [Back To Text]

(46) We assume that the elasticity of supply used in the analysis does not capture any possible effects of wage changes on migration between states. [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]

(48) For simulation purposes, we used the change in the logarithm of employment, holding price constant, as the measure of a percentage shift. [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 TANF’s target population and able to obtain benefits. Further, a larger share of those who are in TANF’s 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]

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