Welfare reform helps keep economy working
by Fred McMahon


National Post

This Labour Day, millions of former welfare recipients will celebrate, many for the first time, their own work and the opportunity that brings. Welfare reform’s astonishing success has startled even its most optimistic proponents. In many places, welfare “as we know it” is coming to end.

There is more here than meets the eye. Welfare reform helps explain one of the great mysteries of today’s U.S. economy – an explanation that is highly relevant for Canada, particularly its lagging regions.

Conventional wisdom says the United States, Alberta and Ontario were oh-so-lucky that reform came along when the job market was hopping and inflation low. In fact, welfare reform contributed to this favourable climate. It recreated one of the key factors that spurred astonishing economic growth after World War II – the entrance of millions of new workers into the labour force.

Rural workers flooded into the cities in the post-war era, moderating wage pressures even when the economy was red-hot. This maintained profits, creating the means and incentive for further investment. By the early 1970s, the flood had become a trickle, which helped bring on stagflation and the worldwide slowdown in economic growth.

Stanford University economist Moses Abramovitz explains how migration from farm to city “inhibited the rise of non-farm wages and so sustained the rates of return to investment in the face of large expansions of capital stock [in the 1950s and 1960s]. By permitting large productivity gains … without provoking an unduly rapid rise in wages, it encouraged the expansion of industry and enlarged the scope for capital investment. The level of investment was raised and the investment boom prolonged instead of being cut short by falling profits.”

This boosted living standards. As investment and productivity rose, wages rose too, but – with a flow of new workers moderating wage pressure – not so fast as to weaken profits and investment. (Baby Boomers, who entered the labour force mostly in the 1970s, had entirely different wage expectations from the post-war wave of rural workers.)

This brings us to a recent economic mystery. How can U.S. job creation be so high and labour markets so tight with almost invisible wage pressure, at least until recently? Many factors contributed to this remarkable performance, but welfare reform helps provide part of the answer.

The numbers leaving welfare for work are huge. In 1993, 5.5% of the U.S. population – 14.1 million people – collected welfare. Recently released data show the number has been nearly halved, to 7.3 million. Some 69% of working-age welfare leavers are employed, according to an Urban Institute study released last month. That’s consistent with other U.S. studies, as well as findings in Canada.

Alberta began welfare reform in 1993, when 94,000 were on welfare. That’s fallen to 33,000 beneficiaries. A 1997 Canada West study found that 68% of welfare leavers were working. A C.D. Howe study in the same year also pointed to employment as the major reason people left welfare. Ontario launched reform in 1995. By this July, the number of beneficiaries had fallen by 412,000, representing a 40% reduction. A 1998 study by Ekos Research found that more than 60% of former beneficiaries were working.

The data understate the effect of reform, which discourages new entrants into welfare and encourages job attachment and training. The overall impact should be large enough to help moderate wage pressure, an effect that would work its way up the wage scale through a number of mechanisms, including skill improvement by former recipients.

Studies demolish the alternative view that prosperity drives reform’s success. From the 1950s to the early ’90s, case loads ratcheted up during recessions but seldom returned to pre-recession levels during recoveries. Two recent Heritage Foundation studies in the U.S. found no statistically significant relationship between a state’s economic vigour and changes in the welfare case load. Changes were related to the toughness of reform. Yet, the vast majority of former recipients found work.

All this is good news – not just for Ontario and Alberta, but especially for Quebec and Atlantic Canada. The large dependency ratio in Montreal, particularly east-end Montreal, becomes a potential engine of growth for the lagging provincial economy.

The same is true in Atlantic Canada, where a perverse “regionally extended” unemployment system immobilized a large part of the workforce. Prior to Employment Insurance (EI) reforms, twice as many people collected benefits as were officially unemployed in some months. The percentage can still be over 100%, depending on the month and province. A recent study showed seasonal workers have no interest in employment in the off-season when they collect EI, even if government gives out extra money for accepting such work. This stifles regional growth.

Nonetheless, welfare reform brings hardship. Many former recipients have trouble making ends meet. One recent study shows falling income for the poorest of the poor because of loss of means-tested assistance, demonstrating the need for well-funded programs to help working poor. Still, income will grow over time as job skills increase. Wisconsin led U.S. welfare reform, reducing dependency by 90% since 1985. In the same period, it halved child poverty. In Canada, income tax for low-income people must be eliminated and programs established for working poor.

Maintaining welfare is no kindness. A study by the City University of New York compared women who received welfare as children with women who did not but were otherwise identical in race, family income, family structure, IQ test results and childhood residence. The women who had been recipients were almost twice as likely to drop out of high school, were 50% more likely to have a child out of wedlock and spent twice as much time on welfare as adults.

What’s more, most welfare recipients cautiously support reform, according to a study by Johns Hopkins University, which conducted a number of focus groups. As one female recipient in Baltimore told researchers: “I think it’s a good thing for me, ‘cuz if they’re going to keep on giving it to me I’m gonna keep on taking it. So I think I should just look at it as a good thing and get out there and work.”

Millions have picked up this challenge. Over a century ago, union leaders established Labour Day to proclaim the value of work and the self-worth and freedom it creates. Compare that to the dependency and closed opportunity of welfare, so often tragically passed down from parent to child for generations.