Welfare reform policies and implementation

Welfare Reform

Working for wages is the principal means for obtaining income and getting ahead in American society. Work is the key to personal independence and an effective way to achieve a meaningful role in our society. Significant participation in the workforce also is a necessary condition for receiving benefits from our nation's major social welfare programs, unemployment insurance, workmen's compensation, Social Security retirement and disability payments, Medicare health insurance, and the Earned Income Tax Credit. With one major exception, adults living outside of an institution, who are unable to work because of their age, physical condition, or other limitations, must depend on family, friends, and/or a meager patchwork of public relief and private charities for income, food, clothing, and housing (e.g., Supplemental Security Income (SSI), food stamps, general relief, homeless shelters, soup kitchens).

Analysis -- Labor Supply and Demand

Parents of minor children (usually women), whose level of income and assets are sufficiently low to make them eligible for monthly cash assistance authorized by the Temporary Assistance for Needy Families (TANF) program in the state in which they reside, are the exception to this "work" policy. TANF is a federally funded block grant program that replaced the 60-year-old Aid for Families with Dependent Children (AFDC) program, our nation's only safety net for economically dependent children. TANF is the heart of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRAWORA), the welfare reform legislation signed into law by President William Clinton on August 22, 1996 (Blank, 2002). The principal elements of TANF include: limiting to five years the federal government's financial and regulatory responsibility for helping poor families with children, regardless of the cause of their poverty; allowing states to spend their share of federal block grant funds ($16.38 billion annually) in any way "reasonably calculated to achieve the purposes of TANF"; limiting the length of time a family can receive federal cash assistance to five years, with states free to further limit assistance to two years; requiring at least 80% of families receiving TANF benefits to participate in employment activities as a condition for receiving cash assistance or services, hence the term welfare-to-work.

There is general support for the goal of TANF, which is to improve the economic circumstances of the poor through a "jobs" policy. The means chosen for accomplishing this goal is to give more latitude to the states to design programs tailored to fit local needs, including the use of sanctions and the withholding of benefits where needed. With the resources and freedom provided by TANF, it is anticipated that states will develop or expand programs designed to increase the capacity of poor families to be self-reliant and enable them to move into the mainstream of economic life. It is assumed that adult recipients of TANF will be offered job training programs, job placement and search opportunities, and the means to maintain employment through affordable child care, reliable transportation, and other supportive services.

The reduction in welfare rolls that has occurred since the enactment of TANF makes it appear that advocates for welfare reform were correct in their assumptions about what was needed to move AFDC recipients from welfare-to-work. What is not clear is the degree to which TANF and its "jobs" policy will provide a safety net for economically dependent children. Are the children of welfare families better off under the new system? Is there greater or lesser economic security? What happens to children in families when a parent is unable to hold a job in the private sector? What happens if the economy slows down and unemployment rises? Despite its limitations, AFDC nevertheless served two important functions for 60 years, only one of which is incorporated in TANF: (1) AFDC was a transitional income security program for parents of very young children who, after a period of time, were able to move successfully into the workforce; and (2) AFDC was an economic "safety net" for children whose parent(s), for a variety of reasons, was unable to earn wages sufficient to support a family. As an economic safety net, AFDC provided a minimum level of income necessary to support millions of economically dependent children during good times and bad times (Finneran, 2004).

Discussion - Welfare Reform and Public Safety Origins

The history of public welfare in the United States has been one of controversy, change, and continued growth. Prior to the 1900s, local governments shared with private charitable organizations major responsibility for public welfare, or as it was often called, "public relief." As the nation's population increased and the economy became more industrial and urban, the need for relief grew beyond the means, and sometimes the willingness, of local public and private auspices to provide for this populace. State governments assumed progressively more responsibility for the poor. For example, by 1926, 40 states had established some type of welfare program for mothers with dependent children, referred to as "mother's pensions" or "widow's mites."

On the first anniversary of his signing the welfare reform bill, President Clinton promulgated that "the debate is over. We now know that welfare reform works." (Woodbury, 2004). Based on the fact that national welfare caseloads have fallen 20% since 1993, the president and others apparently consider reform a success. While any serious analyst would reject this rosy assessment as being premature, it does raise the important question of how to judge the success of welfare reform. This part of the paper takes the view that the success of reform will largely depend on the extent to which former welfare recipients are successfully integrated into the labor market. Will they be able to find work that pays them enough to maintain their already shaky living standards, and to keep it from falling further? Once they find jobs, will they be able to keep them?

Notwithstanding the premature claims of victory, it will be some time before we can begin to know the answers to these questions. It is not too soon, however, to examine the context in which reform is currently transpiring. From the perspective of welfare analysts and policy makers, such an exercise can both help develop a rational set of expectations regarding the outcome of reform and suggest various policies that could lead to a better outcome.

