The Effect of Social Benefits on Youth Employment: Combining RD and a Behavioral Model
Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2016-12
44 Pages Posted: 8 Sep 2016
Date Written: September 1, 2016
Natural experiments provide robust identifying assumptions for the estimation of policy effects. Yet their use for policy design is often limited by the difficulty of extrapolating on the basis of reduced-form estimates. In this study, we exploit an age condition in the eligibility for social assistance in France, which lends itself to a regression discontinuity (RD) design. We suggest to make the underlying labor supply model explicit, i.e. to translate the reduced-form discontinuity in terms of discontinuous changes in disposable incomes. This exercise shows the potential of combining natural experiments and behavioral models. In particular, we can test the external validity of the combined approach. We find that it predicts the effect of a subsequent reform, which extends transfers to the working poor, remarkably well. The model is then used to simulate the extension of social assistance to young people and finds that a transfer program with an in-work component would not create further disincentives to work in this population.
Keywords: behavioral model, regression discontinuity, labor supply
JEL Classification: C52, H31, J22
Suggested Citation: Suggested Citation