Adolescents’ Formal Employment and School Enrollment: Effects of State Welfare Policies*

In this study we hypothesize that variations in state welfare policies in the reform era may affect adolescents through two mechanisms. A competing labor market hypothesis posits that stringent state welfare policies may reduce adolescent employment. A signaling hypothesis posits that stringent welfare policies may promote enrollment. To test these hypotheses, we use a dynamic joint model of adolescents’ school enrollment and formal employment and separate out state welfare policies from non-welfare state policies, state labor market conditions, and unobserved state characteristics. Using longitudinal data from the NLSY97 on adolescents aged 14-18 and various state data sources over the period 1994-1999, we find support for the competing labor market effect but not for the signaling effect. In particular, lower-income dropouts suffer more severely from fewer labor market opportunities when state welfare policies are more stringent, which indicates that welfare reform may compromise work opportunities for lower-income dropouts.