Is welfare dependence optimal for whom – part 6: mandatory work requirements and labour supply

A mechanism for reducing welfare programme entries while increasing welfare exits is work requirements. These minimum hours can be spent working part time, in study and training, work preparation and job search assistance or volunteering.

A work requirement is a screening device removes any advantage of moving on to welfare in terms of more leisure time. U.S. welfare reform side-stepped the problem of programme entry with lifetime time limits on eligibility and work requirements making entry unrewarding. A lifetime time limit on eligibility also reduces inflow in to welfare receipt because workers have an incentive to bank their eligibility to hard time arise. Different work tests and abatement regimes that vary with circumstances on length of time on the benefit also increase exits without increasing entry.

Most work requirement schemes have waivers for those unable to work. Work requirements make welfare receipt less attractive and more hassle while not making welfare receipt any more or any less financially rewarding to those in work.

The gap between working and welfare receipt is larger because of the work requirements make the benefit less pleasant but no additional cash payments are made to encourage welfare programme entry.

Most welfare systems experiment with policy options to separate those who can work from the truly needy. Changes in financial incentives arising from abatement regimes, benefit levels and benefit durations are welfare reform workhorses. The clear-cut labour supply effects of work requirements are a useful contrast to the ambiguity of labour supply changes when benefit levels and abatement regimes change.

Figure 1 illustrates work requirements by introducing a minimum working hours requirement, which eliminates part of the budget constraint before the minimum hours. Work requirements combine a negative tied transfer – an obligation to work – with cash to induce those with a higher ability to work to self-select and opt out of the welfare system entirely.

Figure 1: The labour supply effects of mandatory work requirements as a condition of welfare benefit receipt

mandatory work requirements for welfare benefits

Arrows 1, 2 and 3 in Figure 1 represent possible labour supply responses to work requirements which lead to an increase in the hours worked by different types of workers, some moving to working part-time and others not working at all.

Arrow 1 shows some beneficiaries who are marginal workers increasing their hours from zero to the minimum. Other marginal workers will work more but no longer work enough hours to qualify for a benefit as shown by arrow 2.

This increase in labour supply, as shown by arrows 1 and 2 in Figure 1, is to be expected because a work requirement eliminates welfare benefits altogether over a certain range.

Welfare payments reduce the supply of labour unambiguously so reducing the generosity of welfare reduces the disincentives to supply labour.

A work requirement also reduces entry into and increases exit from the welfare system by more persistent workers as shown by arrow 3 in Figure 1.

This welfare exit effect and entry deterrence arises from the relative non-financial rewards of working and not working have changed in favour of staying in full-time and semi-work for persistent workers temporarily on a welfare benefit.

Persistent workers gain from anticipating the onerous nature of work requirements and searching more intensively for jobs which are more stable and enduring.

These job seekers may reduce their asking wage to win a lower paid but steadier job. Seasonal and temporary jobs will be less attractive if there are work requirements.

The incentive to cycle between the benefit and part-time and full-time work including seasonal and temporary jobs are reduce because work requirements make welfare receipt more onerous.

Those job seekers with fewer outside of the workforce obligations such as young children are the most likely to move to (stable) full-time work because of work requirements.

Those with more extensive outside commitments such as pre-schoolers work the minimum hours or make other arrangements because they now fail to qualify for welfare.

A work requirement unambiguously increases net labour supply and reduces the number of people relying on the welfare system now and into the future.

In contrast to abatement regime reforms, no one enters the welfare system as a new benefit claimant as the result of introducing work requirements.

The number of people working increase and some leave welfare rather than comply with the work programmes. Work requirements make welfare receipt unambiguously less attractive and will close the gap between earning full-time wages and the net rewards of not working or part-time work and partial benefit receipt.

