Low-income working families have always been the least insulated from marketforces. When the economy sneezes, they get pneumonia. It's been a while sincewe've had to think about how to help these families get through a period likethis, and a lot has changed. For the first time in decades, the full-employmenteconomy of the late 1990s brought real wage gains for the lowest-paid workers.The safety net also changed a lot, in some cases intentionally (welfare reform)and in some cases owing to neglect (unemployment insurance). One of the mostnotable trends--the millions of low-income mothers who left welfare forwork--reflects both economic and policy changes.
To understand the current and potential plight of low-wage workers and theirfamilies, we need to examine recent developments both in private markets and inpublic programs. How high has the boom lifted working-class families, and how farmight they fall? What is the condition of the safety net whose very purpose is toprovide protection when the market fails? How well are states prepared to meetthe needs of their most vulnerable citizens?
There's much cause for concern. The downturn is already taking a toll on thosewho traditionally bear the brunt of recessions: blue-collar workers inmanufacturing, minorities, and other less-advantaged workers. Two key componentsof the safety net--welfare and unemployment insurance--are less prepared than inpast downturns. On the plus side, more children have access to health insurancethrough Medicaid or other state programs this time around. Still, many states maysoon be unable to finance their share of this and other importantrecession-related initiatives.
Jobs and Wages
The late-1990s boom, particularly the first full-employment economy in 30years, was tremendously beneficial to low-income families, thenon-college-educated, and minorities: the very groups who had been losing groundsince the late 1970s [see Jared Bernstein and Dean Baker, "Full Employment atRisk," TAP, November 5, 2001]. For the first time in decades, theirreal wages and incomes rose significantly, as the tight labor market providedthemwith the bargaining power they lack when there's too much slack in the economy.
As the slack returns, these long-awaited trends will likely reverse. Since theend of last year, when unemployment started rising, minority workers have lostthe most ground. While overall unemployment rose 1.5 percentage points from itslow of 3.9 percent last October, African-American and Hispanic unemploymentincreased 2.3 and 2.2 points, respectively; for black teens, it's gone up 6.2points.
Welfare reform and the increase in demand for low-wage labor have caused theshare of single mothers in the paid labor force to soar. The Institute forWomen's Policy Research points out that six million more children now haveworking moms compared with 10 years ago. But as the economy slows, theseopportunities are drying up. Beginning last summer, the employment rates of womenwho head families fell sharply, by three percentage points in three months. Andwage increases for people who still hold jobs are already slowing. If pastpatterns hold, wage stagnation for middle- and low-wage workers should beexpected to arrive by early next year.
The Safety Net
Ever since the New Deal, it has been widely recognized that business cyclesare, well, cyclical, and that people need help when, through no fault of theirown, the invisible hand takes a swipe at them. Thus, we've long had a set ofcountercyclical policies to temporarily help those displaced by recession orworse. The most visible of these are unemployment insurance (UI) and welfare (nowknown as Temporary Assistance for Needy Families, or TANF). It's also worthremembering in this context that the vast majority of working families get theirhealth care coverage through an employer.
Unemployment Insurance
With the surge in benefit claims, UI and itsshortcomings are finally receiving some attention. This is a program designed forthe labor market of a bygone era--for full-time male workers. In a variety ofways, it is not set up to meet the demands of a contemporary downturn in aprimarily service economy (this is not to negate the sharp recession inmanufacturing that's been ongoing for at least a year). The main problems areeligibility, benefit levels, and state trust funds.
UI is a joint federal-state program. In most states, part-timers, temps, andothers with nonstandard schedules or short work histories are ineligible for UIbenefits. During the boom, there was an expansion in types of jobs unlikely toqualify for UI. Part of this reflects the interaction of welfare reform and thestrong economy--as poor, single parents were more likely to work part-time orpart-year.
