Since 1993, welfare recipients have been leaving the welfare rolls for work in record numbers. From January 1993 to January 1998, welfare caseloads declined by 33 percent nationally, and several studies have estimated that over half of the adults who have left welfare have entered the labor market.⁽¹⁾ The inflow of welfare recipients into the labor market can be attributed to two basic factors: welfare reform and the strong economy. Welfare reform is widely perceived to have begun with the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in mid-1996, which increased the number of welfare recipients who were required to seek work. But even prior to this legislation, many states were reshaping their Aid to Families with Dependent Children (AFDC) programs under waivers, which likely increased the number of welfare recipients entering the labor force in at least some of these states. In addition, the strong economy from 1993 to 1998 increased the availability of low-skill jobs and undoubtedly lured many welfare recipients into the low-skill labor market.

Several other factors may have contributed to changes in labor market participation of welfare recipients and are worth mentioning. First, the federal government expanded the Earned Income Tax Credit (EITC) for working low-income families in the early- and mid-1990s, which most likely encouraged some welfare recipients to enter the labor force. Second, the minimum wage increased in 1997, which could have offset downward wage pressure from the entry of welfare recipients into the labor force. Third, some regions of the country experienced significant changes in population, which reduced or increased the number of low-skill workers in these areas. Finally, the recession of the early 1990s created a pool of unemployed low-skill workers who were available to take new jobs when the economy began to recover.

Policy-makers have been concerned about whether enough jobs will be available to employ the additional welfare recipients entering the labor market as a result of welfare reform. If a surplus of jobs is not available in particular areas, welfare recipients’ entry into the labor force might reduce low-skill wages and displace some workers. Policy-makers are especially concerned about the impact of welfare reform on rural and small metropolitan labor markets, because these markets might be less able to absorb the inflow of welfare recipients than urban labor markets.

The Assistant Secretary for Planning and Evaluation (ASPE) in the Department of Health and Human Services (DHHS) contracted with The Lewin Group to examine how well rural and small metropolitan labor markets can absorb welfare recipients, and to the extent feasible, estimate the impact of welfare reform on rural and small-metropolitan regions since 1993. This study uses an economic model to estimate the impact of welfare reform and improvements in the economy on the low-skill labor market, where most welfare recipients seek work. A major challenge facing researchers in this area is to distinguish between entry due to reforms (“welfare push”) and entry due to the strong economy (“demand pull”). This decomposition is necessary if we are to anticipate future conditions in the low-skill labor market, when the economy might not be so strong. We attempted such a decomposition in this report. (author abstract)