The 60 per cent reduction in welfare caseloads that followed the 1996 federal welfare reform in the USA that introduced work requirement and time limits on a national basis.
Welfare Caseloads have declined since 1996

The subsequent declines in welfare participation rates and gains in employment were largest among the single mothers previously thought to be most disadvantaged: young (ages 18-29), mothers with children aged under seven, high school drop-outs, and black and Hispanic mothers. These low-skilled single mothers who were thought to face the greatest barriers to employment. Blank (2002) found that:

At the same time as major changes in program structure occurred during the 1990s, there were also stunning changes in behaviour. Strong adjectives are appropriate to describe these behavioural changes.

Nobody of any political persuasion-predicted or would have believed possible the magnitude of change that occurred in the behaviour of low-income single-parent families over this decade.

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Job finding rates under work for the dole when there is involuntary unemployment

Jeff Borland is a critic of work for the dole. He points out that they do not improve the job finding rates of participants and in fact reduce the amount of job search because work for the Dole participants are busy undertaking work for the dole requirements:

The main reason is that participation in the program diverts participants from job seeking activity towards Work for the Dole activity. Research on similar programs internationally has come up with comparable findings.

This made me wonder. If unemployment is caused by deficient aggregate demand, and otherwise is involuntary, how can work for the dole increase unemployment or reduce the rate at which people exit unemployment?

‘Involuntary’ unemployment occurs when all those willing and able to work at the given real wage but no job is available, i.e. the economy is below full employment. A worker is ‘involuntary’ unemployment if he or she would accept a job at the given real wage. Keynesians believe money wages are slow to adjust (e.g. due to money illusion, fixed contracts or because employers and employees want long run money wage stability), and so the real wage may no adjust to clear the labour market: there can be ‘involuntary’ unemployment.

Under the deficient aggregate demand theory of unemployment, people have no control over why they are unemployed – that’s why their unemployment is involuntary.

Sticky wages are no less sticky when work for the dole is introduced and people search more intensively for jobs. Deficient demand unemployment is no less deficient when there is an increase in job search intensity.

Work for the dole must be carefully defined, of course, to differentiate it from the failed active labour market programs of the past that attempted to improve the employability of the unemployed. By work for the dole, I simply mean mandatory work requirements simply make it more of an ordeal to be on unemployment and thereby encourage people to find a job.

Mandatory work requirements simply tax leisure. By taxing leisure,  mandatory work requirements  change the work leisure trade-off between unemployment and seeking a job with greater zeal and a lower asking wage more attractive option. More applicants asking for lower wages will mean employers can fill jobs faster and at lower wages, which means our create more jobs in the first place.

The probability of finding a job for an unemployed worker depends on how hard this individual searches and how many jobs are available: Chance of Finding Job = Search Effort x Job Availability

Both the search effort of the unemployed and job creation decisions by employers are potentially affected by unemployment benefit generosity and mandatory work for welfare benefits requirements.

Modern theory of the labour market, based on Mortensen and Pissarides provides that more generous unemployment benefits put upward pressure on wages the unemployed seek. If wages go up, holding worker productivity constant, the amount left to cover the cost of job creation by firms declines, leading to a decline in job creation.

Everything else equal under the labour macroeconomics workhorse search and matching model of the labour market, reducing the rewards of being unemployed exerts downward pressure on the equilibrium wage. This fall in asking wages increases the profits employers receive from filled jobs, leading to more vacancy creation. More vacancies imply a higher finding rate for workers, which leads to less unemployment.  The vacancy creation decision is based on comparing the cost of creating a job to the profits the firm expects to obtain from hiring the worker.

When unemployment benefits are less generous or more onerous work requirements are attached, some of the unemployed will become less choosey about the jobs they seek in the wages they will accept.  a number of people at the margin between working or not. An example is commuting distance  to jobs. A number of people turn down a job  because is just that little too far to commute. A small change in the cost of  accepting that job would have resulted in them moving from being unemployed to fully employed.

Unemployment is easy to explain in modern labour macroeconomics: it takes time for a job seeker to find a suitable job with a firm that wishes to hire him or her; it takes time for a firm to fill a vacancy. Search is required on both sides of the labour market  –  there are always would-be workers searching for jobs, and firms searching for workers to fill vacancies.

