By increasing the labor supply of welfare recipients, welfare reform may reduce wages
and increase unemployment among other less-educated groups. These "spillover effects"
are difficult to estimate because welfare caseloads decrease in response to improvements
in the economy, which leads caseload reductions to be associated with improvements
in labor market outcomes. This paper corrects for the endogeneity of caseloads by
using instruments that reflect policy. The estimates suggest that welfare reform
has significant spillover effects: welfare reform reduces employment of male high
school dropouts, and reduces wages of single mothers and male high school dropouts.