The Long-Term Labor Market Outcomes of TANF Leavers: Evidence from Wisconsin

Background and Purpose:

The 1996 welfare reform is based on a ‘work-first' approach, which emphasizes the work attachment of welfare recipients. Early research tended to show positive short-term labor market outcomes of TANF leavers, leading some to proclaim welfare reform a success. However, there are several reasons this conclusion may be misleading and additional research could prove useful. First, most of this research examined a relatively short period after reform in which there was an economic boom. Second, the economic boom stopped shortly after the period covered by much of the early research; the recession that followed could worsen the situations of early TANF leavers. Third, much of the previous work paid little attention to local labor market conditions. The purpose of this study is to examine long-term economic outcomes for TANF leavers after welfare reform, with particular attention to local labor markets.

Methods:

Using state administrative data from Wisconsin, this study follows TANF leavers, who exited TANF in 1998 (N=3,405), over 7 years (1998-2005). This study defines TANF leavers as females who: were aged 18 to 55; had known Social Security Numbers (SSN); received cash assistance under TANF in June of 1998; exited TANF within the third quarter of 1998; and remained off TANF for two consecutive months after exit. Employment and earnings as recorded in the Unemployment Insurance system are key measures of the labor market outcomes. In addition, this study utilizes the local labor market information such as the county unemployment rates from the Wisconsin Department of Workforce Development. The analytic approaches are descriptive analyses and panel data analyses. The first analyses, presenting information on long-run employment and earnings, are based on simple descriptive analyses. The second analyses are panel data analyses, which control for time fixed effects and individual characteristics. This study employs homogeneous models and fixed-effects models to examine the relationship between local labor market conditions and labor market outcomes of TANF leavers.

Results:

Descriptive analyses show that the employment rates of TANF leavers declined over time after their exits. Compared to the short term employment rates (nearly 70 percent), the long term employment rates are lower (below 50 percent), implying that the positive short-term employment outcomes are not sustained over time. Utilizing fixed-effects models, which control for unobservable characteristics of leavers and time fixed effects, this study finds that county unemployment rates are negatively associated with labor market outcomes of leavers (at the 0.01 level). The regression analyses also show that human capital factors such as education and work experience are positively associated with labor market outcomes of leavers.

Conclusions and Implications:

The results of this study suggest that labor demand policies (e.g. job creation) needs to be considered to improve economic outcomes of TANF leavers, especially when the economy is weak. Although work-first welfare reform policies can be effective in strong economic times and in the short-term, they should be redesigned to strengthen the human capital development when the economy is weaker.