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Guess Who Pays for Workfare?

It is one thing to claim—as the politicians of both parties now do—that the replacement of welfare by work would be a good thing for recipients, for taxpayers, and for the general reputation of public assistance to the poor. It is quite another question whether that transformation can actually be accomplished, and what it would then take to accomplish it. In particular one is entitled to ask: What jobs will former welfare recipients find, and how will they find them?

This elementary distinction between desirability and feasibility is often neglected in political debate. During the rhetorical maneuvering that led to the welfare “reform” bill passed in the summer of 1997 everyone seemed to be devoted to ending “welfare as we know it” but no one was prepared to describe how the new system would actually function. (Very likely “none of the above” would have been the most popular answer if the question had been asked.) Some time will pass before the shape of the new system is visible. The legislation left the main decisions to the individual states, which may well pass the buck to the large cities where most of the problem is, which may in turn pass the buck to the bishop of Caesarea.

That particular question is not my subject here because I am not trying to understand the consequences of any particular legislative proposal. (That has already been done for the 1997 bill by the Urban Institute, with scary results that do not seem to faze the bill’s sponsors a bit, as well as by Peter Edelman in a recent Atlantic Monthly article.1 ) My intention is quite different from theirs. It is, first, to describe in theoretical but common-sense terms the consequences of withdrawing welfare benefits and forcing the former recipients into the labor market. What will become of them? Where will the jobs come from that they are supposed to find and occupy?

I will also examine the results of some experimental “workfare” initiatives on the part of several states, in order to get a quantitative grip on the employment and earnings prospects of former welfare beneficiaries and their successors. Finally, I will speculate briefly about what would be required for a successful transformation of welfare into work. My conclusion is going to be that we have been kidding ourselves. A reasonable end to welfare as we know it—something more than just benign or malign neglect—will be much more costly, in budgetary resources and also in the strain on institutions, than any of the sponsors of welfare reform have been willing to admit. And the reasons are based on normal economics.

On the question of job availability there are two extreme positions to consider. The first is very optimistic: there is no problem. The jobs are there; they are always there. It is only necessary that those who seek them be willing to accept realistic wages. Former welfare recipients, having nowhere else to go, will do just that. They will be paid what their productive capacity justifies, and that may be more than we think. The demand for labor is elastic; that means even a small reduction in going wage rates will generate a substantial expansion of job openings. And the implied clear presentation of a route to self-betterment will lead unqualified workers to acquire the education and training they need to move up the ladder. The small residue of genetic or accidental incompetents—the true paupers—can be left to private or public charity.

There is nothing illogical or incoherent about this story. It could apply in some worlds. I have to say that I do not think it describes our world, the sort of world that generated the 1982 recession in the United States and a decade of 10 percent unemployment rates, now even higher, in the main countries of Europe. It would be irresponsible, almost Alfred E. Newmanesque, to depend on this idealized story to smooth the transition to welfare as we will come to know it.

There is another extreme theory that sees only rigidity where the first sees flexibility. It comes to deeply pessimistic conclusions. In this story, the total amount of employment is determined almost entirely by macroeconomic factors. Certain broad characteristics of the private economy, together with national monetary and budgetary policies, determine, within narrow limits, the aggregate expenditures of the final purchasers of goods and services. Most of the time the aggregate volume of production is limited by the amount of spending available to support it. The step from aggregate production to aggregate employment depends only on current productivity, a remote and slow-moving part of the macroeconomic equation.

It follows that the labor market is like a game, or several games, of musical chairs. (At the birthday parties of my childhood it had the more picturesque name of Going to Jerusalem.) When the music stops, the players scramble for the available chairs. Since there are fewer chairs than players, the losers are left standing. They are, you might say, the unemployed. If the game were repeated, the losers might be different people, but the number of losers is determined entirely by the number of players and the number of chairs. Adding more players—which is what forcing welfare beneficiaries into the labor market would do—can only increase unemployment. Some former welfare recipients will find jobs—perhaps many will because, among other reasons, they are hungry—but only by displacing formerly employed members of the assiduously working poor.

I think that this story does not give enough credit to the adaptability of real market systems. Anyone who believed it would have a hard time explaining the fairly long periods during which the US economy accommodates a growing labor force while the unemployment rate fluctuates within a fairly narrow range. The only possible explanations would be very good luck or very good policy, and you would have to be pretty gullible to find either one to be a plausible account of history.

