The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High

87 Pages Posted: 22 Aug 2018 Last revised: 30 Sep 2020

See all articles by Marcelo Bergolo

Marcelo Bergolo

Universidad de la Republica - Instituto de Economía; IZA Institute of Labor Economics

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS); IZA

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2020

Abstract

The disincentive effects of social assistance programs on registered (or formal) employment
are a first-order policy concern in developing and middle-income countries.
We study the impact of a conditional cash transfer (CCT) program in Uruguay on the
employment of adult members in beneficiary households in a context of high informality.
Our research design relies on the sharp discontinuity introduced by program eligibility
rules around a poverty score threshold combined with longitudinal administrative data.
We find reductions of about 6 percentage points (a 13% drop) in formal labor force participation
among all beneficiaries and of 8.7 percentage points (a 19% drop) for single
mothers. The implied elasticity of participation in the formal sector with respect to the
net-of-tax rate is about 0.78 for the full sample and about 1.3 for single mothers. The
reduction in labor supply is stronger among individuals who have a medium propensity
to be formally employed, with a smaller reduction in the case of infra-marginal individuals.
We also present suggestive evidence that the reduction in formal employment
increases inactivity and informal work in equal proportions. Finally, despite pervasive
informality in the context of the Family Allowance assistance program (AFAM), the
program’s marginal value of public funds of 0.61 implies an efficiency cost within the
range of cash transfer programs targeted to families in the United States.

Keywords: welfare policy, labor supply, registered employment, labor informality

JEL Classification: H31, I38, J22, O17

Suggested Citation

Bergolo, Marcelo and Cruces, Guillermo, The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3229548 or http://dx.doi.org/10.2139/ssrn.3229548

Marcelo Bergolo (Contact Author)

Universidad de la Republica - Instituto de Economía ( email )

Montevideo
Uruguay

HOME PAGE: http://www.marcelobergolo.com

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) ( email )

Centro de Estudios Distributivos, Laborales y
Sociales, Calle 6 e/47 y 48
La Plata, Provincia de Buenos Aires 1900
Argentina

HOME PAGE: http://cedlas.econo.unlp.edu.ar

IZA

P.O. Box 7240
Bonn, D-53072
Germany

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