Welfare Spending in the Long Run

In this paper,we construct an equilibrium search model of the labor market augmented to include lump sum taxes that finance government expenditures. Using the model, we can decompose the decline in labor force participation (LFP) into the policy effect and that of other factors such as declining economic output. Using census data for the state of Ohio, we learn that declining LFP and the increase in public assistance spending were caused by weaker economic output that led to an increase in the claimant count. Our results indicate that if the economy resembled the pre-crisis period, the Kasich administration would have led to an increase in LFP of approximately 0.6 percentage points. This effect goes up to 2% if all inactive workers are assumed to claim welfare income.