"I can tell you as a former welfare mother that the main reason families are on welfare in the first place is because there aren't enough jobs that pay a family wage, and there aren't the support systems like child care and health care so that they can get off welfare and go into the workforce."
—Rep. Lynn Woolsey, D-California15
Despite recent improvements in the state and national economies, the labor market prospects for low-skilled workers continues to be bleak. Simply requiring welfare recipients to work is not going to alter that reality. Government must play a central role if the goal is not only to end welfare as we know it, but also to end poverty as we know it.
Current Labor Market Trends
As has been widely documented, after two decades of growth immediately after World War II, the bottom two-fifths of American families have watched their real wages decline over the past 20 years. The hardest hit are young male high school graduates and drop-outs, who now earn 20 percent to 30 percent less per hour than they did in the early 1970s.16
There are many explanations for the declining incomes of lower-income workers, including technological advances, international competition, the declining rate of unionism and the declining value of the minimum wage. The end result of these changes, as Rep. Woolsey said, is that "there aren't enough jobs that pay a family wage." Thus, as we have seen, a significant share of families are poor despite their work efforts, including parents who work at full-time, year-round jobs. This problem affects the working poor, as well as welfare recipients who are expected to join the labor force under the new state and federal welfare reform laws.
The single best solution to the problem of low levels of employment and low wages is a low unemployment rate. That is good news right now, since the labor market is the tightest it has been in 25 years, with the national unemployment rate over five percent and the state rate at four percent.17 These low rates combined with the recent rise in the minimum wage should put some upward pressure on wages, but they are not a panacea for low-income workers. While a strong labor market is necessary, it is not sufficient, to end poverty as we know it. Moreover, Federal Reserve Board chairman Alan Greenspan has made it clear that he would find upward pressure on wages due to the tight labor market a sign of inflation. In that case, the bank would likely raise interest rates to slow the economy and reduce pressure on wages (see Box below).
Average statewide unemployment data mask differences across sectors. The metaphor about "a rising tide lifting all boats" is no longer apt; the "boats" do not all rise at the same rate, as is amply demonstrated by data on the rising gap between the poor and affluent since 1980.
While income growth was both rapid and relatively equal across incomes between 1950 and 1979, the picture has changed dramatically since then. Not only has inequality risen in the U.S. compared to our own past, but the degree to which it has risen here is far greater than in other advanced economies.18 There is a great deal of data to illustrate these trends.
Three-quarters of the income gains in the 1980s and all of the increased wealth during that period went to the top 20 percent of families.19
As shown in Figure 21, the wealthiest one percent of the population controlled nearly one-fifth of all U.S. wealth in 1976, while the bottom 90 percent controlled just half. By 1995, however, the wealthiest one percent controlled more wealth — 40 percent of the total — than the bottom 90 percent, which held just 29 percent of the wealth.20
Today the U.S. has the widest gap between rich and poor since the Census Bureau began keeping track in 1947. The top fifth of families earn nearly half — 44.7 percent — of the income, while the bottom fifth earn only 4.4 percent.21
Figure 21
Can Low Unemployment End Poverty?Many economists note that a tight labor market is the best means of raising wages of low-income workers above the poverty line. At the same time, many economists acknowledge that the people who manage our economy do not consider it a desirable goal to have a very low unemployment rate and rising wages. Imagine, for a moment, that a large percentage of the people currently on welfare and currently unemployed found full-time jobs, the unemployment rate dropped precipitously and wages rose. If past is any guide, the Federal Reserve Bank would likely look upon such an occurrence with alarm. They would worry that the economy was "overheating," risking a rise in inflation. Officials at the Federal Reserve Bank would no doubt raise interest rates, thereby tightening the money supply, slowing the rate of growth, and bringing a swift return of unemployment rates to at least five percent. Given this reality, relying on a tight labor market to solve the poverty problem is unrealistic. As long as the federal government consciously institutes policies to ensure there will never be full employment, the government should ensure that there is a safety net in place to support those who are left out of the labor market by design. |
Recent data indicate the gap may be narrowing slightly with improvements in the economy and the 1993 enactment of greater progressivity in the federal tax code, but the great disparities in income and wealth are not likely to be reversed any time soon. Poor skills are probably the most important driving force behind low wages at the bottom of the income ladder. There are many more unskilled workers and potential workers than there are jobs that do not require skills. Other barriers not easily remedied by the marketplace alone are the geographic mismatch between where low-skilled workers live and where jobs are located, continued discrimination against non-white workers and women, and the high costs of entering the labor force, especially for single parents with young children.
