MEMORANDUM FOR THE ECONOMICS AND BUDGET GROUP
Craig J. Albert
July 12, 1999
Poverty, Welfare and Workfare
Introduction
The Great Society, Lyndon Johnson said, asks “not how much, but how good; not only
how to create wealth but how to use it; not only how fast we are going but where we are
headed.” An integral part -- indeed some would remember it as the only part -- of the Great
Society program was the War on Poverty. Now, thirty-four years after war was declared, we can
ask whether the war turned out to Johnson’s other Vietnam.
While the current economic expansion has increased the incomes of a great number of
Americans, the sad fact remains that many have been left behind. Indeed, while the highest
income Americans have seen remarkable increases in their real incomes, the gains for the middle
class have been modest, while gains for the poor have been completely absent. The net result is
that we now have more people living in poverty than ever before; the gaps between rich, middle
and poor are greater than they ever been.
The welfare reforms adopted in the summer of 1996 have begun to phase in, and early
reports indicate that the experience has not been good. Those who have made their way off of
welfare have been helped by the strong economy, and not by the welfare reform law. Those who
labor at workfare find themselves in dead-end jobs with little prospect of private employment.
I. Poverty Demographics
The poverty threshold. The poverty threshold for a family of four in 1998 was calculated
at $16,530 by the Department of Health and Human Services. The official measure of income in
assessing poverty statistics is “money income, excluding capital gains, before taxes.” That
definition includes all cash government transfers such as social security and AFDC. The
definition does not count in-kind benefits such as rent subsidies, food stamps, Medicare and
Medicaid.
Who is poor? In 1997, 13.3% of our people lived below the poverty line, barely lower
than the 13.5% in the final year of the Bush Administration (1990). Indeed, after President
Johnson declared war on poverty in 1965, when the poverty rate was 17.3%, the number slipped
as low as 11.1% in 1973 and has remained stubbornly in the 13% to 15% range since 1980.
Whites make up the vast majority of the population, so their poverty rate of 11.1% is close to the
national average while they make up the vast majority of poor people in the United States
(68.6%), while 26.5% of blacks live in poverty.
In addition to a remarkable disparity by race, the face of poverty is overwhelmingly
female. Since 1966, nearly a third of households headed by women live in poverty; in 1997 the
figure was 31.6%. Reduction in the poverty rate among female-headed households has been one
of the few high points of the Clinton-Gore Administration, as the number was 35.6% in 1991
and declined steadily as the expansion took hold.
The median income for a family of four in 1997 was $53,350. For blacks the figure was
$34,644, while for whites the figure was $56,022. At first glance, then, whites at the median
have a substantial cushion above the poverty line, while blacks are less comfortable.
The Gap Between Rich and Poor is Growing. One standard measure of income
inequality is called the “Gini coefficient”. The Gini measure varies between zero and one, with
the lower numbers reflecting a more equal distribution of income. By this measure, income
distribution in the United States has become more unequal over the last three decades. In 1967,
the measure was 0.399; in 1997 it was 0.459. The underlying reasons can be seen when we
compare the median incomes of those in different income quintiles. For example, the highest
earning quintile of households earns more than $71,500 per year, while the lowest earning
quintile of households earns less than $15,400. The ratio of the top to the bottom is a rough
measure of inequality, and amounts to a 4.64:1 ratio. This ratio, too, has been steadily
increasing, for in 1967 it was only 3.95:1. When we compare the very highest income
Americans (the 95th percentile) to the bottom quintile, the increasing disparity between rich and
poor is even more pronounced. What was a 6.33:1 ratio in 1967 became 8.22:1 by 1997.
The poor need jobs. It ought to be obvious, but it should be emphasized, that the poor
need jobs. Standard measures of poverty assess cash income and government transfers, and the
minimum wage has been adjusted so that a family with two full-time workers at the minimum
wage will earn about 125% of the poverty threshold. In 1997, though, among those in poverty
aged 16 or over, only 41.5% worked at all, and only 10.3% had full-time employment. While the
working poor are in trouble, but the poorest of the poor are not working.
II. Welfare Reform
The Components of Reform. With the enactment of the Personal Responsibility and
Work Opportunity Reconciliation Act in 1996, the main federal welfare program, Aid to
Families With Dependent Children (AFDC), was scrapped and replaced with Temporary
Assistance to Needy Families (TANF). Unlike AFDC, which provided matching funds to states
which changed with with the size of the state recipient population and with the level of state
spending, TANF provides block grants to states which the states use in combination with their
own resources to pay welfare benefits to eligible families. Among the many changes wrought by
the Act were:
- creation of a 5 year limit on time any individual can receive federally funded welfare
benefits, except for hardship cases
- an expanded work requirement, setting a minimum percentage of recipients who must
work and a requirement that (with some exceptions) recipients work within 24 months of
receiving benefits
- creating a definition of work that includes unsubsidized private employment, subsidized
public or private employment, work experience, on-the-job training, job search and job
readiness assistance, community service programs, one year’s vocational education, job
skills training, employment-related education for those who lack a secondary diploma,
and secondary school attendance for recipients under age 20.
