Labor markets and public assistance programs.

• Author: Blank, Rebecca M.

The current heated debate over welfare reform focuses on getting more welfare recipients to work. The effectiveness of changes in the design of welfare programs depends heavily on the economic environment surrounding these programs. Changes in the macroeconomy and the labor market can have large effects on the behavior and the well-being of poor families.

Economic Growth and Poverty(2)

It is a widely held belief that economic growth helps the poor. Many have claimed that a rising tide not only lifts all boats, but might even lift the smaller boats faster than the larger boats. Indeed, the steep declines in poverty in the 1960s were caused almost entirely by strong and sustained macroeconomic growth.

The poor feel the impact of economic growth primarily through the labor market. When the economy expands, demand for labor rises and unemployment falls. This most benefits those who are unemployed, underemployed, employed part time, or out of the labor force entirely. Disproportionately, less-skilled workers experience much higher unemployment. The unemployment rate among workers without high school diplomas has been consistently about five times that of workers with college degrees over the past 20 years. Job expansions therefore help these workers and their families more than they help skilled workers.

Given this relationship, it was puzzling when a strong and sustained recovery during the late 1980s brought the poverty rate down by only a small amount. Estimates based on historical experience would have predicted much steeper declines in poverty between 1983 and 1989. Subsequent analysis indicated that the decline in unemployment over the 1980s followed earlier patterns, as less-skilled workers expanded their employment as quickly as in the 1960s. Why then did poverty not decline as rapidly as in the 1960s?

The difference was attributable to changes in wages. In the 1960s, wages (for workers of all skill levels) increased at the same time that employment expanded. A 1 percent increase in GDP growth in the 1960s was correlated with a $2.18 increase in real weekly wages among the poorest decile of the population. As employment expanded, the result was a double-whammy effect on poverty: people worked more and earned more for each hour that they worked.

In contrast, over the 1980s, wages for less-skilled workers declined steadily. Between 1983 and 1989, GDP growth of 1 percent was correlated with a $0.32 decline in weekly wages for the poorest decile of the population. The result was that the employment expansions were offset by declining wages. People worked more, but they earned less for each hour that they worked. As a result, poverty fell by only a small amount.

In the 1990s, these effects continue to operate. Both 1992 and 1993 were years of aggregate economic expansion. For the first time in...