The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High
117 Pages Posted: 22 Aug 2018 Last revised: 5 Apr 2019
Date Written: July 1, 2018
The disincentive effects of social assistance programs on registered (or formal) employment are a first order policy concern in developing and middle income countries. Means tests determine eligibility with respect to an income threshold, and governments can only verify earnings from registered employment. The loss of benefit at some level of formal earnings is an implicit tax that results in a strong disincentive for formal employment, and there is extensive evidence on its effects. We study an income-tested program in Uruguay and extend this literature by developing an anatomy of the behavioral responses to this program. Our identification strategy is based on a sharp discontinuity in the program’s eligibility rule. We use information about the universe of program applicants for the 2008-2010 period, derived from the program’s records, administrative data on registered employment from the social security administration, and a complementary follow-up survey with information on informal work. We construct the anatomy of the program’s effects along four dimensions. First, we establish that, as predicted by the theory, beneficiaries respond to the program’s incentives by reducing their levels of registered employment by about 8 percentage points. Second, we find substantial heterogeneity in these effects: the program induces a larger reduction in formal employment among individuals with a medium probability of being a registered employee, suggesting some form of segmentation. Those with a low propensity to work formally do not respond to the financial incentives of the program, probably because they have limited opportunities in the labor market to begin with. Third, we document suggestive evidence that the fall in registered employment is due to both an increase in unregistered employment and a shift towards non-employment. Fourth, we find an elasticity of participation in registered employment of about 1.5. We conclude by discussing the welfare implications of those results by using the Hendren (2016)´s “policy elasticity” approach.
Keywords: welfare policy, labor supply, registered employment, labor informality
JEL Classification: H31, I38, J22, O17
Suggested Citation: Suggested Citation