The Jobs Aren't There
By Mark Weisbrot
"We now know that welfare reform works," declared President Clinton last August, one year after signing the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). 1 But is "welfare reform" really a success in terms of its stated goal-- moving people "from welfare to work?" Or is it merely removing poor people from the welfare rolls, without offering them an opportunity to find employment that will allow them to escape from poverty?
Many observers have been reluctant to give a definitive answer to this question, on the grounds that we do not yet know what has happened to all the people who have left welfare since the legislation has been implemented. Also there are many more people targeted to be removed from the welfare rolls over the next few years. But there is now a considerable body of statistical evidence, both regional and national, which indicates that welfare reform cannot succeed as it is currently structured.
This evidence is straightforward and conclusive: there simply are not enough jobs, even in a growing economy, to provide employment for those who are and will be thrown into the labor market. Even more importantly, the overwhelming majority of available jobs do not pay enough to lift former welfare recipients out of poverty. Furthmore, the effect of pushing millions of people into competition for low-wage, low-skill jobs is to further depress wages in this segment of the labor market.
In other words, the problem is in the structure of the labor market itself. The basic premise of the PRWORA, that requiring welfare recipients to find employment would somehow create the necessary jobs and income, is demonstrably false. As a result of recent research on the relevant sectors of the labor market, it is no longer necessary to wait several years until social scientists have tracked all the people removed from the welfare rolls, in order to evaluate the success of welfare reform.
Table 1 shows the projected number of net new low-skilled jobs for 1997-98, for all 50 states. 2 This is compared with the number of welfare recipients that are targeted to be removed from the rolls by the end of 1998.
As can be seen from the data, only 13 states, with just 9% of the nation's welfare caseload, are projected to create enough new jobs to absorb the former welfare recipients seeking work. Regionally, these states are primarily in the Mountain West, Pacific Northwest, the Plains states, and the Southeast. Nationally, only 704,100 jobs are projected to be created, as compared with 1,298,000 people leaving the welfare rolls. This is only 54% of the jobs that would be necessary to employ these new job seekers, even if there were no other new entrants competing for the same jobs. In other words, the former welfare recipients will outnumber the net new jobs by nearly two to one.
Six of the largest states, which together carry nearly half of the national welfare caseload, will be especially deficient in jobs: New York, California, Illinois, Michigan, Pennsylvania, and Ohio. The outlook for New York is particularly bleak, with net new jobs projected to cover only 13% of people leaving welfare.
However, these numbers give only a first, partial glimpse of the "job gap." This is because they are only comparing the number of net new jobs created with the number of former welfare recipients seeking employment. The problem is actually much worse than this, because the labor force is also growing each year, and people coming off of welfare will have to compete with other new entrants to the labor force. If we add the new entrants who can be expected to compete with former welfare recipients for these jobs, the percentage of workers that can be absorbed by new job creation shrinks from 54% to 37%. 3 In other words, the ratio of job seekers to jobs moves from about two to one to closer to three to one, with a national shortage of more than a million jobs.
It is worth noting that these numbers are consistent with regional "job gap" studies, which have now been completed for a number of states.
It is also worth emphasizing that these results are consistent with historical studies in the labor economics literature. The number of job seekers has almost always exceeded vacancies, and this gap widens at higher unemployment levels. 4 In perhaps the most comprehensive study of these phenomena, Katherine Abraham of the Brookings Institution estimated the ratio of job seekers to vacancies at between two and three to one, for an unemployment rate between 4.5 and 5 percent. 5
The current unemployment rate is in this range, and it has become common to regard this as full employment, or even greater than full employment. While it is true that the present rate of 4.7% constitutes a 24-year low, it is still far above the rate at which there would be enough vacancies for everyone seeking employment. 6
Therefore the basic premise of "welfare-to-work," as it is currently structured, runs counter to everything that economists have long known about the functioning of labor markets in the United States. The idea that removing welfare recipients from the rolls will lead to their employment in the private sector is based on a logical error known as a fallacy of composition: it is assumed that what is true for the individual, that he or she may be able to find a job, is true at the macro level. But the evidence clearly shows that this is false.
Studies of the actual behavior of welfare recipients reinforce the conclusion that we are not facing a problem of unwillingness to work. In one study that tracked welfare recipients over two years, 70 percent were found to have participated in the labor force, either by working or looking for work. 7
If we look at the unemployment rates of people who share the demographic features of the populations targeted by welfare reform, the chances of finding employment drop precipitously. Table 2 shows the educational attainment of single mothers on welfare. Nearly half (48%) have less than a high school education. Three-quarters are under the age of 35, with 65% between the ages of 20 and 34.