Then how would a large-scale substitution of work for welfare play itself out in the real-world system of imperfect labor and product markets? A more accurate understanding will lie somewhere between the extremes I have just sketched. It will have to allow market forces to operate with some effectiveness, but will also respect the power of macroeconomic conditions over aggregate expenditure and output. This territory is still being fought over by mainstream economists.

Any effective transformation of welfare into work, if it means anything, must mean that a substantial number of unqualified people will be looking for work who were previously not doing so. Some of them will find jobs just by being in the right place at the right time; they might have done so earlier if they had tried. These jobs will represent a net addition to aggregate employment. One sometimes gets the feeling that this is what some members of Congress visualize, and all that they visualize. If so, they cannot be right. There is absolutely no reason to believe that our economy holds a substantial number of unfilled vacancies for unqualified workers. The machinery of adjustment must be something more elaborate. Here and later, it is worth keeping in mind a point recently emphasized by Christopher Jencks.2 There are substantial cash costs associated with going to work; the largest costs are incurred when the mothers of small children take jobs. For that reason, many welfare recipients who do find work will find themselves worse off, perhaps substantially so.

The most immediate route by which the ex-welfare population can find jobs is by competing with and displacing other unqualified workers who are already employed, either by being in some way a more suitable employee or, more likely, by offering to work for less than the incumbent is getting. Unqualified workers are presumably excellent substitutes for one another, so only a very small wage cut would be needed. But pure displacement is just musical chairs: more players and the same number of chairs.

More important is the possibility that competition for jobs by ex-welfare recipients and their successors will drive down the wage for unqualified workers by enough to induce some employers to hire them to replace slightly more qualified incumbents who do the job better but have to be paid more. Since bottom-end workers are less than perfect substitutes for second-level workers, the fall in the unskilled wage will have to be perceptible to make the switch profitable for employers. There is displacement going on here too, but it is somewhat better than one-for-one because unqualified workers are, by definition, less productive than second-level workers. Also, a broader wage reduction for lowest-level and second-level workers has a better chance of expanding the number of employment opportunities available in that segment of the labor market. So there would be a small gain in total employment, but it comes at the expense of the earnings and job prospects of previously employed second-level workers. (This talk of discrete levels of skill is just an artificial simplification of a more complex process of job search by individuals and occasional matches with firms. It helps keep the discussion orderly.)

In principle, the process does not stop there. The erosion of the wages of second-level, slightly skilled, workers makes them more competitive with third-level, slightly more skilled workers. The fact that some second-level workers have been displaced into unemployment may lead to a further bidding-down of third-level wages as the competition for jobs intensifies. So the costs of adjusting to the influx of former welfare recipients spreads to the working poor, the working just-less-poor, and so on, in the form of lower wages and heightened job insecurity.

There is, of course, a long, branching hierarchy of skill levels in a modern economy. Each level is subject to competition from those just above and below, especially below. But one would naturally expect the degree of displacement to attenuate as one gets further and further away from the relatively unqualified former welfare recipients whose appearance on the job market is the source of the disturbance. By the time you get to the very top of the food chain, say the Princeton philosophy department, no one will be feeling any pain, and in fact the tenured members may be able to get their yardwork done more cheaply. The adjustment costs will be concentrated at the bottom of the job hierarchy and the bottom of the income distribution. Of course it could be said that those are the very people who have been protected from competition all along by the unreformed welfare system. It is not a remark I would choose to make myself, but there must be some truth to it.

All this reshuffling in the labor market must have macroeconomic implications. The relevant question is whether any of them hold the promise of an easier transition to a world in which work has replaced welfare. Suppose we imagine the displacement and wage-reduction process to have worked itself out completely. The result is a lower economy-wide real wage. Can we expect that interim fact to generate enough net new jobs to accommodate the addition to the labor force created by the end of welfare as we know it? Or will there just be more unemployment?

  1. 1

    The Worst Thing Bill Clinton Has Done,” Atlantic Monthly, March 1997.

  2. 2

    The Hidden Paradox of Welfare Reform,” The American Prospect, May- June 1997, pp. 33-40.

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