Welfare and Social Insurance Lead to Declining Desire to Work

The U.S. labor market has witnessed two apparently unrelated trends in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. A substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s.

The decline in the number of nonparticipants who want to work is due mainly to prime-age females, and, to a lesser extent, young individuals. Moreover, the decline is mainly a low-income and non-single household phenomenon, and is stronger for families with children than without.

Changes in the provision of welfare and social insurance (notably disability insurance) explain about 50 percent of the decline in desire to work, which suggest a possible role for the major welfare reforms of the 90s — the 1993 Earned Income Tax Credit (EITC) expansion and the 1996 reform of the Aid to Families with Dependent Children (AFDC) program — which precisely affected low-income households with children. Changes in the provision of welfare and social insurance explain about 60 percent of the decline in desire to work among prime-age females, and attribute between 50 and 70 percent of the decline in mothers’ desire to work.

Two mechanisms could explain the results:

– The EITC expansion raised family income and reduced the secondary earner’s incentives to work.
– The strong work requirements introduced by the AFDC/TANF reform would have left the “weaker” welfare recipients without welfare and pushed them away from the labor force and possibly into disability insurance.

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