Promise of a Job: Reducing Poverty and Enhancing Children۪s Future Opportunity, By Anthony J. Mallon, Virginia Commonwealth University, and Guy V.G. Stevens, Former Senior Economist, Federal Reserve Board

With the unemployment rate persistently hovering near 10 percent for the past 8 months despite the recent and welcome job growth of 162,000 in March national attention has increasingly, and rightfully, focused on the need to create jobs. On March 18, the President signed into law the HIRE Act, an $18 billion package of job-creation tax incentives and an additional $20 billion in direct spending on highway and transit programs. We applaud this effort but take the President at his word when he stated “While this jobs bill is absolutely necessary, it۪s by no means enough.”

We concur because we are concerned that the HIRE Act and its predecessors will not adequately serve a key sub-group of the un- or underemployed: the millions of so-called welfare-leavers Americans who have left TANF since 1996 more than half of whom find themselves mired in poverty. To address the special problems of welfare-leavers, we call for a job creation program, Promise of a Job (POJ).

While it has been widely publicized that TANF caseloads declined by 50 percent or more since the passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in 1996, the high poverty rate of these welfare-leavers is much less well known. A number of interlinked problems limit the extent to which leavers are able to maintain stable, long-term employment.

First is the well-documented impact of personal and structural “barriers to work”e.g., low basic skills, learning disabilities, poor understanding of workplace norms, the physical and mental health problems of leavers and their families, lack of affordable health care, unreliable transportation, and housing problems.

Second is the economy۪s pervasive inability to generate a sufficient number of jobs to employ all of those who want and need to work, even during the full employment۪ era of the late 1990s. For example, when the overall unemployment rate fell to 4.1 percent and 5.7 million were officially unemployed at the beginning of 2000, there existed another 7.4 million who had either dropped out of the labor force or who where involuntarily forced to work part time.

These problems of both labor supply and demand should come as no surprise. At the dawn of welfare reform, in his 1996-97 lectures and subsequent book, Work and Welfare, Nobel laureate Robert Solow predicted that without a serious program of job creation for welfare-leavers, “the transformation of welfare into work is likely to be the transformation of welfare into unemployment and casual earnings so low as once to have been thought unacceptable for fellow citizens.” Solow drew an important and obvious conclusion: “an adequate number of jobs for displaced welfare recipients will have to be deliberately created, either through some version of public-service employment or through the extension of substantial special incentives to the private sector.”

We believe POJcan do much to correct the failure of TANF as an anti-poverty programa failure that we fear will be repeated by the Obama administration۪s job programs. POJ builds on the transitional jobs program concept and is consistent with the work-first philosophy of TANF, but is also designed to be an anti-poverty program. POJ includes elements that address the difficulty for welfare-leavers to secure and maintain private-sector employment.

As an anti-poverty program, the wages of the jobs developed by the program will be sufficient, when combined with the EITC and Food Stamps, to lift the vast majority of participating families out of poverty. Adequate work hours will be assured by a job guarantee for a job in the public or private sector. POJis described and costed-out in detail in some of our recent work, but we give a sketch of its components and costs below.

A general description of POJ includes four key components:

I. Recruitment/Referral

II. Assessment, Job Readiness Training, Job Development, Search and Placement

III. The Job

IV. Services after the Initial Placement: Monitoring, Mediation, Retention, and Entry into an Unsubsidized Job

The Recruitment/Referral Phase can be administered in cooperation with local TANF programs and make use of the existing workforce development infrastructure such as “One-Stop” centers. The goal of phase I is to prepare entrants and move them to jobspreferably unsubsidized in the private sector, but, if necessary, subsidized positions with the public sector. What little firm evidence is available indicates that despite the many activities encompassed under this phase, the “work first” principle should be the guide.As stated by Charles Michalopoulos, Senior Fellow with MDRC, “The group of programs with the most consistent effects on employment and earnings were employment-focused programs that allowed some welfare recipients to enroll in short-term education or training.”

The transitional job programs on which we based our phases II and III have shown quite impressive results in placing participants in full-time jobs, easily beating the 60 percent mark for TANF leavers through 2000 reported by the Department of Health and Human Services. If a subsidized position is required, we would recommend a job that requires a minimum of 30 hours of work per week, supplemented by an additional 10 paid hours for continued job searching and training to resolve remaining barriers to employment. As discussed in detail by the National League of Cities۪ Clifford Johnson when he was with the Center on Budget and Policy Priorities, a rich body of results and experience exists for subsidized transitional jobs in the private sector, local governments, public schools and non-profits.

