FEDERAL RESERVE BANK of ATLANTA

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1 FEDERAL RESERVE BANK of ATLANTA Welfare Recpency, Job Separaton Outcomes, and Postseparaton Earnngs: Insght from Lnked Personnel and State Admnstratve Data Jll Mare Gunderson and Jule L. Hotchkss Workng Paper May 2006 WORKING PAPER SERIES

2 FEDERAL RESERVE BANK of ATLANTA WORKING PAPER SERIES Welfare Recpency, Job Separaton Outcomes, and Postseparaton Earnngs: Insght from Lnked Personnel and State Admnstratve Data Jll Mare Gunderson and Jule L. Hotchkss Workng Paper May 2006 Abstract: Ths paper uses a unque personnel data set and state admnstratve data to follow welfare and nonwelfare hres who separate from smlar jobs wth the same frm. Welfare hres are more lkely to separate from ther job and are more lkely to be on welfare after separaton compared wth smlarly lowsklled nonwelfare hres. Those not returnng to welfare, however, are no more or less lkely to have moved on to a lower- or hgher-payng job than nonwelfare hres. JEL classfcaton: H53, J31, J62 Key words: welfare, welfare-to-work, separaton behavor, multnomal logt, swtchng regresson, admnstratve data Ths research benefted from dscussons wth John C. Robertson and from research assstance provded by Suzanne Zurkya. The vews expressed here are the authors and not necessarly those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remanng errors are the authors responsblty. Please address questons regardng content to Jll Mare Gunderson, ERS Group, 4901 Tower Court, Tallahassee, FL 32303, , ext. 140, (fax), jgunderson@ersgroup.com, or Jule L. Hotchkss, Georga State Unversty and the Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA , , jule.l.hotchkss@atl.frb.org. Federal Reserve Bank of Atlanta workng papers, ncludng revsed versons, are avalable on the Atlanta Fed s Web ste at Clck Publcatons and then Workng Papers. Use the WebScrber Servce (at to receve e-mal notfcatons about new papers.

3 Welfare Recpency, Job Separaton Outcomes, and Postseparaton Earnngs: Insght from Lnked Personnel and State Admnstratve Data I. Introducton and Background There s a volumnous lterature documentng transtons of welfare recpents to the labor market and the success of those transtons. Welfare-to-work transtons are often found to be plagued by low pay, hgh turnover rates, and welfare recdvsm (for example, see Lane and Stevens 1995, Hozer et al. 2004, Hoynes 2000, and Acs and Loprest 2004). Much of ths lterature s lmted n that the analyss ncludes only welfare recpents as the focus of analyss. 1 The absence of smlarly sklled nonwelfare recpents n an analyss of labor market outcomes ntroduces the potental of confoundng the behavor of welfare recpents wth that of the behavor of low-sklled workers n general. The purpose of the analyss n ths paper s to quantfy the labor market experence of former welfare recpents and to compare that experence to other, smlarly low-sklled workers. Identfyng smlartes and dfferences n labor market outcomes between welfare and nonwelfare hres wll allow us to dentfy what part of that experence s unque to former welfare recpents and what part s common among all low-sklled workers. If smlar outcomes are dentfed, then polces amed at mprovng labor market outcomes among welfare hres mght be more effectvely targeted at all lowsklled workers. 1 Exceptons can be found n Loeb and Corcoran (2001) who fnd that wage growth s smlar among welfare and nonwelfare recpents and Gunderson and Hotchkss (2004) who fnd very smlar job separaton rates and reasons among welfare and nonwelfare recpents. 1

4 Ths paper follows low-sklled workers (some of whom were welfare recpents) who separated from a sngle frm n the late 1990s. Personnel data from the frm wll provde demographc and job nformaton for each worker. The personnel records are lnked to admnstratve data from the Georga Department of Labor and the Georga Department of Human Resources n order to assess the postseparaton outcome for each worker. 2 The frst analyss explores how the earnngs among workers who separate compare wth those who stay employed wth the orgnal employer (controllng for the decson to separate), whether the earnngs experence dffers across welfare status, and how mportant future earnngs expectatons are n the separaton decson. Efforts to keep welfare hres from separatng from ther employer may not be called for f they fare better than, or at least as well as, nonwelfare hres when they separate. Ths analyss s followed by a closer look at the lfe after an employee separates to determne the lkely outcome among four alternatves: return to welfare, no job, better job, or worse job. Ths analyss explores the ssue of welfare recdvsm n greater detal and helps to shed lght on the earnngs outcomes of the frst analyss. II. Data The data used n ths study are from the personnel records of a large, unonzed frm n the transportaton ndustry wth numerous domestc and nternatonal locatons. Snce the admnstratve data to whch these workers wll be lnked are only avalable for the state of Georga, the study s restrcted to workers employed at frm locatons n 2 Although the frm employs workers across the U.S. and nternatonally, due to data avalablty lmtatons only workers employed n Georga are able to be followed n ths study

5 Georga. 3 Due to the numerous dfferent job types ths frm employs, the focus wll be on one partcular type: part-tme package sorters. Ths part-tme poston typcally nvolves workng four to fve hours a day, fve days a week. By focusng on one job type, ths study provdes for homogenety n workng condtons. 4 Ths homogenety n job type s mportant snce we don't have nformaton on prevous work experence. Presumably, ndvduals qualfyng for ths entry-level job have smlar (very lmted) work experence. Ths type of work often nvolves heavy lftng, repettveness, and workng condtons wth extreme temperatures dependng on the weather. Snce ths job requres a relatvely low level of skll, ths s a typcal job that a welfare recpent would be able to obtan (for example, see Loprest 2001, Wolman 1996, and Zll et al. 1991). The data set was constructed by queryng the frm s personnel records for all employees (of ths job type) hred from January 1, 1998, to December 31, These employees were then matched wth other personnel tables to obtan data on demographc characterstcs such as educaton and age, and job-related characterstcs such as shft worked. To be classfed as a welfare hre, the ndvdual must meet the welfare crtera applcable to the Work Opportunty Tax Credt (WOTC). Qualfed AFDC recpents were any ndvduals who were members of a famly recevng AFDC (or a successor 3 One advantage to an analyss lmted to one geographc locaton and coverng a relatvely short perod of tme s that the results are not confounded by varaton n labor market condtons. 4 Johnson and Corcoran (2003) and Henrch et al. (2005) explore the mpact of dfferences across job characterstcs on subsequent labor market outcomes among welfare recpents and former recpents only