- reduction of state block grants for failure to meet aggregate work requirements
- creation of a bonus and penalty system applied to state block grants for achivement in
meeting federally established goals
- termination of benefits for adults who either do not have a high school diploma or are
not working toward one
Impact of Reforms. Congress has appropriated $10 million per year for 7 years for the
Census Bureau to study the impact of the welfare reform law. Its report is not yet available.
Since the 1996 welfare reforms have only been in place for a short time, there are no
reliable data to indicate whether the reforms are a success or a failure. Most important is the fact
that the five year lifetime cap on federally funded benefits does not begin to affect recipients
until 2001, although many families are just now beginning to run up against the requirement that
they work after receiving 24 months of benefits. In addition, today’s low unemployment rate has
created a strong demand for workers at the low end of the wage scale, so that the decline in
welfare participation that we have seen can be attributed at least in part to the overall strength of
the economy and not to welfare reform.
There is some evidence (primarily anecdotal) on how recipients are managing the
transition to work, some of which is based on the experience of states which received waivers for
experimental programs under AFDC. Also, we can examine the incentive structure for states
under TANF to predict how they will likely manage their population of recipients.
The anecdotal evidence is mixed. While there are reports of some recipients finding their
way into the workforce, there are a number of complaints with respect to implementation. First,
where recipients are being used by state and local governments to perform government services,
TANF recipients are squeezing out higher paid government employees. Unions representing
government workers view the presence of workfare as a substantial threat to their membership.
The problem is particularly acute where the welfare benefit per working hour is less than the
minimum wage. Some courts have limited the amount of required work in order to keep the
hourly benefit at or above minimum wage levels.
The anecdotal evidence is mixed. While there are reports of some recipients finding their
way into the workforce, there are a number of complaints with respect to implementation. First,
where recipients are being used by state and local governments to perform government services,
TANF recipients are squeezing out higher paid government employees. Unions representing
government workers view the presence of workfare as a substantial threat to their membership.
The problem is particularly acute where the welfare benefit per working hour is less than the
minimum wage. Some courts have limited the amount of required work in order to keep the
hourly benefit at or above minimum wage levels.
Second, recipients complain that the assistance provided to them in the form of training
and job placement skills are poor. It should not be surprising that one study of the impact of
welfare reform in Wisconsin showed that the persons most likely to be successful after leaving
welfare were those who were young, better educated, and did not have young children for which
to care. The results showed a tremendous diversity in post-welfare experience, with some
recipients showing an improvement in their economic conditions following departure from
welfare, but with more showing a decline.
Welfare reform is likely to increase the size of the labor force in the long term (according
to one estimate) between one and two million people between now and 2005. While this is a
small number in proportion to the total population, the impact of the increase is likely to be
particularly acute in regions where both unemployment is high relative to the national average
and where welfare recipient populations are concentrated.
The incentives built into the block grant system are likely to lead to the results that are
being reported anecdotally. The block grants both require the states to provide a level of benefits
determined by their recent experience under AFDC, but penalize states that fail to achieve
specified performance levels in the areas of interest under TANF. The most important of these
performance penalties is found in the work requirement. States that fail to have a specified
percentage of their recipients involved in work activities will find their block grants cut. Those
states which comply with the requirement to provide their historically determined level of
benefits, but do not succeed in putting their recipients to work, will find that they have to bear
much of the cost of the benefits on their own because their block grants have been cut.
III. Summary
Whether federal welfare reform is a success depends entirely upon the definition of
success.
If the measure of success is simply found in reducing the number of recipients, then the
program will likely succeed. By definition, once the five-year limit takes effect, a substantial
number of recipients will become ineligible for federal assistance. The goal of Congress in
reducing AFDC from an open-ended entitlement program to a grant program with a predictable
commitment will have been achieved. During the year 2000, then, the promise of TANF’s
reduction of welfare rolls will be held out as an achievement of the Clinton-Gore Administration.
If the measure of success is found in creating a program that devolves power to the states,
then the program will be no more of a success than the programs that were already available as
experiments under AFDC. States were free to design experimental welfare programs under
AFDC’s waiver provisions, and most states did so. Under the federalism model of states as
laboratories for innovation, we would expect either that the most selfishly successful of the
programs would end up in the long run being emulated by other states, or else that the federal
government would, in the long run, impose the most successful model as a single national
program. The political dynamic of the present day, combined with the desire on the part of states
to keep the unspent surplus from block grants, would suggest that the selfish emulation model
will prevail.
If the measure of success is in providing the poor with a meaningful entry into the
workforce, then the success of welfare reform will depend first upon whether the states take
seriously their responsibility to provide training and educational opportunities, and second upon
the continued growth of the economy, particularly in those geographic areas most troubled by
poverty. President Clinton’s recent initiative to spur investment in these depressed regions can
be viewed as an effort to aid in the achievement of the latter goal.
Finally, if the measure of success lies in having the federal government wash its hands of
responsibility for the failure of the welfare system, then the program is likely to be successful
from a political viewpoint. The devolution of power to the state governments poses a tricky
problem for the federal government. Under TANF, the federal government’s role has been
reduced to approval of state plans once they comply with the minimum requirements of the
federal act, together with the distribution of grant money. The mechanics of each state’s plan is
dictated by the state itself, so if welfare reform turns out to be a failure, then the failure can be
laid at the feet of state officials.