The Labor Market Effects of Welfare Reform

Abstract

The recent reform of the federal welfare system is meant to encourage recipients to leave welfare and enter the workforce. If the reform is successful there are likely to be effects felt throughout the low-- skilled end of the labor market. As former welfare recipients enter the labor market, they may exert downward pressure on wages or displace employment of others already in the labor market. Since there has been limited changes in eligibility for federal welfare programs from which to draw inferences, the magnitude of these labor market effects are open to debate. This study considers these issues in general and evaluates how labor markets in Michigan were affected when the General Assistance program in that state was eliminated in 1991. General Assistance was a large-- scale, state--administered program that provided benefits to people who fell through the cracks in federal anti--poverty programs. In all, about eighty to one--hundred thousand able--bodied adults lost benefits. Increased labor force participation among these people resulted in a decline in weekly hours among high school drop--outs of 1.2 to 2.4 percent. There is little evidence of declines in hourly earnings, except in the Detroit area, where wages fell by about five percent.