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Welfare "Reform" Backfires

The new welfare law creates a major disincentive to invest in productivity-enhancing technology and worker training.

Thanks to a bizarre alliance between a Republican Congress and a Democratic president, almost all welfare recipients are going to have to move into “jobs” of some sort, generally paying the minimum wage. For the first time since the New Deal created Aid to Families with Dependent Children (AFDC), the federal government no longer guarantees, as a right of citizenship, assistance to poor mothers with young children.

Welfare has long been widely misperceived. Contrary to public belief, most AFDC recipients are white. And for all the hand-wringing about teenage mothers, fewer than 8 percent of AFDC parents are under age 20.

From an economic standpoint, the end of “welfare as we know it” raises both short-run and long-term questions. The most pressing concern, of course, is where the work will come from. Local governments are already wrestling with how to insert welfare recipients into their street- and subway-cleaning and child-care-assistance programs in ways that don’t destroy the livelihoods of the “permanent” public employees. Everyone seems to want the private sector to provide most of the jobs. Toward that end, President Clinton proposes federal tax incentives to companies who hire from the welfare rolls.

But economists agree, with near unanimity, that such tax breaks have in the past not enticed companies to hire anyone-let alone the poorest of the poor-whom they would not have employed anyway. For successful companies, taxes simply do not constitute a large enough fraction of the cost of doing business for such discounts to matter. The most recent example of such failure was President Carter’s targeted jobs tax credit, which continued into the Reagan years before Congress cut it off on the grounds that it was merely providing firms with windfall profits. At best, tax incentives might redistribute jobs from other prospective employees to the targeted group, without creating new openings. This can be a legitimate policy objective, but it is not what President Clinton is seeking.

Then there are the long-run questions. Can temporary public-service jobs-cleaning parks and buses, assisting child-care professionals, working in the clerical temp pools of government agencies-foster skills that people can apply to fruitful careers? Acquiring skills may be equally difficult in the private sector. Peter Cappelli, who chairs the management department at the University of Pennsylvania’s Wharton School, and others have conducted surveys that document how cautious most companies are about investing in employee training, especially for their less educated workers. If we assume that training has at least something to do with upward mobility, how can we expect those forced off welfare to look forward to “moving on up”?

Perhaps the most serious long-term economic danger of welfare reform is that increasing the supply of cheap labor may undermine incentives to invest in productivity-enhancing technologies. Right now, high wages-whether sustained by labor shortages, union contracts, or civil service rules-pressure employers to acquire new technology and keep their workers trained. Only by raising productivity can an organization afford the high wages that prevail.

But the flood of low-cost labor that welfare reform is creating may well persuade at least some organizations to postpone technological upgrading and defer training. Rather than invest in new and more productive equipment, businesses (and government employers as well) may find it more cost-effective to hire platoons of people, pay them little, and set them to work on slow, outmoded computers, machine tools, and switchboards. To what extent this happens will depend in part on the size of the wage effect of welfare reform; the Economic Policy Institute estimates that wages could be depressed by as much as 17 percent in New York State alone.

This is not to say that technology will stand still. Some decisions regarding the introduction of new technologies have little or nothing to do with the availability of cheap labor. A company that wants to improve communication with its suppliers, for example, will still probably insist that all the players in the contracting chain introduce best-practice computer systems, software, and standards, and that they train their employees to use the new technology.

The challenge is to implement welfare reform in a way that is attentive to the dignity, incomes, and life chances of those being shoved into the (low-wage) labor market, but that also protects the hard-won gains of established workers-all without further undermining employers’ willingness to invest in technology and training. That’s a tall order-perhaps, in a slow-growth economy, an impossible one. But simply identifying what is at stake-economic growth rates, wage levels, investments in training and technology, the resilience of existing contracts between employers and their usual workers-makes it clear that welfare reform is about much more than “just” several million poor mothers and their children. It is about the structure and trajectory of the economy in which we all live and work.

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