6 program) for any nne months durng the last 18 months, endng on the hrng date. An outsde agency hred by the frm dentfed whch employees were welfare hres. 5 Indvdual employee records are lnked to ndvdual-level and employer-level data collected by the Georga Department of Labor (DOL) and welfare recept data collected by the Georga Department of Human Resources (DHR). 6 Even though the sample s lmted to workers employed by ths frm n the state of Georga, the frm has multple establshments n the state, thus all ndvduals do not work at the same job locaton. There are 6,421 nonwelfare hres and 271 welfare hres (these numbers nclude both workers who separated and workers who dd not separate from the frm). Sample statstcs are contaned n Table 1. [Table 1 here] The means n Table 1 ndcate that welfare hres are younger (by three years), more lkely to be sngle, black, and female, compared to nonwelfare hres. The average educaton level of welfare hres s smlar to nonwelfare hres, 12.7 years versus 13 years, respectvely. Lookng at the tenure of those who separated from the frm, welfare hres and nonwelfare hres separate at approxmately the same tme after 48 days for welfare hres and after 47 days for nonwelfare hres, however welfare hres are slghtly more 5 There s no way to tell whether a worker dentfed as a "nonwelfare hre" has ever been on welfare. That ndvdual was merely not dentfed as recently recevng welfare benefts. It s also not clear whether ndvduals self-dentfed themselves as a welfare recpent or as a member of a welfare-recevng famly. Any potental contamnaton of the nonwelfare hre sample wth ndvduals who were on welfare but ddn't self-dentfy s lkely adequately dluted by the large numbers of truly nonwelfare hres. In addton, snce ths frm had an actve welfare hrng program, the usual concerns about the mpact of employment subsdy programs on employer behavor (e.g., see Tennenwold 1982) are not lkely relevant. 6 There was a 100% match between the sub-group from the man data set and the DOL and DHR data sets

7 lkely to separate (73 percent) than nonwelfare hres (70 percent). In addton, the reasons for separatng are smlar across welfare status. 7 Among workers who dd not separate, welfare hres have, on average, hgher tenure, 271 days versus 203 days for nonwelfare hres. Welfare hres are less lkely to work the nght shft, perhaps reflectng the hgher proporton of women among welfare hres. The hourly rate of pay s smlar, reflectng the hghly structured pay scale, although hourly pay s skewed more to the rght among nonwelfare hres. Welfare hres are slghtly less lkely to be students and handcapped veterans. Both of the analyses descrbed below requre that we construct, for each person who separates from the orgnal employer and s subsequently employed, an earnngs varable for the worker's prmary job after separatng. The worker s prmary job s dentfed as the frst job for ths person that appears n the DOL wage fles for three consecutve quarters after separaton. The wage reported n the nteror (.e., mddle) quarter s selected as the prmary job s earnngs. Ths strategy used to dentfy a person's postseparaton earnngs wll be referred to as the "nteror job method." If an ndvdual does not have a job appearng for three consecutve quarters, the frst nstance of a job appearng for two consecutve quarters s selected and the hghest wage s used. 8 For ndvduals wth postseparaton earnngs, but not havng the same job for two or more consecutve quarters, the hghest postseparaton quarterly earnngs s used. 7 Reasons for separatng n ths study nclude personal reasons (e.g., chldcare or transportaton dffcultes), professonal reasons (e.g., gettng a better job or pay dssatsfacton), or beng fred for cause. Lad-off workers are not ncluded snce the focus s on the mpact of ndvdual behavor rather than exogenous demand shocks. 8 If an ndvdual had more than one job wth two or three consecutve quarters appearng at the same tme, the hghest wage job was selected

8 Table 2 reports the average postseparaton wages by welfare status usng alternatve ways to defne an ndvdual s prmary postseparaton job. On the lower end, workers' average postseparaton quarterly wage s $1,741 for welfare hres and $2,424 for nonwelfare hres. On the upper end, workers' maxmum postseparaton quarterly wage s $3,291 for welfare hres and $4,251 for nonwelfare hres. Usng the methodology dscussed above (the nteror job method), the average postseparaton quarterly wage s $2,346 for welfare hres and $3,097 for nonwelfare hres. If ndvduals not havng a job for two or more consecutve quarters are excluded (strct nteror job method), the average quarterly wage rses for both groups ($2,532 for welfare hres and $3,353 for nonwelfare hres). Although the model wll be estmated usng these varous measures of postseparaton wages, the nteror job method s preferred, wth the assumpton that a job lastng two or three consecutve quarters s more representatve of an ndvdual s earnng capacty than the average or maxmum wage receved. [Table 2 here] III. Emprcal Methodology A. The Separaton Decson and ts Impact on Wages The frst analyss s desgned to determne what nfluences a worker's decson to separate from the orgnal employer, to explore what mpact that decson has on earnngs, and how welfare hres fare relatve to ther nonwelfare counterparts. The emprcal methodology employed s a swtchng regresson model wth selecton. The mechansm determnng a worker's wage s allowed to dffer by a worker's separaton status.: - 6 -

