Labor Gains

What welfare reform could mean to your business.
Magazine Contributor
13 min read

This story appears in the January 1997 issue of Entrepreneur. Subscribe »

Talk of welfare reform has been bandied about Congress for years like a beach ball at a college graduation. But when President Clinton finally signed The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 in August, small-business owners were left wondering "What exactly does this mean to me?"

The bill affects the Aid to Families With Dependent Children (AFDC) program (popularly known as welfare), the Supplementary Security Income program, and the national Food Stamp program. In simple terms, the new law changes the assumption that welfare is a guaranteed right. It limits the amount of time adults can collect welfare to five years in a lifetime, in most cases, and requires states to have 50 percent of their eligible welfare recipients working (whether those jobs are subsidized by the state or not) by 2002.

But what does welfare reform mean to small business? Read on.

  • Everybody Into The Labor Pool

For many small employers, welfare reform will mean a new source of employees. The prospect of millions of people moving into the work force could be a gold mine for certain industries, such as food service, that experience chronic worker shortages.

Recognizing that potential, in January 1995, the National Restaurant Association launched the Good Start Project, which got a pledge from more than 250 restaurant owners nationwide to work more closely with state and local officials to help hire, train and promote people receiving public assistance.

Paul Cunningham, president and owner of Schreiner's Restaurant Inc. in Fond du Lac, Wisconsin, and a board member of the state's restaurant association, which responded to the pledge request from the national association, has hands-on ex-perience hiring AFDC recipients. In general, he has found they are eager to work.

"We're always looking for people who've got the personality and physical ability to keep up with us," says Cunningham. Located on a major highway and serving about 600,000 people each year, Schreiner's earns in excess of $3 million annually and employs about 150 people.

Cunningham, who for years has worked with government agencies to hire veterans, workers with disabilities and other hard-to-place employees, says hiring welfare recipients has eased the crunch of the labor shortage that plagues his industry. However, he notes, there are some special considerations when dealing with AFDC recipients. For example, some also need monetary assistance obtaining the necessary work clothes; Schreiner's managers have become adept at tactfully directing them to the appropriate agencies that provide assistance in this area.

The restaurateur also found that welfare recipients changed the character of his work force. "Typically, we start people at a training wage [of $4.50 to $4.75 an hour] washing dishes, and they're usually high school students," says Cunningham. The people from the welfare program, however, were a little older than Cunningham was accustomed to getting for entry-level positions.

This forced Cunningham and his managers to adjust--not lower--their expectations. "We were used to having a 30-year-old person with six years of experience," he says. "Now we've got 30-year-olds [with minimal experience]. This means we have to provide training."

Cunningham's experience is a graphic example of what potential employers and entrepreneurs are likely to encounter. Former welfare recipients often come with more baggage than the typical worker. Although some are college-educated, many have limited skills and education. Some have histories of domestic abuse and neglect and have ingrained habits of dependency that may not change with two weeks--or even two months--of intensive job preparation training.

Cunningham points out another requirement: the need to offer a fair wage. If your business pays less than people can make on welfare, he says, they won't be able to afford to work for you. Some states' welfare reform programs address this problem by allowing recipients to keep receiving at least some of their benefits during the transition to employment. However, one Ft. Wayne, Indiana, employer found it common for workers to leave one job to take another paying just 5 cents more per hour. In other words, money is a big motivator.

Another barrier rarely talked about but ever present is the fact that many of the single mothers on welfare suffer from low self-esteem because of past educational and life failures. (Eighty percent of AFDC recipients are single mothers in their 20s and 30s.) This problem has prompted officials in Culpeper, Virginia, to begin discussing something they believe is a logical and critical element of any welfare reform program--mentoring.

"We've gone to the United Way to set up a mentoring system, and we're going to the private sector looking for mentors to work one on one with people," explains Chip Coleman, director of social services for Culpeper County. Mentoring, which Coleman describes primarily as emotional support, is a concept that employers who hire welfare recipients should consider; it's something Cunningham and his staff have done informally for years.

  • New Opportunities

For some, welfare reform spells entrepreneurial opportunity. Just ask Shanta Reid, a 36-year-old Richmond, Virginia, single mother of three who knows what it's like to live with poverty.

"I always thought I would be the black June Cleaver, baking cookies in a house with a white picket fence while Ward was at work," recalls the effervescent Southerner. Instead, she ended up with three children, no husband, and just enough money to disqualify her from receiving welfare assistance but not enough to afford rat-free housing for herself and her children.