Impacts on Labor-Management Relations

There are a number of ways to generate a set of expectations regarding the impact of welfare reform on employment and wages. One is to apply the rules of comparative statistics, along with accepted labor supply and demand elasticities, to derive estimates of the impact of moving potentially millions of persons from welfare to work. Numerous studies, described in the pages that follow, have used such methods to produce plausible estimates of the impact of the added supply of less-skilled workers on wages and employment. Another way is to describe the current and historical conditions in the low-wage labor market, delineating the various constraints facing workers who are both already earning low wages as well as those coming off of the welfare rolls who are most likely to find work in that sector. The goal of this approach, undertaken in this section, is to try to paint a picture of low-wage labor market conditions and to extrapolate a set of possible outcomes.

New trends in the 1990s

The genuine wage growth in the late 1990s was benefited from across the wage configuration, by low-, middle-, and high-wage earners and by both men and women (see Table A). Salary growth has also been larger among lower-wage employees than among high-wage (or middle-wage) employees, showing a remarkable turnaround from the early 1990s and the former two decades, when low-wage workers not only did worse than other workers but in fact saw their wages continuously decline after inflation (Montgomery, 2004).

TABLE A. Pay and productivity trends, 1990-200

Labor market indicator

Annual growth

Acceleration

1995-2002 vs.

1990-95

(2)-(1)

1990-95

(1)

1995-2002

(2)

Labor productivity

1.4%

2.5%

1.1%

Average hourly:

Wages

0.6%

2.7%

2.0%

Compensation

0.6

1.8

1.3

Real hourly wages*

Men

Low

-0.9%

1.7%

2.6%

Middle

-1.1

1.3

2.4

High

0.1

1.8

1.7

Women

Low

-0.3%

2.0%

2.3%

Middle

-0.3

1.4

1.7

High

0.7

1.9

1.2

*Measured as 20th, 50th and 90th percentiles.

Source: www.census.gov

Moreover, the attributes of jobs have improved remarkably since 1995. The share of workers with employer-provided health insurance -- a clear dividing line between a "good" and a "bad" job -- has grown since 1995, reversing the downward slide in health insurance coverage during the 1980s and early 1990s. The growth of part-time jobs relative to full-time jobs slackened, to the point that there were proportionately fewer voluntary part-time workers in 2002 than in 1995.

Impact -- Trends and Future

Demographic change, as in the shift to single-parent families, has been held to be a major determinant of poverty since the 1970s, when this shift was occurring most quickly (Gimble, 1991). But this conventional wisdom is incorrect. While family structure changes have led to higher poverty rates over the years, their role has diminished over time, and other factors, such as more education (which has led to less poverty) and the growth in inequality (which has increased poverty rates over time) have been quantitatively more important than changes in family structure in determining the rate of poverty. Economic trends have, of course, played a primary role in poverty trends. Over the 1980s, growth was slower, the labor market never tightened up as it did in the 1990s, and, most importantly, inequality grew quickly relative to earlier periods. As a result, poverty rates never responded to the growing economy as much as might have been expected given the growth that did occur in the 1980s and early 1990s. In the latter 1990s, however, the labor market moved toward full employment, creating upward pressure on wages that was felt by even the lowest wage workers. At the same time, welfare reform, with its emphasis on work, was passed, and together these two factors led to a notable increase in labor supply from poor families.

Work through temporary help agencies continued to grow throughout the recovery, but the growth slackened considerably after 1995 (Monk, Hodge, & Dunn, 2000), the share of workers employed by temporary agencies grew 60% from 1991 to 1995 but by just 26% from 1995 to 2002. Had the 1991-95 growth continued, there would have been 826,000 more people employed through temporary agencies in 2002. In addition, during the 1995-2002 period the share of the workforce working more than one job -- multiple job-holders -- fell from 6.2% to 5.8%, reflecting fewer people working two part-time jobs or supplementing their full-time job with a part-time one. In terms of all types of nonstandard work -- including regular part-time, temporary help agency, on-call, independent contracting, and contract firm work -- the share of workers in these arrangements fell from 26.4% to 24.8% of total employment during 1995-2002. For most low-income prime-age families, the primary source of family income is the earnings of family members. Government transfers such as welfare benefits and housing subsidies are also important, but, particularly in the era of welfare reform, paid work in the labor market is key to economic well-being. For prime-age poor families, transfers play a larger role. Yet, even for these families, earnings are still the largest component of income, and, with the decline in public assistance benefits in the 1990s, earnings have become significantly more important over time (Hillard, & McIntyre, 2005).

Assessment

The above analysis demonstrates an increase in low-wage jobs, particularly among men, which leads to an examination of changes in labor demand, wherein I try to differentiate between the shift in relative demand against low-skill workers (defined in the literature as workers with a high-school education or less) and the shift in demand, at least for men, toward lower-wage workers. The analysis shows that the demand twist against low-skilled workers is not so evident when we examine demand shifts by absolute wage levels, which I argue is the relevant metric in the question of welfare-to-work. The impression I derive is that, barring an economic downturn, it is possible that the labor market will be able to absorb the increased supply of low-wage workers moving from welfare to work. I am, however, much less optimistic about the effect of reform on the wage trends of low-wage workers.