9 lnw S S S S S S = τ 0 + τ 1 X + τ 2 Welfare + υ S (1) and lnw NS NS NS NS NS NS = τ 0 + τ 1 X + τ 2 Welfare + υ NS (2) where S corresponds to those who separated from the orgnal employer, NS refers to those who dd not separate, τ represents the coeffcents to be estmated, X represents the personal characterstcs of age, age squared, prevous experence, greater than hgh school educaton, veteran-handcapped status, female, whte, and marred. Welfare s a dummy varable whch equals one f the ndvdual s a welfare hre n the orgnal job, and zero otherwse, and υ represents the random error term. The dependent varable for those who separate s based on the nteror postseparaton quarterly earnngs (descrbed n the prevous secton). For those who do not separate, the dependent varable s the worker's last quarter of earnngs n ther job wth the orgnal employer. A nave strategy would be to estmate the coeffcents (τ s) of equatons (1) and (2) separately, wth the coeffcents from equaton (1) beng estmated by ordnary least squares (OLS) on ndvduals who have separated and the coeffcents of equaton (2) also beng estmated by OLS, but ths tme on ndvduals who dd not separate. The relatve wage premum pad to those who separate could then be obtaned gven the coeffcent estmates of equatons (1) and (2): ln ˆ ˆ ( ˆ ˆ ( ˆ ˆ ( ˆ ˆ2 S NS S NS S NS S NS W lnw = τ 0 τ 0 ) + τ 1 τ 1 ) X + τ 2 τ ) Welfare (3) However, ths estmaton procedure may produce based results snce the error terms n equatons (1) and (2) are not necessarly uncorrelated wth the other explanatory - 7 -

10 varables. Sample selecton results f ndvduals do not randomly select to separate or not. The goal s to obtan parameter estmates from each equaton that wll allow us to make earnngs predctons for those not ncluded n the estmaton sample. Followng Lee (1978), a probt model s estmated to compute the nverse of the Mlls ratos that are then ncluded as addtonal regressors n the wage equatons n order to control for the possblty of non-random ndvdual selecton nto the separate and not-separate samples. The unobserved structural probt model s: I * S NS = 0 + β1 (lnw lnw ) + β 2Y + β 3 β Welfare + η (4) And, the observed model s: I * 1 f I > 0 = 0 otherwse (5) Thus, when I equals one, a separaton s observed, and otherwse no separaton s observed ( I = 0). The vector Y conssts of the set of varables outlned for equatons (1) and (2) (except age squared) and the addtonal dummy varables reflectng whether the ndvdual worked the day or nght shft. The shft-of-work dummy varables are beleved to affect the probablty of a worker separatng, but to not drectly affect one s postseparaton wage. The parameters to be estmated are represented by the β s, and η represents a normally dstrbuted random error term whose varance s assumed to equal one. Separaton from the orgnal employer s modeled as an ndvdual choce snce roughly 90 percent of those who separate qut for professonal or personal reasons and one could argue that beng fred for cause s a matter of ndvdual (bad) behavor choce, rather than nvoluntary acton. Layoffs are not ncluded n the analyss

11 In order to obtan the nverse of the Mlls Ratos, the reduced-form probt model S NS s derved by substtutng equatons (1) and (2) for (lnw lnw ) n the structural probt model, equaton (4). Thus, the probablty of observng a separaton s a functon of all of the explanatory varables n the model. Usng MLE, coeffcent estmates are obtaned and used to compute the nverse of the Mlls rato (selectvty correcton factor), λ, for each ndvdual : 9 ˆS λ ˆ λ NS = [ f ( ˆ β ) / F( ˆ β )] = [ f ( ˆ β ) /1 F( ˆ β )] (6) (7) where F(.) s the cumulatve normal dstrbuton of a standard normal random varable, f(.) s the densty functon of a standard normal random varable, and the ˆs β are the coeffcents from estmatng the reduced-form probt. The nverse of the Mlls rato s then added to the correspondng wage equatons to control for an ndvdual s probablty of separatng (or not separatng) from the orgnal employer: and lnw = ˆ 3 S NS S S S S S S α 0 + α1 X + α 2Welfare + α λ + lnw = ˆ 3 NS NS NS NS NS NS α 0 + α1 X + α 2 Welfare + α λ + ν S ν NS (1') (2') A comparson of the coeffcents on the explanatory varables across equatons (1') and (2') wll determne whether there s a dfferental mpact of welfare status (and other 9 S NS The coeffcent on λˆ ( λˆ ) s the estmated covarance of the error term n the probt equaton and the error term n the wage equaton for separators (non-separators), dvded by the standard devaton of the probt equaton s error term. If ths coeffcent s sgnfcant, t ndcates there s sgnfcant self-selecton by those who separated (those who dd not separate)

12 characterstcs) on postseparaton wages, and how well those who separate from the orgnal employer fare compared to smlar workers who do not separate. B. Postseparaton Outcomes To focus more closely on the lfe after an employee separates, workers who separated from the orgnal employer are followed for a mnmum of two quarters beyond the quarter they separated to examne whether they: (1) returned to welfare (welfare), (2) dd not report wages (no job), (3) obtaned a lower-payng job (job losers), or (4) obtaned a hgher-payng job (job wnners). These mutually exclusve outcomes, whch wll also be referred to as outcomes one, two, three, and four, respectvely, are determned by comparng the quarterly earnngs receved durng the last quarter of employment n the orgnal job wth the quarterly earnngs reported postseparaton by the Georga Department of Labor. 10 If an ndvdual receves welfare benefts n any quarter after separatng, her outcome s welfare. Indvduals reportng no wages for the entre postseparaton perod, and who do not receve welfare benefts have the outcome "no job." 11 Snce an ndvdual may have several jobs (.e., several employers) postseparaton, a prmary job s determned for each ndvdual not n the "welfare" or "no job" category. A worker's postseparaton prmary job s determned by the "nteror job method," as descrbed n the Data secton. Outcome classfcatons by welfare status are presented n Table people (3% of those who separated) have the outcome "welfare," 532 ndvduals (11%) have the 10 Snce the orgnal job wage nformaton s reported hourly, the quarterly wage was computed as: [(hourly pay rate * 20 hours) * 52 weeks] / Havng no wages reported could also mean the ndvdual moved out of Georga or s workng at a non-covered (n regards to unemployment nsurance) job