Then, in 1991, Reid was introduced to First Home Inc., a program designed to take people from homeless to homeowner. "We were the first family in the program and its first success story," says Reid, who was able to put a down payment on a home in 1995.

Once her life began to take shape, Reid's desire to help others drove her to start a support group for single mothers. "I wanted to find a way to empower single mothers," explains Reid, who had worked in secretarial jobs all her life. In the process of launching her program, Reid met Michael A. Evans, director of social services for the city of Richmond, who liked her straightforward, upbeat approach.

"In 1995, Virginia began implementing a welfare-reform program requiring AFDC recipients who are able-bodied and have children over 18 months old to work for their benefits," says Evans, describing how he began working with Reid. "The program is scheduled to go on line in April; however, we've already implemented some parts of the program." Richmond has about 4,000 individuals eligible to participate in the program, dubbed Welfare to Work. About 90 percent are black, most of them single women aged 18 to 44 with an average of two kids and an eighth- to 10th-grade education.

Although Reid's initial idea was a support group called Single Mothers Acting Responsibly Together (S.M.A.R.T.), after she talked with Evans, it evolved into a two-week-long job preparation workshop that women in the Welfare to Work program are now required to attend.

Today, Reid has a contract with the city to teach the class, in which participants learn basics such as how to dress for a job as well as gain experience going to companies to find out about employment opportunities.

In Wisconsin, which has a Work Not Welfare program in Fond du Lac and Pierce counties and expects to fully implement the Wisconsin Works (W-2) program by fall, businesses have the opportunity to bid to be a W-2 agency or work as a subcontractor to the government agency responsible for the reform efforts, says Tom Van Ess, a program analyst at W-2.

Those W-2 programs not run by a county are put out for bid among the private-sector companies that have applied to become a W-2 agency.

Thompson Consulting Ltd. in Brookfield, Wisconsin, is one such firm. Rob Saam, executive vice president of the 50-employee outplacement business, says his firm applied to become a W-2 agency after noticing that the government was getting more involved in helping people find work.

"The state has set up job centers where people can go to file for unemployment and look at job openings on computers. The centers also provide counselors, and to some degree, they're working with the same people we would otherwise work with," explains Saam, who says his company is typically paid by employers to provide services such as helping laid-off workers assess job experience, education, background and skills to find their next job.

"We help people with interviewing techniques and negotiating job offers," says Saam. "In some cases, we also provide offices where people can telephone for jobs and secretaries who'll type correspondence."

If Thompson Consulting wins the contract, Saam says, it won't be the first time people on his staff, which includes licensed psychologists and counselors, have provided services to AFDC recipients.

Entrepreneurs with ideas you think would work for welfare reform should remember the emphasis has shifted away from education to work, says Richmond's Evans. Any proposal should stress how quickly you will be able to move welfare recipients into permanent work situations. And in many, if not all cases, pay is directly tied to the program's performance.

"We use local community colleges and a private industry council to provide short-term training, but we're also open to using the private sector," says Evans. "But companies must offer a good product and meet the requirements for job placement and retention. We're generally looking for a 75 percent completion rate for the program and another 75 percent [of participants] getting placed and staying on a job for at least 90 days."

Indiana also has pay-for-performance job placement contracts where profit or nonprofit groups can provide job search, skill development and placement services in all of the state's 92 counties. According to Cheryl Sullivan, secretary of the Indiana Family and Social Services Administration, proposals should stress how quickly workers will be placed in full-time, entry-level or better jobs that offer more than 37 hours per week, pay at least $6.06 per hour, and include health care and other benefits.

In Richmond, if you've got an idea related to welfare reform, just call Evans. In other states, like Indiana, you need to wait for a request for proposals to be issued. In general, contacting the state department that handles AFDC is a good place to start, as is the state's private industry council.

  • Basic Needs And Beyond

Providing job search assistance, training and placement for welfare recipients is not the only business opportunity to be found in welfare reform. Some of the biggest opportunities revolve around the very barriers that have traditionally made it difficult for single mothers on welfare to work--reliable and quality child care and transportation.

In Culpeper, Virginia, Coleman says the government operates a year-round day-care system that offers government subsidies for welfare recipients and the working poor. This program, he adds, could easily be run by the private sector.

Indiana conducted a needs assessment and found that child care, transportation and medical care were critical needs for the welfare population. These present excellent entrepreneurial opportunities, particularly in transportation. Sullivan says her Indiana agency would seriously consider subsidizing any proposal that offered a solution to the transportation dilemma.