Low Skills
As Prof. Harry Holzer has documented, many low-wage workers and welfare recipients have poor reading, writing, and math skills, yet only about five percent of all jobs do not require one or more of those skills. Today, three-fourths of all jobs involve contact with customers, and a majority of jobs involve some familiarity with and use of computers.
Because of this "skills gap," a low overall unemployment rate can mask the fact that the rate is much higher for people with low levels of education and training. For example, in 1994 workers with less than a high school diploma had an unemployment rate of 12.4 percent, more than double the national rate of 5.8 percent. For women aged 18 to 30 without a high school diploma the unemployment rate was 21.3 percent.22
A key reason for these dismal numbers is that we have lost a significant number of blue collar jobs that once provided workers who did not have a college education with an opportunity to earn good wages and benefits.
Regionally, this trend is well-documented in a 1996 report by The Massachusetts Institute for a New Commonwealth.23 In 1983, the manufacturing sector was the largest employer in New England, accounting for one out of every four jobs. By 1995, only one job in six was in manufacturing. The region experienced a net loss of 339,000 manufacturing jobs between 1983 and 1994. What's more, the manufacturing jobs that remain are increasingly calling for workers with higher education levels. In 1980, about 20 percent of the region's manufacturing jobs were professional jobs that typically required a college degree. By 1994, that figure had risen to 33 percent. Indeed, in all sectors the most significant employment growth has been in high paid professional, technical, and managerial jobs. These occupations account for 97 percent of the net job increase in the region from 1983 to 1994.
These trend are likely to continue. According to the Division of Employment and Training, the majority of new jobs created in Massachusetts between now and 2005 will require advanced degrees with specialized skills.
Geography
A second problem identified by Holzer and others resulting in high pockets of unemployment and poverty in the inner cities is that many jobs have moved to the suburbs. In Holzer's study of the Greater Boston area, nearly two-thirds — 63 percent — of the non-college level jobs were located in the suburbs, and just one in six — 17 percent — were located in Boston itself. The remaining 20 percent were located in other cities near Boston.
Many of these suburban jobs are hard to reach without a car, making the jobs largely inaccessible to many central city workers. Moreover, Holtzer finds that nearly half of all jobs are typically filled through informal networks — mainly personal contacts and recommendations — to which many inner city residents have no access. In addition, many non-white inner city residents continue to face discrimination when they seek jobs in predominantly white suburbs, although the magnitude this problem is difficult to quantify.
Benefits
A corollary to the problem of low wages for many workers is that entering the workforce often entails significant new costs for a family, notably for child care and transportation. And many who leave public assistance to take a low-wage job also lose government subsidized benefits they were receiving, including cash assistance and health care. Again, these are problems that the marketplace alone has not solved; indeed, market trends are moving in the opposite direction as more and more workers are hired on a contingent or part-time basis without benefits.
Problem May Get Worse Under Welfare Reform
Since the competition for the low-skill jobs that exists is already fierce, there is widespread agreement that the labor force situation is likely to become worse when people who are currently receiving cash assistance are forced into the labor market under the new state and federal welfare reform laws.
According to Holzer's analysis, the federal welfare reform law could result in nearly half of the roughly 5 million women on AFDC entering the labor force in the next several years. All of the problems identified above — skills and education, transportation, and loss of benefits — will be exacerbated. Many of these women live in inner cities, where jobs are already scarce. Many have few skills; 48 percent to 70 percent of long-term AFDC recipients are high school drop-outs and between 30 percent and 40 percent have no recent work history. Many will need child care subsidies, which will likely swamp the modest increases scheduled under welfare reform.