13 outcome "no job," 1,988 ndvduals (42%) have the outcome "job wnner," and 2,015 (43%) ndvduals have the outcome "job loser." There are 2,007 ndvduals (30% of the sample) who dd not separate. As one may expect, a larger percentage of welfare hres had the outcome "job loser" (48% versus 43% for nonwelfare hres), as well as the outcome welfare (16% versus 3% for nonwelfare hres). A larger percentage of nonwelfare hres had the outcome "no job" (12% compared to 6%), perhaps because these ndvduals pursued educatonal actvtes, no longer needed to work due to fnancal crcumstances, or because they moved out of state. [Table 3 here] To model the choce of work status for welfare and nonwelfare hres, a multnomal logt model s estmated, based on the four possble outcomes. The ndvdual s assumed to choose the outcome provdng her the hghest level of utlty. Let y be the dependent varable wth j outcomes, numbered but not assumed to be ordered, and defne the probablty that ndvdual chooses outcome one (where U refers to utlty): P = P( y1 = 1) = P( U 1 > U 1 j ) for j=2, 3, 4. (8) Thus, the probablty of choosng outcome one s the probablty that the utlty from outcome one exceeds the utlty from outcomes two, three, and four. Let the average utlty assocated wth choosng outcome j be gven as: U = β + ε (9) j X j j where ε j s a random error term. For outcome j, defne: P( y exp( X β j ) = j) = 4 exp( X β ) j= 1 j (10)

14 where X s the vector of ndependent varables whch ncludes dummy varables for race, greater than hgh school educaton, gender, shft worked at orgnal job, excellent or good performance ratng whle employed at orgnal job, prevous employment wth the orgnal frm, martal status, reason for separatng orgnal job, and welfare status; and contnuous varables for wage rate at orgnal job, age, age squared; and β j s the vector of parameters to be estmated. Thus, 4 j= 1 P( y = j) = 1. (11) Although the probabltes sum to one, the model s not dentfed snce there s not a unque set of parameters whch gves rse to the probabltes observed. To dentfy the model, the parameters assocated wth outcome four ("job wnner") are set equal to zero ( β = 4 0). Wth ths constrant, equaton (10) s replaced by: and P( y P( y exp( X β j ) j) = 1+ exp( X β ) = 3 4) = 1+ j= 1 = 3 j= 1 1 exp( X β ) j j for j 3 (12) for j = 4 (13) Followng Greene (2000), the log lkelhood functon s: N ln L( β ) = d ln P 4 = 1 j= 1 j j (14) where d j = 1 f alternatve j s chosen by ndvdual and 0 f not, for the j possble outcomes. Thus, the estmated coeffcents wll tell us the percentage change n the odds

15 of pursung a partcular work status alternatve, relatve to beng a "job wnner," for a one-unt change n an ndependent varable. 12 IV. Emprcal Results A. To-Separate or Not-to-Separate: Implcatons for Earnngs The frst order of busness s to determne what nfluences a worker's decson to separate from the orgnal employer, to explore what mpact that decson has on earnngs, and how welfare hres fare relatve to ther nonwelfare counterparts. Efforts to keep welfare hres from separatng from ther employer may not be called for f they fare better, or at least as well as nonwelfare hres, as a result of separatng. Results from the frst-stage, reduced-form probt model that descrbes a worker's tendency to separate or not, are found n Table At the 90% sgnfcance level, welfare hres have an ncreased probablty of separatng. 14 As expected, workers wth a greater than hgh school educaton also have an ncreased probablty of separatng. Lowsklled workers wth more educaton lkely separate from ther job n order to pursue more promsng employment opportuntes than are avalable to workers wth less educaton (see Gunderson and Hotchkss 2004). Workng durng the nght shft also results n a hgher probablty of separatng the orgnal job. Beng a student or havng 12 Margnal effects of a unt change n the value of each regressor on the change n the probablty of a gven postseparaton outcome wll actually be what s dscussed below. See Greene (2000), pp observatons (8.1 percent of the total number of observatons) were dropped due to havng postseparaton earnngs of zero. Of the 545, 14 were welfare hres. 14 Many others have documented hgh turnover rates among welfare recpents (for example, see Berg et al 1992, Holzer et al. 2004, and Johnson and Corcoran 2003). Whle Gunderson and Hotchkss (2004) also fnd a hgher rate of turnover among welfare recpents, they fnd that the tme to separaton s slghtly longer for welfare hres, relatve to non welfare hres

16 worked for the frm before contrbutes to a sgnfcantly lower probablty of separatng, the latter beng ndcatve of ths frm beng a good job match for certan ndvduals. Also, students may fnd ths type of job a partcularly good ft wth ther academc schedule. [Table 4 here] Table 5 presents the estmated coeffcents from the wage equatons (1') and (2'). The results suggest that beng a welfare hre negatvely mpacts postseparaton wages, whle welfare status does not sgnfcantly affect the wages of those who dd not separate. 15 The mplcaton s that the earnngs outcome among those who separate s sgnfcantly (21 percent) lower for welfare hres than for nonwelfare hres. In spte of the lower earnngs outcome among welfare hres that separated, others have found that future earnngs among these workers are lkely to be hgher than those of welfare recpents that have not had an employment experence (for example, see Henrch et al and Grogger 2005). The outcomes analyss to follow wll shed lght on the reason for ths lower postseparaton earnngs outcome of welfare hres. [Table 5 here] The selecton term, λˆ, s negatve and sgnfcantly dfferent from zero n the wage equaton for those who separate. Ths ndcaton of negatve self-selecton suggests that an ndvdual who chooses to separate ends up wth a lower wage than the average person would upon separaton. The nsgnfcance of the selecton term n the nonseparatng wage equatons suggests that those who choose to stay wth the orgnal 15 The estmated coeffcents for the non-separaton wage equaton should be nterpreted wth cauton due to the relatvely low R 2. Very low systematc varaton across regressors s not unexpected as those stll employed by the orgnal employer contnue to have ther wages determned by a unon-negotated formula