In this context it is more accurate to consider underemployment as well as unemployment. Underemployment includes not only the unemployed who are seeking work, but also those who have looked for work in the past year but are not currently looking because of various constraints such as lack of child care or transportation. It also includes those who have given up looking for work because they have become discouraged, and people who are working part-time involuntarily. Table 3 shows unemployment and underemployment rates for females by education, age, and race.
Women with less than a high school education face an unemployment rate of 13.6% and an underemployment rate of 24.3%. For black women, many of whom live in areas where jobs are particularly scarce, the rates of unemployment and underemployment are 20.9% and 35%, respectively. For all women under 25, the rate of underemployment is 19.8%.
These are depression levels of unemployment and underemployment for most of the population that is targeted for "welfare-to-work." Their employment prospects are therefore considerably worse than would appear from looking at just the number of openings relative to job seekers, even in the bottom quintile of the wage distribution. The job vacancies in Table 1 are based on projected growth in a number of low-skilled, low-wage occupations that people leaving welfare might be expected to get: machine operators, cleaning and building service workers, food preparation, textile and apparel, among others. But many employers in these occupations require prior experience or education, such as a high school diploma, that many welfare recipients do not have. This experience or education may not be relevant to the job, but as long as there remains a surplus of low-skilled labor, employers are able to use such requirements as a screening device to select workers that they believe will have a better chance of success on the job.
Given the low levels of education and job skills among much of the welfare population, a good deal of attention in policy circles has focussed on the need for training programs. While funding for such training is as important as it is lacking, it is also important to keep in mind that no amount of training will make a significant dent in the employment problem so long as there are so few jobs relative to job seekers. Furthermore, the emphasis on skills and training is often misconstrued to place the blame for the low wages at the bottom end of the income distribution on the workers themselves. It is assumed, in accordance with traditional economic theory, that pay is commensurate with productivity, and that the low pay of "low-skilled" 8 jobs results from the low productivity of these workers.
However, as will be shown below, the low and declining wages faced by workers trying to leave welfare is, like the scarcity of job opportunities, a result of market and policy failure rather than individual failure. It is this problem-- the inability of our economy to create living wage jobs-- that presents the single most important obstacle to the reduction of poverty.
In the last two years there have been several regional studies by economists who have carefully estimated the number of low-skilled jobs that might be available to welfare recipients, relative to the number of people seeking these jobs. Their results are consistent with the national data analyzed above, and find a large "job gap" in every state that has been examined.
These studies take also tackle the more important problem of the quality of the jobs that are available. The typical recipient of AFDC (Aid to Families with Dependent Children) that will now enter the labor market is a mother with two children. The vast majority of the jobs available to these workers, even if they are fortunate enough to obtain one, do not pay nearly enough to lift these families out of poverty.
The largest study included six Midwestern states: Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin. This research found a shortage of more than a million low-skilled jobs for the region. This translates into a ratio of four workers seeking jobs for every low-skilled job opening. 9
The ratio expands quite rapidly when we restrict the set of job openings to those that pay a poverty level wage, or more reasonably, to a "living wage." Kleppner and Theodore (1997) calculated a basic budget which would be required to cover the cost of household necessities and work related expenses. This came to $25,907 of pre-tax income for a family of three, which was taken as the cut off for a "living wage" in the Midwest region.
The precise cut off for a living wage may be subject to debate, but the results of this research are compelling no matter where it is set. Table 4 lists the number of low-skilled jobs available in the Midwest at various wage levels. Note that the number of job openings fall off very sharply as the wage increases beyond the official poverty line: at 150% of the poverty level, the number of low-skilled jobs drops by two-thirds. It drops by another third as we move to a living wage.
Table 5 shows the ratio of job seekers to low-skilled jobs in the Midwest. Even at the official poverty level of $12,278 dollars for a family of three, there is a worker-to-job ratio of 22 to 1. This ratio increases to 64 to 1 at 150% of the poverty level, and to 97 to 1 for jobs that pay a living wage.
These numbers probably represent the most realistic estimate of the odds that a typical target of welfare reform will escape poverty through employment. They are truly formidable odds, and call into question the intent and purpose of this legislation and its "welfare-to-work" mandate. The Midwestern states on which this study is based compare favorably to the rest of the country, so it is reasonable to conclude that these odds are not significantly better, on average, in the national economy as a whole.
These results are consistent with other empirical studies that have looked at both the projected and actual earnings of former welfare recipients. Danziger and Lehman (1997) have projected the earnings of welfare recipients in Atlanta, Detroit, Los Angeles and New York, taking into account both the probability of finding employment as well as expected wages. The results are illustrated in Figure 1. For black women under 25, the projected earnings are between $4900 and $6800 a year; even for the 26-35 age group, they are less than $15,000. Only for women over 35 -- who constitute about a third of welfare recipients -- do the projected earnings begin to approach a living wage.
