ECON101: Principles of Microeconomics (2021.A.01)

The welfare system in the United States came under increasing attack in the 1980s and early 1990s. It was perceived to be expensive, and it had clearly failed to eliminate poverty. Many observers worried that welfare was becoming a way of life for people who had withdrawn from the labor force, and that existing welfare programs did not provide an incentive for people to work. President Clinton made welfare reform one of the key issues in the 1992 presidential campaign.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 was designed to move people from welfare to work. It eliminated the entitlement aspect of welfare by defining a maximum period of eligibility. It gave states considerable scope in designing their own programs. In the first years following welfare reform, the number of people on welfare dropped by several million. Much research on the impact of reform showed that caseloads declined and employment increased and that the law did not have an adverse effect on poverty or the well-being of children. This positive outcome seemed to have resulted from an expansion of the earned income tax credit that also occurred, the overall low unemployment rate until the most recent few years, and larger behavioral responses than had been expected.

Advocates of welfare reform proclaimed victory, while critics pointed to the booming economy, the tight labor market, and the general increase in the number of jobs over the same period. The recession that began at the end of 2007 and the ensuing slow recovery in the unemployment rate provided a real-time test of the effects of the reform. Economists Marianne Bitler and Hilary Hoynes analyzed the impact of welfare reform during the Great Recession on nonelderly families with children. They found that participation in cash assistance programs seemed less responsive to the downturn but that participation in noncash safety net programs, particularly the food stamp program, had become more responsive. They did find some evidence that the increase in poverty or near-poverty status might have been greater than it would have been without the reform.