17 employer do not fare better or worse than the average worker who stays. Ths s not surprsng gven the strong nsttutonal nature of the wage determnaton through unon contracts wth the orgnal employer. The dfferences n wage determnng mechansms across the two equatons can largely be explaned by the unon nfluence of wage determnaton n the orgnal employer. Beng older (a rough proxy for overall labor market experence) has a sgnfcant effect on the wage rate of those who separate, but not on the wage rate of nonseparators. Ths result s as expected snce overall labor market experence has value n general, but may not be correlated wth senorty, whch appears to be more mportant n the determnaton of wage wth the orgnal employer. Evdence of ths s found n the postve and sgnfcant coeffcent on the Prevous Experence (wth the frm) regressor; among those who reman employed wth the orgnal frm, those wth prevous experence wth the frm earn 1.6 percent hgher wage than those who do not. A greater than hgh school educaton ncreases the wage rate for all workers whether they separate from the frm or not, wth the mpact beng much stronger for those who separate. Agan lkely reflectng the unon nfluence of wage determnaton, beng whte does not have a sgnfcant effect on wages of those who reman employed wth the orgnal frm, but sgnfcantly postvely affects wages of those who separate. It's unclear why marred workers would earn a hgher wage among those who separate, but earn a lower wage among those who do not. Estmaton of the structural probt model, equaton (4), allows us to nvestgate the effect of the wage premum a worker mght expect from separatng from her job on that decson to separate. If the expected earnngs dfferental postvely affects the decson

18 to separate, the coeffcent on the term (lnwˆ S lnwˆ NS ) wll be postve and sgnfcantly dfferent from zero. 16 Estmates from the structural probt model are presented n Table 6. [Table 6 here] The sgn on the expected wage dfference between separatng and not separatng s postve, although nsgnfcantly dfferent from zero. The sgns, sgnfcance, and magntude of the varables n the structural probt are smlar to those n the reduced-form probt. The nsgnfcance of the expected wage dfference ndcates that expected wages are not a drvng force n the decson to separate from the orgnal employer. Ths s not entrely unexpected snce, as wll be seen n the next secton, the predcted probabltes of a worker that separates endng up wth a hgher or lower payng job are about the same. B. Postseparaton Outcomes The analyss of postseparaton outcomes wll provde some nsght as to why expected earnngs don't seem to nfluence the separaton decson and why, among those who separate, welfare hres end up wth lower earnngs than nonwelfare hres. Table 7 contans the margnal effects calculated at the mean for the multnomal logt estmated to descrbe the outcome probabltes of those who separate. 17 These results are 16 The expected wage from separatng and from not separatng s calculated for all observatons, regardless of ther separaton decson. Havng controlled for potental selecton nto each of these states allows us to use the consstent parameter estmates to make predctons out-of-sample. 17 The estmated coeffcents are n Appendx tables A1 through A3. The model was estmated usng outcomes based on the nteror wage job, "strct" nteror wage job, average wage job, and maxmum wage job. The margnal effects reported are based on

19 generalzable to those who separate from the orgnal employer only and are desgned to answer the queston, "Are welfare hres more lkely to end up n a partcular postseparaton outcome than nonwelfare hres wth the same characterstcs?" [Table 7 here] Havng a greater than hgh school educaton, beng whte, or marred decreases the probablty that welfare s the outcome after separaton. Indvduals who are welfare hres, female, or who were fred for cause have an ncreased probablty of havng ther outcome be welfare. Beng a welfare hre ncreases the probablty of a welfare outcome by 4.1 percentage ponts, whle beng female ncreases the probablty by 8.0 percentage ponts. Ths sgnfcant tendency to return to welfare among welfare hres s consstent wth results reported by Hoynes (2000) who fnds that the "demand for welfare" perssts even through mproved labor market condtons. However, Gottschalk (2005) reports that exposure to work reduces a recpents demand for welfare through an alteraton of ther belefs about treatment n the workplace. Ths suggests that welfare recdvsm n ths sample s lkely lower than among recpents who experence a spell off of welfare that dd not nvolve an employment experence. 18 Nam (2005) also fnds lower rates of recdvsm among welfare recpents wth labor market experence. The probablty of havng a "no job" outcome s hgher for students, whch would be expected, and s lower for welfare hres and ndvduals who qut for professonal reasons or for beng fred for cause. Most lkely, welfare hres are at a reduced the nteror wage job. Overall, the estmated coeffcents do not dffer consderably by how the postseparaton wage was specfed. 18 Furthermore, Carrngton et al. (2002) fnd that welfare recdvsm s lower n the postwelfare reform years than before TANF replaced AFDC

20 probablty of a "no job" outcome because f they truly do not have a job, they have most lkely returned to welfare. The sgns on the margnal effects for the "job wnner" and "job loser" outcomes are as expected. A hgher wage rate (earned wth the orgnal employer), beng older, havng greater than a hgh school educaton, or separatng for professonal reasons ncreases the probablty of havng the outcome be "job wnner." Females, students, and ndvduals who have prevous work experence wth the orgnal frm are less lkely to have a "job wnner" outcome, as are ndvduals who worked the day shft. Focusng on the "job loser" outcome, students, day shft workers, and ndvduals fred for cause are more lkely to have ths outcome. A hgher wage rate, beng older or quttng for professonal reasons decreases the probablty of a "job loser" outcome. These results are consstent wth Johnson and Corcoran (2003) who fnd, among welfare recpents/former recpents only, that greater labor market experence and a hgher orgnal wage rate mprove the chances of transtonng nto a better job, whereas job performance problems lead to a worse job outcome. Also consstent wth Johnson and Corcoran, educaton beyond hgh school ncreases the probablty of a "job wnner" outcome and t s also found here to reduce welfare recdvsm--an outcome not evaluated by Johnson and Corcoran. The results suggest a number of polcy mplcatons. Beng fred for cause sgnfcantly ncreases the probablty of havng a welfare or "job loser" outcome. Snce one of the man reasons ndvduals are fred for cause s due to excessve absenteesm (68% of workers fred for cause was because of absenteesm), efforts to mprove workreadness sklls may reduce the chances of beng fred for cause, and thus ncrease the

