Unless there are jobs, welfare reform fails

While the meltdown in financial markets has shrunk the wealth of people at the top of the income distribution, growing unemployment rates will test the assumptions behind the welfare reforms of the 1990s that radically changed the nation’s safety net for the poor.

In 1996 Congress replaced Aid to Families with Dependent Children (AFDC) with the program Temporary Assistance to Needy Families (TANF). Two of the major differences between the programs were work requirements and time limits. TANF required that some minimum percentage of recipients in a state hold jobs, and time limits were imposed. Recipients could typically only receive benefits for a maximum of five years. AFDC had no time limits; recipients could stay in the program as long as they had dependent children and incomes below the cutoffs.

During the same period Congress approved the expansion of the Earned Income Tax Credit (EITC), which subsidizes the earnings of low income families. Up to a point, the more the adults in the family earn the larger the tax credit they receive. The EITC is now the nation’s largest cash transfer program. Expenditures on EITC are close to twice the amount spent on TANF. The changes in the two programs represented a major shift in emphasis in the nation’s cash anti-poverty programs from payments based on need to payments tied to work effort.

At the time some liberals such as Sen. Daniel Patrick Moynihan vigorously opposed the changes because they felt millions of children could face severe economic hardship as families were pushed off of welfare. Those concerns turned out to be unfounded for most welfare recipients. Since TANF replaced AFDC the number of families on welfare has fallen by more than half, employment for never-married single mothers has risen, and the poverty rate of children is lower than it was in the mid-1990s. Serious opposition from liberals to the basic design of TANF has largely disappeared. When asked to give an example of an issue on which he had changed his mind, Barack Obama replied welfare reform.

Challenges remain

This is not to suggest that welfare reform was a panacea. On average the income of women who have left welfare is roughly the same as when they were on welfare, indicating they were not able to find employment that would pull them out of poverty. Also, a high percentage of recipients who were forced out of the program by time limits suffered significant declines in income. For detail, see Robert Moffitt’s excellent summary of the living standards of former welfare recipients (From Welfare to Work: What the Evidence Shows”) on the Brookings Institution’s Web site (http://www.brookings.edu/papers/2002/01welfare_moffitt.aspx).

However, one of the greatest concerns about the structure of TANF has yet to be tested. The fundamental assumption behind TANF is that potential welfare recipients will be able to find work. The establishment of TANF was followed by a period of exceptionally low unemployment. By 2000 the unemployment rate had fallen to 3.9 percent, the lowest since the 1960s, giving women leaving welfare the opportunity to hunt for work in a strong labor market. Since 2001 the unemployment rate has drifted upward (peaking in 2003 at 6.3 percent before falling to 4.6 percent in 2006), but until recently it has been relatively low by historical standards.

The most recent employment data show a sharp downturn in the labor market, with virtually all economists predicting more bad news to follow. It is extremely unlikely, despite all of the stories comparing the crisis to the stock market crash of 1929, that unemployment will rise to Great Depression levels (in 1933 about one-fourth of the labor force was unemployed). However, it’s conceivable the downturn could match the 1981-82 recession, when unemployment peaked at close to 11 percent.

When unemployment rises, less-skilled workers are the most likely to lose their jobs. The unemployment rate for workers who did not graduate from high school (the group most likely to qualify for transfer payments) is typically double the unemployment rate for college graduates. If the downturn is as severe as 1981-82, EITC payments to many families will fall as layoffs push down earnings. Simultaneously, some single-parent families will be locked out of the welfare program by the time limit provisions. It would also be a mistake to assume that those families will necessarily receive unemployment insurance, since individuals need to meet work and earnings requirements to qualify for the benefits.

If we are lucky, the increase in unemployment will be modest. If not, we will find out what happens when the welfare system assumes recipients should work but jobs are very hard to find.

X Dr. Porter is chair of the economics department at Youngstown State University.