A recent University of Wisconsin study tracked the actual earnings of former AFDC recipients and found similar results. Average earnings in the first year were $6100; by the fifth year they had increased to only $9900, far below the poverty level for a family of three. 10
Many welfare recipients face other serious obstacles to their employment. About 30% are women who are either disabled themselves or caring for disabled children. Almost half the children supported by AFDC were under age six, and in a survey about one-third of unemployed welfare recipients cited lack of child care as the reason for their unemployment. 11 It is clear that a large portion of the people who are being asked to move from "welfare-to-work" will not be able to do so unless very heavily subsidized child care is made available.
But the biggest problem faced by welfare recipients remains the lack of living-wage, or even poverty-wage jobs. Without legislation to resolve this problem, "welfare reform" can not have any significant effect other than increasing the rate of poverty among the low-wage work force.
Perhaps the most powerful result of welfare reform, and one that has been little noticed, is the effect on wages of moving millions of former welfare recipients into the low-wage labor market. As noted above, these workers are already being thrown into a market where there is surplus labor. For example, unemployment was 21.3% in 1994 for women without a high school diploma between the ages of 18 and 30.
Table 6 shows the decline in average earnings for unmarried mothers, one of the primary targets of welfare reform. From 1979-1993 the real weekly earnings of the 25-34 year age group without a high school diploma declined by 25%, from $307 to $231 for full-time work. This is an enormous cut for this group of women, enough to push the average wage-earner far below the poverty line. Those with a high school education have not been hit as hard, but have still suffered historically unprecedented declines in their real wages.
Welfare reform now threatens these workers with an accelerated version of prior wage deterioration. Mishel and Schmitt (1997) have estimated the effect of the influx of former welfare recipients on the wages of the bottom 30% of workers--about 31 million people with wages of less than $7.19 an hour. They estimated that these wages would fall by 11.9%, a very serious cut for a sector of the workforce that has been losing ground for more than two decades. The cut is even steeper for states that have larger welfare populations: 17.8% for California and 17.1% for New York. The total income lost to these workers nationwide would be about $36 billion a year. Ironically, this is $8.5 billion more than the total of federal and state spending on AFDC in 1994.
This wage-depression effect of welfare reform is particularly insidious because it will worsen the structural problem that is the primary cause of most welfare recipients' poverty to begin with: the failure of labor markets to produce enough jobs that can keep low-wage, full-time workers above the poverty level. This illustrates with alarming clarity the danger of misdiagnosing the causes of poverty in our society. Having convinced themselves that poverty is primarily a problem of work effort, policy makers have now created a situation which not only worsens the plight of former welfare recipients but everyone in the low-wage labor market. We can therefore expect a significant increase not only in poverty among welfare recipients, but also in the numbers of the working poor.
This blow to the low-wage labor market comes at a time in which poverty and inequality have been increasing for more than two decades. Almost all the gains from economic growth over the last decade have gone to the top 5% of the income distribution. 12 At the lower rungs, the progress made in the war on poverty has been largely reversed: In 1960 the poverty rate for children was 27%, and it fell to 14% in 1973. By 1993 it was back up to 23%. 13
These long-term trends in poverty and inequality across the entire income distribution provide further confirmation that the problems of welfare recipients are deeply entrenched in our labor markets and related institutions. Until just three years ago, the Federal Reserve had set the "Non-Accelerating Inflation Rate of Unemployment" at 6%, which means that its policy would be to raise interest rates and slow the economy if unemployment dipped too far below that rate. The Fed still keeps a very close eye on wage growth, and consistently interprets any increase in real wages as a threat of accelerating inflation. This is the primary reason for the unprecedented phenomenon that median real wages still remain below their 1989 (pre-recession) level, after more than six years of economic growth.
Globalization has also taken its toll, and economists now acknowledge that increasing international trade has contributed significantly to the worsening income distribution in the United States. The most recent, and thorough study of trade and inequality just published by the pro-globalization Institute for International Economics concluded that 39% of the increased inequality over the past two decades is attributable to trade. 14 And this does not include the effects of the increased international movement of plant and equipment, as well as the threat of relocation, which has also been documented recently. 15 Changes in labor law, the declining bargaining power of unions, the deregulation of certain industries such as transport and communications--all of these have had powerful effects on the price of low-wage labor.
The prospects of moving welfare recipients to work, and out of poverty, are not likely
to improve until conditions in the labor market improve. Unfortunately, welfare reform as
it is currently structured does nothing to ameliorate these conditions-- in fact it is
pretty much guaranteed to make them worse.