21 chances of havng a better outcome n the event of a separaton. Enhancement of workreadness sklls also appears to have a more postve effect than the actual qualty of work performed, as represented by the lack of sgnfcance of the performance ratng dummy varable. The results also ndcate that havng an educaton greater than hgh school reduces the probablty of the outcome beng welfare. Thus, promotng educaton beyond hgh school would be benefcal and would appear to help reduce the probablty of a welfare outcome. 19 Whle perhaps more dffcult to desgn polcy for, promoton of marrage would also ade n reducng the probablty of havng a welfare outcome. However, one cannot be certan that t s marrage per se that reduces the probablty of a welfare outcome; t could be unobserved characterstcs of marred ndvduals whch contrbutes to the reduced probablty. Whle some vrtually unchangeable characterstcs, such as race and gender, have sgnfcant effects on the outcomes estmated, there are some characterstcs whch can be targeted, such as educaton and work-readness sklls, n order to ncrease the probablty of a more desrable outcome. It s also of nterest to note that welfare hres were no more or less lkely to experence a "job wnner" or "job loser" outcome than nonwelfare hres, although 78 percent of welfare hres and 83 percent of nonwelfare hres fnd themselves n one of these two outcomes. The mplcaton s that when t comes to low-sklled workers movng from one job to another, welfare hstory s not a hndrance (or help) n makng a 19 Nam (2005) fnds that promoton of educaton even at lower levels (e.g., hgh school completon) would reduce welfare recdvsm, as well

22 postve transton. 20 Ths means that efforts to mprove the job transton outcomes among welfare hres mght very well be best addressed to assst all low-sklled workers; there s nothng specal about welfare recpents that wll make ther transton ether more or less dffcult than smlarly sklled workers wthout a welfare hstory. Snce 91% of ndvduals wth the welfare outcome reported at least one quarter wth postve postseparaton wages, the model was re-estmated wth three outcomes only: "no job," "job wnner," and "job loser." 21 The margnal effects are presented n Appendx A, Table A4 and resemble the margnal effects calculated from estmatng four outcomes. 22 Most notably, there s stll no sgnfcant mpact of havng a hstory of welfare recept on endng up wth a "job wnner" or "job loser" outcome. V. Summary and Conclusons The analyses n ths paper ndcate that whle the job separaton experence of welfare hres s smlar n many ways to that of ther nonwelfare counterparts, there are also some mportant dfferences. The study makes use of unque personnel data from one frm and admnstratve data from the state of Georga to follow workers who separate from ther employer to determne how these experences dffer across welfare status. 20 Ths result s consstent wth Loeb and Corcoran (2001) who fnd that workers of smlar labor market hstores experence smlar wage growth, regardless of ther welfare recept experences. 21 A Small-Hsao test of the IIA assumpton was rejected for the welfare outcome, ndcatng that when the probablty of the welfare opton changes, the relatve choces of the other outcomes changes. See Small and Hsao (1985). 22 Two exceptons are the female dummy varable coeffcent, whch s now sgnfcantly postve n the "job loser" outcome, and the whte dummy varable coeffcent, whch s now sgnfcantly negatve n the "job loser" outcome

23 Welfare hres are found to be more lkely to separate from ther job and they can expect lower postseparaton earnngs, on average, than ther nonwelfare counterparts. Ths suggests that job-stablty efforts concentrated on welfare recpents has mert. Furthermore, promotng educaton beyond hgh school would mprove the postseparaton earnngs outcome among both welfare and nonwelfare hres. Evdence that separaton decsons of both types of workers are beng drven by factors other than expected hgher earnngs on a subsequent job s also presented. An analyss of job separaton outcomes confrms that those who separate are, for all practcal purposes, equally lkely to fnd themselves n hgher or lower payng jobs than the one they left, regardless of whether they were a welfare or nonwelfare hre on the orgnal job. However, those dentfed as welfare hres wth the orgnal employer are sgnfcantly more lkely than nonwelfare hres to end up on welfare after separaton. Ths suggests that "welfare" presents tself as a more vable postseparaton outcome for those wth prevous experence of recevng welfare. Havng been "fred for cause" (regardless of welfare status) also ncreases the probablty (by 1.8 percentage ponts) that a worker who separates ends up on welfare and ncreases the probablty even more (by 7.6 percentage ponts) that the worker ends up n a lower payng job from whch they were fred. Therefore, mprovng job-readness sklls (.e., reducng the odd of beng fred for cause) and promoton of educaton beyond hgh school would mprove the job separaton outcomes of all workers. However, t appears that extra effort concentrated on welfare hres s warranted, gven that they are sgnfcantly more lkely to end up on welfare after separaton than ther nonwelfare counterparts