However, despite the success of transitional job programs in initial job placements, many graduates have not remained fully or even satisfactorily employed one or two years after their initial placement (as established by Thomas Fraker, Senior Fellow at Mathematica, and his colleagues). Phase IV, for post-employment monitoring and retention services, is our attempt to implement services provided in the few transitional job programs that have had relatively good results in maintaining full-time employment. The other part of the attempt to maintain employment is the job guarantee.

In our other work in this area, using data from past transitional job programs, we estimate the annual costs for a single participant in POJ. The maximum cost for someone who uses all services, including a full-time minimum wage job (at $7.25/hour), would be between $17,100 and $19,360; for a participant graduating immediately into a non-subsidized job, the cost could fall by as much as $14,000. The overall gross costs of the program would depend on the overall scale, the length of time each recruit spends in publicly-supported employment, and the degree to which employers are induced to cover a percentage of these costs.

In addition, costs will vary over time as participants graduate to private-sector jobs or exit without necessarily securing private sector employment, and as new and returning participants are added to the program.

In our study, we also estimate the total costs of a number of simulated programs. For example, using the adults in the 2007 TANF population as the basis of eligibility, under what we think are reasonable assumptions, POJ could service 715,000 cases for between $4.6 and $7.9 billion. A smaller pilot program would of course be much cheaper.

Offsetting the costs related to POJ are a potentially wide range of increased revenues and reduced indirect costs: revenues from the productive work of the participants; increased income taxes paid; the reduction or elimination of the TANF benefits the entrant was receiving; and a long list of possible social or third-party benefits. Some of these revenues and cost savings can in principle be captured by the agency administering POJ, thus lowering the total direct costs incurred by the program; all are relevant for calculating the net social benefit of POJ.

The potentially large, but more difficult to capture, net social benefits include: (1) the reduction of the direct and indirect costs of physical and mental illnessessavings that are likely because of a participant۪s exit from poverty and joblessness; (2) the health and other costs for children, as mentioned above (which, again, will be reduced by an exit from poverty); (3) the stimulatory effects on local communities and the larger economy by increasing the earned income of millions of families; and (4) the savings to society at large by the demonstrably lower rates of crime and incarceration resulting from the reduction in the poverty rate and the increase in employment. When we examined the estimates of such social benefits, their magnitude overwhelmed any estimate of the net private and social costs.

For example, in our simulations related to the 2007 TANF population, a calculation of the savings from reducing the number of children in poverty alone more than compensates for the cost of the whole program. That simulation shows a fairly modest reduction in the number of poor children by 1.6 million, lowering the children۪s poverty rate from 18 percent to 15.8 percent. However, using recent estimates by Georgetown professor Harry Holzer and his colleagues that children۪s poverty costs the United States a minimum of $500 billion a year, this 12 percent drop in the percentage of children who are poor would save the country $60 billion more than 7 times POJ۪s maximum cost.

It turns out the reduction in poverty in the above simulation is small when compared with other simulationsfor example, when considering the costs and benefits of having implemented POJ in 1996 at the advent of “welfare reform.” The reason is that by 2007, a much smaller percentage of the poor, especially poor children, was covered by TANF than in 1996 or 1997. By 2007, only 19 percent of poor children were covered, whereas 54 percent were covered in 1996.

POJ is built as an extension and expansion of existing transitional job programs and accepts as a basic assumption that the American people continue to support and require that anti-poverty efforts be based on work. Thus, POJ is consistent with PRWORA in acknowledging “personal responsibility” as a key element. But it also requires what PRWORA, despite its title, does not: that responsibility goes both ways; that American society shoulders its own responsibility of the “reconciliation of work opportunities” with personal responsibility by guaranteeing the availability of a job to everyone willing and able to work. We believe that a program containing a carefully designed job guarantee will go far toward eliminating this inconsistency in PRWORA that has led to so much poverty among welfare-leavers.

The gross costs of POJ are not low, but we have shown that the net benefits can be vast. Given the relatively small size of POJ when compared with the 2009 stimulus and present plans for creating jobs, it would appear easy to embed our program within the larger effort. We are concerned, however, that current proposals seem to concentrate so exclusively on the recently unemployed that the population of welfare-leavers and their families will be forgottenespecially when overall unemployment returns to more politically acceptable levels.

Finally, let us not forget about another social benefit from POJ that has so far not been entered into our calculations: the benefit of living in a society where we actually, rather than just rhetorically, strive to reduce poverty among our most vulnerable members, our children.

Anthony J. Mallon is a professor at Virginia Commonwealth University. Guy V.G. Stevens is a former Senior Economist with the Federal Reserve Board