1. Washington Post, August 24, 1997, p. C6.
2. Cochrane et al (1997). These projections were made on the basis of regional occupation and industry data from the Bureau of Labor Statistics, combined with Regional Financial Associates' employment projections at the state level. The data are for the bottom quintile of occupations, in terms of income, under the assumption that former welfare recipients would mainly be applying for these jobs.
3. The labor force is projected to grow by about three million people for 1997-98. There are no data on the educational attainment of the new entrants. However, if we assume as a first approximation that 20% of the new entrants will seek jobs at the bottom 20% of the pay scale, this adds 600,000 people to the pool of job seekers that former welfare recipients will be competing with.
4. This is due not only to the increased number of job seekers, but also a significant decline in the economy-wide vacancy rate, as unemployment increases.
5. Abraham (1983), p. 718. There has been no comparable research updating this work since the 1980s.
6. For almost all of the data on vacancies used in Abraham's analysis, she estimated that this unemployment rate would be about 3.3% (1983, p. 718-719).
7. Spalter-Roth et al (1995).
8. Economists often use the term "low-skilled" for jobs that do not require a college degree, which would include about 70% of the labor force. Many of the workers that fall in this category are clearly skilled, and many are also have high productivity, whether skilled or not.
9. If one excludes from the job seekers those welfare recipients who are not presently required to seek employment, the ratio falls to two-to-one, rising to about three-to-one by the year 2000.
10. Meyer and Cancian (1996). These numbers are in 1997 dollars.
11. Burtless (1997), p. 40.
12. See Freeman (1997).
13. Lawrence (1997), p. 29.
14. Cline (1997), p. 264.
15. A recent, comprehensive study by Kate Bronfenbrenner (1996) of Cornell University found that NAFTA had "created a climate that has emboldened employers to more aggressively threaten to close, or actually close their plants to avoid unionization (p. 3)."
Abraham, Katharine G. 1983. "Structural/Frictional vs. Deficient Demand Unemployment: Some New Evidence." The American Economic Review (September):708-724.
Bernstein, Jared. 1997a. The Challenge of Moving From Welfare to Work: Depressed Labor Market Awaits Those Leaving the Rolls. Issue Brief #116. Washington, DC: Economic Policy Institute.
Bernstein, Jared. 1997b. Low-Wage Labor Market Indicators by City and State: The Constraints Facing Welfare Reform. Working Paper No. 118 Washington, DC: Economic Policy Institute.
Bernstein, Jared, and Lawrence Mishel. 1994. Trends in the Low-Wage Labor Market and Welfare Reform: The Constraints on Making Work Pay. Washington, DC: Economic Policy Institute.
Bronfenbrenner, Kate. 1996. Final Report: The Effects of Plant Closing or Threat of Plant Closing on the Right of Workers to Organize (September).
Burtless, Gary T. 1997. "Welfare Recipient's Job Skills and Employment Prospects." Welfare to Work 7, no.1 (Spring): 39-51.
Cline, William R. 1997. Trade and Income Distribution. Washington, DC: Institute for International Economics.
Cochrane, Steven G., Toni Horst, and Sophia Koropeckyj. 1997. "The Economic Impact of Welfare Reform." Regional Financial Review (May).
Danziger, Sheldon, and Jeffrey Lehman. 1996. "How Will Welfare Recipients Fare in the Labor Market?" Challenge (March-April).
Freeman, Richard B. 1997. "Solving the New Inequality." Boston Review. Volume XXI, No. 6 (January).
Kleppner, Paul and Nicolas Theodore. 1997. Work after Welfare: Is the Midwest's Booming Economy Creating Enough Jobs? Midwest Job Gap Project. Office of Social Policy Research, Northern Illinois University and the Chicago Urban League.
Lawrence, Robert Z. 1997. Current Economic Policies: Social Implications Over the Longer Term. Societal Cohesion and the Globalizing Economy. Paris: OECD.
Meyer, D.R. and Maria Cancian. 1996. "The Economic Well-Being of Women and Children Following an Exit From AFDC." Madison, Wisconsin. Institute for Research on Poverty. Discussion Paper (1101-96).
Mishel, Lawrence, and John Schmitt. 1995. Cutting Wages By Cutting Welfare: The Impact of Reform on the Low-Wage Labor Market. Briefing Paper. Washington, DC: The Economic Policy Institute (September).
Spalter-Roth, Roberta, Beverly Burr, Heidi Hartman, and Lois Shaw. 1995. Welfare that Works: The Working Lives of AFDC Recipients. Washington, DC: Institute for Women's Policy Research.
The author would like to thank Robyn Pretlow, Elizabeth Hanson, Nicole Woo and Kurt Seibert for their research and production assistance. Thanks also to Simon Greer, Fred Azcarate, Jared Bernstein and Richard Healey for their invaluable editorial advice and input. Any errors that remain are the responsibility of the author.
December 10, 1997