24 Table 1: Means of Selected Varables Varable Nonwelfare Hres Welfare Hres Age 26 (7.9) [16, 57] 23 (5.5) [16, 46] Educaton (years) 13.0 (1.3) [12, 18] 12.7 (1.0) [12, 16] Hourly pay rate wth orgnal employer $8.52 (0.20) [8.00, 16.19] $8.51 (0.09) [8.50, 9.50] Day shft = Nght shft = Twlght or Sunrse shft = Prevous experence wth orgnal employer = Excellent or good performance ratng = Tenure at orgnal job (days) 95 (119) [1, 729] 106 (133) [1, 725] Workers who separated 48 (51) [1, 473] 47 (49) [1, 371] Workers who dd not separate 203 (156) [4, 729] 271 (155) [ 17, 725] Separate = For professonal reasons For personal reasons For beng fred for cause Female = Whte = Black = Sngle = Vet-handcapped = Student = Maxmum welfare beneft (pre-separaton) a $699 (353) [26, 1848] $796 (274) [140, 1485] Maxmum welfare beneft (postseparaton) b $643 (376) [33, 1980] $729 (343) [85, 1874] Number of Observatons 6, Standard devaton s n parenthess. Mnmums and maxmums are n brackets. a Excludes zeros. The percent of welfare and nonwelfare hres recevng benefts was 13 and 2 percent, respectvely. b Excludes zeros. The percent of welfare and nonwelfare hres recevng benefts was 12 and 2 percent, respectvely

25 Table 2: Postseparaton Quarterly Earnngs Varable Nonwelfare Hres Welfare Hres Average Pre-separaton Quarterly Wage $2,211 (28) [2080, 3292] $2,211 (10) [2210, 2340] Postseparaton Interor Job Wage $3,097 (3185) [0, 64603] $2,346 (2160) [0, 10736] Postseparaton Strct Interor Job Wage a $ 3,353 (3290) [0, 64603] $2,532 (2225) [0, 10736] Average Postseparaton Wage $2,424 (2451) [0, 34548] $1,741 (1662) [0, 9444] Maxmum Postseparaton Wage $4,251 (5087) [0, ] $3,291 (3042) [0, 26550] Number of Observatons (separators) 4, a NOBS = 3,852 for nonwelfare hres and 173 for welfare hres. Standard devaton s n parenthess. Mnmums and maxmums are n brackets. Table 3: Outcomes by Welfare Status Outcome Entre Sample Nonwelfare Hres Welfare Hres Dd not separate 2,007 1, Welfare 150 (3%) 118 (3%) 32 (16%) No Job 532 (11%) 521 (12%) 11 (6%) "Job Wnner" 1,988 (42%) 1,928 (43%) 60 (30%) "Job Loser" 2,015 (43%) 1,919 (43%) 96 (48%) Number of Observatons 6,692 6, Percent of those who separated s n parenthess

26 Table 4: Coeffcents from Reduced-Form Probt; Explanng the probablty of separatng. Varable Coeffcent Age (0.016) Age squared (0.000) Prevous Experence (0.128)*** Greater than Hgh School (0.036)*** Student (0.046)*** Vet-handcapped (0.058) Female (0.045) Whte (0.051) Welfare (0.088)* Marred (0.050) Nght (0.041)*** Day (0.044)* Constant (0.228)*** Log lkelhood Pseudo R NOBS 6,147 Standard errors are n parenthess. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level

27 Table 5: Coeffcents from Wage Equatons Adjusted for Selectvty Varable Separators Non-Separators Age (0.018)*** (0.001) Age squared (0.000)*** (0.000) Prevous Experence (0.189) (0.005)*** Greater than Hgh School (0.045)* (0.002)*** Student (0.107) (0.004)*** Vet-handcapped (0.061) (0.003) Female (0.050) (0.002) Whte (0.057)*** (0.002) Welfare (0.092)*** (0.004) Marred (0.054)** (0.002)*** λˆ (0.235)*** (0.007) Constant (0.288)*** (0.012)*** R Number of Observatons 4,140 2,007 Standard errors are n parenthess and have been adjusted usng Heckman s (1979) consstent estmator. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level

28 Table 6: Coeffcents from Structural Probt Varable Coeffcent Age (0.006)*** Prevous Experence (0.128)*** Greater than Hgh School (0.038)*** Student (0.046)*** Vet-handcapped (0.059) Female (0.045) Whte (0.054) Welfare (0.092)* Marred (0.053) Nght (0.041)*** Day (0.044)* ln ŴQ ln Ŵ NQ (0.110) Constant (0.134)*** Log lkelhood Pseudo R NOBS 6,147 Standard errors are n parenthess. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level

29 Table 7: Margnal Effects from Multnomal Logt Varable Welfare No Job Job Loser Job Wnner Quarterly wage rate wth orgnal employer (0.012)* (0.061)* (0.271)** (0.220)** Age (0.002) (0.005) (0.007)*** (0.008)*** Age squared (0.000) (0.000) (0.000)*** (0.000)*** Prevous Experence (0.013) (0.047) (0.070) (0.069)* Greater than Hgh School (0.003)*** (0.010) (0.016) (0.017)** Student (0.004) (0.018)*** (0.023)*** (0.024)*** Vet-Handcapped (0.005) (0.016) (0.026) (0.026) Female (0.012)*** (0.013) (0.020) (0.021)*** Whte (0.004)*** (0.015)* (0.022) (0.024) Welfare (0.013)*** (0.018)*** (0.036) (0.040) Nght (0.003) (0.011) (0.018) (0.019) Day (0.003) (0.013) (0.020)*** (0.021)*** Excellent or Good performance ratng (0.005) (0.015) (0.024) (0.024) Separated for professonal reason (0.003) (0.010)*** (0.016)*** (0.017)*** Separated for beng fred for cause (0.008)** (0.014)*** (0.029)** (0.030) Marred (0.004)*** (0.015) (0.023) (0.023) Pr(Outcome X) 1.58% 11.51% 35.02% 51.90% Percent of Sample (NOBS) 3.20% (150) 11.36% (532) 42.43% (1,988) 43.01% (2,015) NOBS = 4,685. Standard errors are n parenthess. Outcomes based on usng nteror wage job. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level. Log Lkelhood = ; psuedo R 2 =

