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

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Author Info
Corrado Andini (University of Rome 'La Sapienza' Department of Public Economics)
Abstract

The Council of Economic Advisers (1997) started a large research effort about the relationship between the US unemployment rate and the welfare participation rate, with special regard to the 1990s. In this paper, this relationship is examined in a structural VAR over the period of 1960-2000. It is found that the unemployment rate does not Granger-cause the welfare participation rate, while the converse is true. Moreover, a negative shock to the welfare participation rate predicts a reduction in the unemployment rate. These results are robust to State and year heterogeneity over the period of 1990-1998. A first implication is that - contrarily to the majority view - the decline of the welfare participation rate in the last decade should be mainly attributed to restrictive welfare reforms, not to the fall in the unemployment rate. Further, the political choice to reduce the welfare participation rate may have inflated the reduction in the unemployment rate.

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Paper provided by EconWPA in its series HEW with number 0501005.

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Date of creation: 14 Jan 2005
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Handle: RePEc:wpa:wuwphe:0501005

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Related research
Keywords: Welfare Unemployment VAR;

Find related papers by JEL classification:
I - Health, Education, and Welfare

This paper has been announced in the following NEP Reports:

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  4. Rebecca M. Blank, David Card and Philip K. Robins, 1999. "Financial Incentives for Increasing Work and Income Among Low-Income Families," Economics Working Papers E99-264, University of California at Berkeley. [Downloadable!]
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  5. Bruce D. Meyer & Dan T. Rosenbaum, 2000. "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects," NBER Working Papers 7491, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. 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.
  7. Schoeni, R.F. & Blank, R.M., 2000. "What Has Welfare Reform Accomplished? Impacts on Welfare Participation, Employment, Income, Poverty, and Family Structure," Papers 00-02, RAND - Labor and Population Program.
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  8. 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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  9. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  11. Jacob A. Klerman & Steven J. Haider, 2001. "A Stock-Flow Analysis of the Welfare Caseload: Insights from California Economic Conditions," Working Papers 01-02, RAND Corporation Publications Department. [Downloadable!]
  12. 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!]
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  17. 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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  18. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February. [Downloadable!] (restricted)
    Other versions:
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