Evans in Richmond agrees, adding that a business that could develop a way to provide these new workers with reliable, low-cost cars and car repair services could create a new business avenue.

In fact, Evans sees even further opportunities in this market. "We've got 4,000 people [in Richmond who will be] entering the work force. They're going to find themselves with income they've never had before and are going to be looking for ways to dispose of that income through purchasing autos, housing, other commodities and even luxuries. This is a potential market for small business to explore," he says.

By the same token, many former welfare recipients will need training in how to budget and use credit, banks and other financial tools.

Coleman and Evans also urge entrepreneurs to consider more long-term needs. Both realize that many of the people exchanging welfare for jobs will merely swell the ranks of the working poor. Consequently, employers who provide these workers with on-site training will be creating trained workers who can advance as their companies evolve.

Whether you see welfare reform as the dawning of new entrepreneurial opportunities or a source of desperately needed employees, remember that, like Rome, the welfare system was not built in a day and won't be changed in a day. But if enough entrepreneurs get involved in the planning process, chances are good that the new system could become something that benefits everyone involved.

Changing The Rules

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 will have a major effect on America. But to understand just how big it is, you need some facts.

Welfare reform is not new. In fact, The Family Support Act, passed in 1988, required all states to implement the Jobs Opportunities and Basic Skills (JOBS) training program, mandating that at least 20 percent of a state's eligible welfare recipients be involved in work activities by 1995. These activities included getting a high school education, receiving job preparation or vocational training, working in community service, or finding subsidized or unsubsidized employment.

The new legislation supersedes this law. However, some states with federal government waivers may be able to keep operating their current programs with only minor revisions. Others may have to totally restructure.

Although it is not in the federal legislation, some state programs may offer employers limited subsidies for hiring welfare recipients.

Among the changes under the 1996 welfare reform legislation:

  • The Aid to Families With Dependent Children program will now be called Temporary Assistance for Needy Families.

  • People are no longer guaranteed assistance; states determine eligibility criteria and benefit limits.

  • Recipients receive benefits for no more than two years without working.

  • Adults are limited to five years of welfare in their lifetime; however, 20 percent of each state's recipients can be exempted from this limit.

  • States must have 50 percent of their single-parent welfare recipients working by 2002.

  • States may reduce or terminate the cash benefits of those who fail to fulfill the work requirement.

  • Able-bodied food stamp recipients with no dependents must work at least 20 hours per week after receiving benefits for three months in any three-year period.

Whos Who?

To more fully understand The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, it's critical to understand who the welfare recipients are.

  • An estimated 4.5 million families receive Aid to Families With Dependent Children (AFDC); by 2002, about 2 million adults in these families will be required to work under the new law.

  • A Congressional Budget Office report found that benefits provided under AFDC and Food Stamps programs represented approximately 3 percent of the federal budget in 1995.

  • In 1992, according to the most recent federal statistics, 66 percent of all AFDC recipients were children, 80 per-cent lived in families headed by mothers in their 20s and 30s, and 8 percent lived in families headed by a teen.

  • Seventy percent of all people in the welfare system leave within two years; 50 percent leave within one year. Only 15 percent of welfare recipients stay on more than five years, and less than 25 percent stay on for 10 years or more.

  • Studies estimate at least half of AFDC families who leave the system return because of job loss or child-care problems.

  • Ethnic breakdown of AFDC families in 1993 (the most recent figures available):

  • 38 percent non-Latino Caucasian

  • 37 percent black

  • 19 percent Latino

  • 4 percent American Indian, Asian/Pacific Islander and unknown

Contact Sources

Indiana Family and Social Services Administration, 402 W. Washington St., P.O. Box 7083, Indianapolis, IN 46207-7083, (317) 232-4705;

National Restaurant Association, (202) 331-5900;

Schreiner's Restaurant Inc., 168 N. Pioneer Rd., Fond du Lac, WI 54935, (414) 922-0590;

Single Mothers Acting Responsibly Together, P.O. Box 234, Richmond, VA 23218-0234, (804) 321-2787;

Social Services of Culpeper County, 155 W. Davis St., Culpeper, VA 22701, (540) 825-1251;

Thompson Consulting Ltd., 17700 W. Capitol Dr., Brookfield, WI 53045, (414) 781-0177;

Wisconsin Works, 1 W. Wilson St., Madison, WI 53707, (608) 266-3035.

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