Welfare Reform, Work and Wages

A Summary of the US Experience

Published in: CESifo DICE Report, no. 2, Feb. 2005, p. 8-12

by Jeffrey Grogger, Lynn A. Karoly

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Economic theory predicts that it should be possible to raise work effort either using sticks, such as work requirements and time limits, or carrots, such as financial incentives. Results from dozens of welfare reform studies largely bear this prediction out. At the same time, those studies reveal that the magnitude of those effects tends to be modest. This finding has important implications, particularly for the long term. Policy reformers often speak of work as first step toward a "virtuous cycle" by which recipients eventually leave the welfare rolls. The idea is that increased employment leads to higher wages, which in turn result in greater work effort and eventually higher incomes. In order for the virtue to start cycling, however, today's work must generate tomorrow's wage gains. This, in turn, requires that wages grow with experience and that experience grows enough to generate meaningful wage gains. Recent work has provided mixed results regarding the return to experience facing low-skill workers such as welfare recipients. With the prospects for substantial wage growth in doubt, the policy tradeoffs between alleviating need, limiting dependency and promoting work can be expected to dominate future welfare reform debates.

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