Unemployment and Welfare Partecipation in a Structural VAR: Rethinking the 1990s in the United States

Abstract

A 1997 report by the Council of Economic Advisers started a large research effort about the effects of the unemployment rate on the welfare participation rate and vice-versa, with special regard to the 1990s in the United States. In this paper the relationship between the US unemployment rate and the welfare participation rate is examined in a structural VAR. It is found that the unemployment rate does not Granger-cause the welfare participation rate, while the converse is true. Moreover, a negative shock to the welfare participation rate predicts a reduction in the unemployment rate. The conclusion is that the decline in the welfare participation rate in the 1990s should be attributed to restrictive welfare reforms, not to the fall in the unemployment rate. Further, the political choice to reduce the welfare participation rate may have inflated the reduction in the unemployment rate, by increasing the number of people willing to accept peripheral jobs, for instance in the Eating and drinking places.welfare; unemployment; structural VAR