In other words, many of these former AFDC recipients will be competing for the small number of jobs that require few skills — jobs for which the supply of labor already significantly exceeds demand. Consequently, it is likely that many AFDC recipients simply will be unable to find work — even if they seek employment and are motivated by the threatened loss of cash assistance. There have been several studies that describe the "job gap" that is likely to arise when the welfare reform law fully take effect. For example, one recent study estimated that there would be six workers for every entry level job in the city of Chicago if all people currently unemployed and on AFDC were to look for work.24
A similar analysis of the local job market was done for the Massachusetts Advocacy Center in 1994. Although the economy has improved and welfare rolls have declined since that study was done, the analysis is illustrative of what the impact could be during a year in which the economy is recovering. The problems would of course be much worse during a recession. At the time of the study, the state was projecting that 25,000 full-time and another 12,500 part-time low-skill positions would be opening up in the post-welfare reform period. So who would be competing for these jobs?
The Department of Transitional Assistance projected that about 36,000 AFDC recipients would be searching for full-time work within two years, and another 18,000 parents of school-age children would be looking for part-time work within 60 days as a result of being "reclassified." Thus for both full-time and part-time work, there would be nearly 50 percent more new workers than new jobs.
In short, there are too many low-skilled people chasing too few jobs under current labor market conditions. In the long run, it is unlikely that the labor market will change course and start adding — rather than shedding — low-skill jobs that pay a living wage. Many economists believe there is little doubt the end result of that adjustment would be a further decline in wages for new workers as well as for those currently working at low-skill, low-wage jobs. As Larry Mishel has concluded,
"[T]he working poor, praised by welfare reformers as an example to be followed by current welfare recipients, will foot the bill for 'fixing' the system. Those now struggling in precarious, low-paying jobs will have to compete directly with former welfare recipients in a labor market that cannot even provide adequately for the existing workforce."25
15. Nancy Folbre and Randy Albelda, The Center for Popular Economics, The War on the Poor, (New York: The New Press, 1996) p. 61, citing Republican Study Committee, Running from Reality: How Liberals Can't Accept the Failure of The Welfare State (Washington, D.C., May 19, 1994) p. 5.
16. Harry J. Holzer, What Employers Want: Job Prospects for Less-Educated Workers, (New York: Russell Sage Foundation, 1996), p. 2.
17. Just as the official poverty figures do not tell the whole story about who is truly economically disadvantaged, the official unemployment rate does not give a true picture of how many people are out of work. There are a significant number of people who are not official "unemployed," but who are not working and wish they were; this group is sometimes called the labor market "overhang." It includes discouraged workers who have given up trying to find work and people whose family situations, geographic location or other factors prevent them from seeking employment even though they would prefer to be working. Economists Andrew Sum and Paul Harrington estimated that, in 1994, the "overhang" in New England was equivalent to 60 percent of the annual average number of unemployed in the region.
18. Katherine L. Bradbury, Yolanda K. Kodrzcki, and Christopher J. Mayer. Spatial and Labor Market Contributions to Earnings Inequality: An Overview. (New England Economic Review, Federal Reserve Bank of Boston, May/June 1996).
19. Edward N. Wolff, Top Heavy: A Study of the Increasing Inequality of Wealth in America, The Twentieth Century Fund Press, 1995.
20. Keith Bradsher, citing Federal Reserve Bank data in "Gap In Wealth in U.S. Called Widest in West," New York Times (April 17, 1995).
21. Aaron Bernstein, "Inequality: How the Gap Between Rich and Poor Hurts the Economy," Business Week (Aug. 8, 1994).
22. Lawrence Mishel and John Schmitt, Cutting Wages by Cutting Welfare: The Impact of Reform on the Low-Wage Labor Market, Briefing Paper, (Washington, D.C.: Economic Policy Institute. September 1995).
23. Andrew Sum et al., The State of the American Dream in New England, (Boston: Massachusetts Institute for a New Commonwealth, January 1996.)
24. Virginia Carlson and Nicholas Theodore, Are There Enough Jobs Out There? (Chicago: The Job Gap Project, December 1995).
25. Mishel, op cit. According to this study, if all former AFDC recipients and people who are currently unemployed found jobs — which the authors do not believe would happen — wages of the bottom 30 percent of workers would fall by nearly 12 percent. This would mean that about 31 million people who earn less than $7.19 an hour would see their earnings fall by 86 cents an hour. In this scenario, if welfare reform were to be successful in pushing people into the work force, unemployment would no longer be the problem, but poverty would rise for those currently working at low incomes.