Benefit levels also have suffered from neglect over the years. They nowreplaceonly 33 percent of an average worker's lost earnings, down from 36 percent in1990. The percentage of unemployed workers who actually get UI benefits has alsodeclined over the past 40 years, peaking at 49 percent in 1975 and declining toaround 37 percent in 2001.
Finally, numerous states neglected their UI reserve funds during the long boomand are unprepared to meet the current surge of claims, much less expandeligibility and benefit levels. Although the federal UI trust fund is pretty wellstocked, Congress and the president must act quickly to use those funds fortemporary extensions and expansions of state unemployment programs.
Welfare (TANF)
In 1996, just as the boom was surging, President Bill Clintonsigned the bill ending welfare as we knew it. Whether TANF is judged scourge orblessing, it hasn't been through a downturn. To us, it looks like a fair-weathership about to hit some rough seas.
While TANF's predecessor, Aid to Families with Dependent Children, wasdeficient in many ways (it provided only minimal subsistence and did not offer aladder out of poverty), it was countercyclical. That is, it automaticallyexpanded when more families became eligible. TANF, which is funded through fixedblock grants to the states, does not share this important feature. For the firsttime since we introduced federal welfare in the midst of the Great Depression,needy families with children can be turned away.
Even before the downturn began, 100,000 income-eligible families lostassistance owing to time limits--a number that is bound to grow in the future. Injust the first three years of TANF, 540,000 families had benefits terminated fornot complying with program rules. (Studies show that these families typicallydon't understand the rules or they face unreasonable barriers to compliance.) Fewof these families will return to the welfare rolls in this recession, regardlessof their needs.
Even so, the welfare rolls will grow as more parents lose jobs, since manypoor families still have access to temporary assistance. Depending on the lengthand depth of the recession, some states will have sufficient welfare reserves tohelp these families. However, the drain on cash benefits will likely require cutsin some of the useful work supports that states have built up over the past fewyears, such as child care and job training.
On the other hand, reserves are relatively thin in a number of states,including Illinois and Michigan. Given the administration's budget priorities,states cannot expect additional federal funds when the reserves run out. So thecosts of higher caseloads will fall heavily on already weakened state coffers.States could be forced to scale back TANF-funded job training or work supports orto limit caseload increases.
Food Stamps
Since a considerable number of low-wage working parents who arelaid off will get neither unemployment benefits nor welfare, food stamps willtake on added importance. After unemployment insurance, this has been the federalprogram most responsive to rising unemployment. But eligibility restrictions forlegal immigrants and unemployed adults without children have narrowed theprogram's scope. And even among eligible individuals, the participation rate hasfallen sharply in recent years because of barriers to access.
On the positive side, because food-stamp benefits are funded entirely by thefederal government, the recession may give states an incentive to make it easierfor families to get food stamps. Increased participation brings more federalfunds to states and thus provides an economic stimulus.
Medicaid/Children's Health Insurance
A bright spot in government policy for low-income working families in recentyears has been an expansion of health-insurance coverage. Every state hasincreased coverage for children,usually up to 200 percent of the poverty level (that is, up to about $35,000 fora family of four). Parents who suffer a loss of earnings can keep their childreninsured even if their income isn't so low as to qualify for welfare.Unfortunately, few states have done the same thing for adults (whether or notthey have children). Half of working adults who lose their jobs will becomeuninsured. And growing Medicaid programs have made this form of aid a biggertarget for state-budget cutters during the current recession, putting some ofthese expanded benefits at risk.
All of these economic pressures will fall heavily on immigrants, who representone-fifth of the low-wage workforce but are the least able to seek temporaryhelp.The 1996 welfare law made many legal immigrants ineligible for foodstamps, cash assistance, and Medicaid. Though children in immigrant familiesoften are U.S. citizens and thus are eligible for assistance, their parents mustapply. Not surprisingly, ineligible parents often are unaware that they can seekassistance for their children or are reluctant to do so, and this means that thewhole family suffers. Recent research shows that the risk of hunger has risensignificantly among immigrants affected by these safety-net restrictions.
