Public Policy and Extended Families: Evidence from South Africa

Abstract:     
How are resources allocated within extended families in developing countries? To investigate this question, we use a unique social experiment: the South African pension program. Under that program, the elderly receive a cash transfer that represents roughly twice the per capita African income. We ask how this transfer affects the labor supply of working-age individuals living with these elderly. We find a sharp drop in the working hours of the prime-age individuals in these households when elder women reach 60 years old or elder men reach 65, the respective ages for pension eligibility. We also find that the drop in labor supply is much larger when the pensioner is a woman, suggesting an imperfect pooling of resources. The allocation of resources among prime-age individuals depends strongly on their absolute age and sex as well as on their relative age. The oldest son in the household reduces his working hours more than any other prime-age household member. The large labor supply response we observe raises important issues for the design of social policy programs in developing countries and also leads us to be wary of any model of intra-household allocation of resources that does not fully account for the endogeneity of earned income.

Keywords: Families, Pension, Labor Supply, South Africa

JEL Classifications: D1, H55, I38, J22, O10

Working Paper Series