The State of the Economy and the Problem of Poverty: Implications for the Success or Failure of Welfare Reform

Abstract

This paper uses an historical perspective to examine the labor market prospects and the macroeconomic setting facing mothers with dependent children who were (or would have been) enrolled in the old AFDC program, now that their welfare status will be handled by the new state programs in the wake of the Personal Responsibility and Work Opportunity Reconciliation Act, passed by Congress in 1996. The new law mandates the end to entitlements to cash payments for these women and their families and requires that they become self-supporting after the time limits for the cash payments are reached—a maximum of five years. Effectively, job holding is to replace welfare assistance as the main means of self-support. This paper documents the historical record of three trends that, given the new welfare laws, will largely determine the future poverty status of the affected women: wage growth, women’s labor force participation, and single-parent families (which reflect trends in marital breakups and in out-of-wedlock births). Since 1959, the first year for the modern series of poverty statistics, both women’s labor force participation and female headship of families have increased, the latter increasing poverty rates and the former, by itself, reducing poverty rates. The paper argues that wage growth is central to reducing poverty, especially now that government income support programs have been drastically reduced. The favorable economic record in the United States from 1959 to 1973, when wages and family incomes grew, is contrasted with the period from 1973 to 1997, when wages stopped growing and the growth in family incomes was slow. Given the difficulty in reversing demographic trends, macroeconomic economic growth appears necessary and effective to reduce poverty.