States of Need
Recessions wreak havoc on state budgets. Unlike the federal government, 49 ofthe 50 states cannot run a deficit: Except for Vermont, they must have a balancedbudget. When revenues dry up as economic activity falls, states quickly use uptheir rainy-day funds and then are faced with tough choices on spending cuts orrevenue increases.
In many states, large budget deficits are in the offing. California projects ashortfall of $9.5 billion. Deficits exceeding $1 billion are expected in NewYork,Arizona, Ohio, and Florida. The picture is likely to become bleaker in comingmonths as other states issue revised projections.
Budget cuts are being considered or have already been implemented in at least30 states. Governors have ordered agencies to cut back 15 percent in California,7 percent in Indiana, and 4 percent in Arizona and North Carolina. Eight statesraised taxes and fees significantly in their fiscal year 2002 budgets.
In the recession of the early 1990s, nearly every state froze or reduced cashassistance for poor families with children. Cash-aid programs for poornon-elderly adults without children were hit even harder, with benefitscutor eliminated for nearly 600,000 people. Those general-assistance programs havenot come back, leaving childless adults with almost no safety net.
Even the tax increases that states enacted in the last recession fell heavilyon the poor. More than half came in the form of regressive sales taxes. And taxincreases leave low-income families with less to spend.
In this recession, Medicaid faces trouble. It's one of the biggest programs inmost state budgets, so it's especially vulnerable to cuts. Some states areconsidering eligibility restrictions: 180,000 Tennesseeans could lose coverage,and a referendum that extended eligibility to working-poor Arizona families couldbe reversed. The ranks of the uninsured, already growing as laid-off workers loseemployer-provided coverage, could grow even more. Elsewhere, cutbacks in servicescovered by Medicaid are a possibility.
State spending cuts and tax increases are harmful not just to individuals butto state economies as a whole. At a time when states need stimulus,budget-balancing efforts make their economies shrink. Cutting government programsusually means less money in residents' pockets, more state employees out of work,or fewer goods and services purchased from private businesses.
The important economic question has shifted from "Are we in a recession?" to"What should be done about it?" The administration's response does almost nothingfor the families most at risk. Instead, the federal government ought to movequickly on the following fronts:
- Update Unemployment Insurance: At least temporarily, the federalgovernment should increase benefits, extend the benefit period, and changeeligibility rules to allow more part-time workers and those with only limitedjob tenure to qualify.
- Bolster TANF Programs: This would mean giving states morefederal-block-grant funds, thus reducing pressure to restrain welfare caseloadsor scale back job supports.
- Implement Enhanced State-Revenue Sharing on a Temporary Basis: Manyeconomists endorse this policy, including recent Nobel laureate Joseph Stiglitz.One efficient way to accomplish this would be to increase the federal matchingrate in existing programs, particularly Medicaid.
President Bush's tax plan (which was signed into law in June) and the proposedHouse stimulus bill will hurt state finances rather than help them. The repeal ofthe federal estate tax could cost states up to $3.5 billion by 2004, sincestates' estate taxes are based on the federal tax. If the House stimulus billbecomes law, it will allow businesses to write off their investments at anaccelerated rate. Yet because state corporate-income taxes typically use federalprovisions as a starting point, state revenues will fall, too, by $5 billion peryear.
During the boom, economic policy became ever more enamored of free markets,especially when they were juiced up with powerful new technologies. More than afew policy makers and journalists wondered if the new economy rendered thebusiness cycle obsolete. Now, the new economy looks suspiciously like the oldone, and the recession is already threatening to reverse the short-lived gains ofthe late 1990s. If we act fast, we can contain the damage, protect the livingstandards of the most vulnerable, and stimulate growth. But if we dawdle overpartisan plans that will fail to meet the pressing needs of working families,we'll needlessly and selfishly subject them to the ill winds of recession.