30 REFERENCES Acs, Gregory and Pamela Loprest. Leavng Welfare: Employment and Well-beng of Famles that left Welfare n the Post-Enttlement Era. Kalamazoo, Mch: W.E. Upjohn for Employment Research, Berg, Lnnea, Lynn Olson, and Amee Conrad. Causes and Implcatons of Rapd Job Loss among Partcpants n a Welfare-to-Work Program. Workng Paper No. 92-1, Center for Urban Affars and Polcy Research, Northwestern Unversty, Brauner, Sarah and Pamela Loprest. Where Are They Now? What States Studes of People Who Left Welfare Tell Us. New Federalsm: Issues and Optons for States, no. A-32. Washngton, D.C.: Urban Insttute, Carrngton, Wllam J.; Peter R. Mueser; and Kenneth R. Troske. "The Impact of Welfare Reform on Leaver Characterstcs, Employment and Recdvsm." IZA Dscusson paper No. 561 (August 2002). Gottschalk, Peter. "Can Work Alter Welfare Recpents' Belefs?" SRDC Workng Paper Seres (February 2005). Greene, Wllam H. Econometrc Analyss, 4 ed. New Jersey: Prentce Hall, Grogger, Jeffrey. "Welfare Reform, Returns to Experence, and Wages: Usng Reservaton Wages to Account for Sample Selecton Bas." NBER Workng Paper #11621 (September 2005). Gunderson, Jll Mare and Jule L. Hotchkss. "Job Separaton Behavor of Welfare Recpents: Results from a Unque Case Study." Federal Reserve Bank of Atlanta Workng Paper # (May 2004). Henrch, Carolyn J.; Peter R. Mueser; and Kenneth R. Troske. "Welfare to Temporary Work: Implcatons for Labor Market Outcomes." Revew of Economcs and Statstcs 87 (February 2005): Holzer, Harry J.; Mchael A. Stoll; and Douglas Wssoker. "Job Performance and Retenton Among Welfare Recpents." Socal Servce Revew 78 (September 2004): Hofferth, Sandra L., Stephen Stanhope, and Kathleen Mullan Harrs. Extng Welfare n the 1990s: Dd Publc Polcy Influence Recpents Behavor? Unpublshed paper, Unversty of Mchgan, August,

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32 Tannenwald, Robert. "Are Wage and Tranng Subsdes Cost Effectve? Some Evdence from the new Jobs Tax Credt." New England Economc Revew (September/October 1982): Wolman, Hal. Welfare to Work: The Need to Take Place Dfferences nto Account. Techncal Analyss Paper No. 45, Department of Health and Human Servces, January Zll, Ncholas, Krstn Moore, Chrstne Nord, and Thomas Stef. Welfare Mothers as Potental Employees: A Statstcal Profle Based on Natonal Survey Data. Washngton D.C.: Chld Trends, Inc.,

33 Appendx A: Multnomal Logt Parameter Estmates. Table A1: Coeffcents from Multnomal Logt: Outcome = Welfare Varable Interor Wage Job "Strct" Interor Wage Job Average Wage Job Maxmum Wage Job Wage rate (0.610) (0.611) (0.594) (0.578) Age (0.104)*** (0.105)*** (0.103)*** (0.103)** Age squared (0.002)** (0.002)** (0.002)*** (0.002)* Prev. Exp (1.055) (1.093) (1.058) (1.050) Greater than Hgh School (0.197)*** (0.199)*** (0.199)*** (0.195)*** Student (0.292) (0.299) (0.297) (0.288) Vet-Handcapped (0.443) (0.445) (0.445) (0.443) Female (0.199)*** (0.203)*** (0.204)*** (0.197)*** Whte (0.403)** (0.405)** (0.405)** (0.402)* Welfare (0.257)*** (0.260)*** (0.274)*** (0.251)*** Nght (0.232) (0.235) (0.234) (0.230) Day (0.223) (0.226) (0.227) (0.220) Goodwork (0.289) (0.291) (0.292) (0.288) Prof. Reason (0.206) (0.207) (0.208) (0.204) Fred for Cause (0.268)*** (0.272)*** (0.277)*** (0.263)*** Marred (0.440)*** (0.440)*** (0.441)*** (0.440)*** Constant (5.342) (5.362) (5.205) (5.073) Log Lkelhood Pseudo R NOBS Welfare Outcome NOBS=4,685. Standard errors are n parenthess. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level. Coeffcents are estmated relatve to the "Job Wnner" category

34 Table A2: Coeffcents from Multnomal Logt: Outcome = No Job Varable Interor Wage Job Strct Interor Wage Job Average Wage Job Maxmum Wage Job Wage rate (0.388) (0.378) (0.384) (0.375) Age (0.051)** (0.052)** (0.052)*** (0.050) Age squared (0.001) (0.001) (0.001)*** (0.001) Prev. Exp (0.408) (0.444)** (0.412) (0.395) Greater than Hgh School (0.105)** (0.106)* (0.107)** (0.102)** Student (0.140)*** (0.145)*** (0.149)*** (0.133)*** Vet-Handcapped (0.170) (0.171) (0.172) (0.168) Female (0.138) (0.140) (0.142) (0.135) Whte (0.139) (0.142) (0.143) (0.136)* Welfare (0.331)** (0.333)** (0.344)* (0.326)* Nght (0.119) (0.121) (0.122) (0.116) Day (0.131)* (0.133)** (0.137)*** (0.127) Goodwork (0.168) (0.169) (0.171) (0.165) Prof. Reason (0.119)*** (0.121)*** (0.122)*** (0.118)*** Fred for Cause (0.220)** (0.222)** (0.230) (0.215)** Marred (0.149) (0.150) (0.150) (0.147) Constant (3.367) (3.289) (3.339) (3.251) Log Lkelhood Pseudo R NOBS No Job Outcome NOBS=4,685. Standard errors are n parenthess. *** ndcates sgnfcant at the 99% level; ** ndcates sgnfcant at the 95% level; * ndcates sgnfcant at the 90% level. Coeffcents are estmated relatve to the "Job Wnner" category