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Unemployment and Welfare Participation in a Structural VAR: Rethinking the 1990s in the United States

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Author Info
Corrado Andini

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Abstract

A report by the Council of Economic Advisers (1997) is the first of a group of studies, known as caseload studies, analysing the relationship between the US unemployment rate and the welfare participation rate, with special regard to the 1990s. We examine this relationship in a structural VAR model over the period of 1960--2000 and find that the unemployment rate does not help to predict the welfare participation rate while the converse is more likely to hold. These results are robust to state and year heterogeneity over a period of unprecedented positive correlation between unemployment and welfare participation, i.e. 1990--1998. Further, we find that a shock to the welfare participation rate has a contemporaneous impact on the unemployment rate while the converse is less likely to hold. The main conclusion is that several caseload studies may be based on the wrong assumption that the unemployment rate is an exogenous explanatory variable of the welfare participation rate.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 20 (2006)
Issue (Month): 2 (April)
Pages: 243-253
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Handle: RePEc:taf:irapec:v:20:y:2006:i:2:p:243-253

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Keywords: Welfare; unemployment; VAR;

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  1. J. P. Ziliak & D. N. Figlio & E. E. Davis & L. S. Connolly, . "Accounting for the Decline in AFDC Caseloads: Welfare Reform or Economic Growth?," Institute for Research on Poverty Discussion Papers 1151-97, University of Wisconsin Institute for Research on Poverty. [Downloadable!]
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. David Roodman, 2004. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics," Development and Comp Systems 0412003, EconWPA. [Downloadable!]
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  4. Robert A. Moffitt, 1999. "The Effect of Pre-PRWORA Waivers on AFDC Caseloads and Female Earnings, Income, and Labor Force Behavior," JCPR Working Papers 89, Northwestern University/University of Chicago Joint Center for Poverty Research.
  5. Rebecca M. Blank, 1997. "What Causes Public Assistance Caseloads to Grow?," NBER Working Papers 6343, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor and Francis Journals, vol. 19(3), pages 321-340. [Downloadable!] (restricted)
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  7. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies. [Downloadable!]
  8. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  9. David Roodman, 2003. "XTABOND2: Stata module to extend xtabond dynamic panel data estimator," Statistical Software Components S435901, Boston College Department of Economics, revised 19 Sep 2009. [Downloadable!]
  10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
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  11. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178. [Downloadable!] (restricted)
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  12. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January. [Downloadable!] (restricted)
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  13. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September. [Downloadable!] (restricted)
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