In a recession, a large number of jobs are destroyed at the same time. It takes time for these unemployed workers to be reallocated new jobs.  It takes time for firms to find where it is profitable to create new jobs and find workers suitable to fill these new jobs.

Recessions are reorganisations. Unemployed workers look for jobs, and firms open vacancies to maximize their profits. Matching  unemployed workers with  new firms firms is a time-consuming and costly process.

Lessons from field trials with work mandates


One of the most controversial aspect of the U.S. program changes are the negative incentives – time limits, sanctions, and diversion – that are built into their structure.

All of these policies limit the entitlement to cash public assistance, by either enforcing behavioural requirements (such as work search) or limiting the availability of assistance.

As Besley and Coate (1992) pointed out, linking such requirements with public assistance payments can help deter welfare participation among those who could find a job on their own.

The majority of evaluations of mandatory welfare-to-work programs show significant increases in labour supply and reduced welfare dependency. The drawback is the increase in wage income is greatly offset by the decline in benefit income. In–work tax credits played a major role in making work pay in 1996 U.S. welfare reform

The Minnesota Family Investment Program (MFIP) was implemented in 1994 and provided a strong earnings threshold, allowing women to receive some cash assistance until their earnings reached about 140 per cent of the U.S. poverty line. It also required participation in mandatory job search programs.

A randomly assigned control group remained in AFDC without work requirements or substantial earnings thresholds. MFIP involved both strong negative and positive work incentives. A subset of the treatment group (also randomly assigned) was provided with the earnings thresholds but not the mandatory work requirements.

The MFIP results allow the separate and joint effects of mandatory job search and earnings thresholds to be explored. When only positive work incentives are provided through an expanded earnings threshold, this has little effect on labour supply, consistent with earlier results. The additional income provided by these higher thresholds had strong income-increasing and poverty-reducing effects. Once mandatory work requirements are added to MFIP, then labour supply increases as well, but there is little further effect on income or poverty.

The evaluations of MFIP suggest that the stick of work requirements increases labour supply, but has little effect on overall income as increases in earnings are offset by reduced benefits.

The carrot of greater earnings thresholds provides an income enhancing effect. When used together, there is increased work and higher earnings, along with reduced poverty.

The relatively strong measures to mandate work participation can be effective. Work mandates with sanctions are more effective at inducing work than are more financial incentives. Strict work requirements by themselves may have little income-enhancing effects if they are not combined with some form of wage support for the low-skilled.

Education and training programs do not seem any more effective in promoting labour force attachment and increased earnings than work experience programs. In various welfare reform experiments in the U.S. during the 1990s, states tested training programs – human capital development programs — against work first programs – labour force attachment programs.

The work-first programs increased earnings and decreased welfare usage faster, while human capital development programs cost more, particularly in the first year when women were training rather than working.

But even three years out, after women from human capital development programs had been in the labour market two years, human capital development participants still did not outperform labour force attachment participants.

This may suggest that the gains to experience among women who have been out of the labour market may be larger than the gains to formal education and training. Employment outcomes did not seem significantly worse among less skilled participants or participants with identifiable barriers to work, such as child care or health problems. Learning by doing and job match and job search capital are major sources of hard-to-measure post-school human capital and wages growth even for less skilled workers. Work-first programmes suggest that the reward from working which is human capital as well as wages are greater than an investment in time away from working to train.

The dual emphasis in the U.S. welfare reforms on positive work incentives and more punitive work mandates seems to have been important.

Work mandates (mandatory welfare-to-work programs, backed by sanctions and time limits) forced more people into work faster than would have naturally left welfare even strong economic environments. With low wages and (often) part-time hours, many welfare leavers would have gained little in income without subsidies to low-wage work. Reduced earnings thresholds, the expanded EITC, and subsidies to assist with child care or other work related expenses, all helped make work pay.


Diagrams HT: Conflicting Benefits Trade-Offs in Welfare Reform by Jeffrey Grogger, Lynn A. Karoly, and Jacob Alex Klerman (2002).

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