The Labor Market Effects of Welfare Reform

Abstract

A major goal of the 1996 federal welfare reform was to increase the labor market participation of welfare recipients. Some analysts have speculated that if the reform is successful, this increase in labor supply may exert downward pressure on wages and reduce the employment rate of other low-skilled workers in the labor market. The magnitude of these hypothetical labor market effects is uncertain because there have not been large changes in eligibility for federal welfare programs from which to draw inferences. This study treats the 1991 elimination of the General Assistance program in Michigan as a rough analog to the 1996 federal reform. In all, about 82,000 able-bodied adults lost benefits. Comparisons with other states indicate that employment in Michigan increased by two to four percentage points among high school dropouts, which corresponds to 25–50% of the original GA caseload. There is little evidence of wage or employment declines among other low-skilled workers.