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Monday Jun 22, 2009

What Is the Impact of Cash Transfers on Labour Supply?

This One Pager investigates the impact of the Brazilian Conditional Cash Transfer Programm, the Programa Bolsa Família (PBF), on beneficiaries’ decision to supply their labour. The theoretical departure is this: households have a time allocation strategy between housework activities and paid work. Income shocks, such as cash transfers, alter such time-allocation preferences. In other words, they change the relative value of time.

We assume that paid work hours do not generate any additional well-being to households, except for increases in income. As cash transfers increase income, paid time loses value relative to unpaid time. Therefore, the expected behaviour is a reduction in the supply of paid work hours and an increase in housework or leisure hours.

Posted at 08:33AM Jun 22, 2009 by IPC in Social Protection and CCTs  |  Comments[4]

Comments:

It was a very good paper, showing the positive impact of PBF on reduction of labor supply and resulting in greater household well-being and leisure activities. I have a question, in the paragraph # 6, you have mentioned that the supply of Labor varies according to "GENDER & SECTOR", how would you define the term "SECTOR"? Is it about the Formal work and self employment?

Posted by 172.16.0.98 on June 22, 2009 at 08:34 AM BRT #

A great one-pager. I have just two quick comments: first, in the second paragraph, it appears like you are suggesting that the tradeoff between hours of leisure and hours of work is changed as a result of the cash transfer. This is not exactly true, since a cash grant does not change the relative price of leisure, so it entitles no substitution effect. The only effect at work is the income effect. (And your results are in line with the fact that leisure is a normal good.) Also, to add to your suggestion as to alleviate this problem, I think the best suggestion would be to learn from the American EITC (Earned Income Tax Credit): give tax credit on the first hours worked until some income threshhold; this will pull some non-labor-force participant into the labor force, and will increase the supply of hours worked by those who already work.

Posted by 172.16.0.98 on June 22, 2009 at 08:35 AM BRT #

First of all, thanks for the comments! It's nice to see others are interested in this matter. About paragraph 6, yes, "sector" refers to formal, informal and self-employed people. In what concerns paragraph 2, I believe the grant changes the price of leisure. By definition, the shadow price of time is determined by the marginal utility of time divided by the marginal utility of income. The grant reduces the marginal utility of income consequently increasing the shadow price of leisure (in the One Pager, the time of non-paid work). Thus the substitution effect exists. On the other hand, I agree that the income effect is sufficient to promote an increase in non-paid time in detriment of paid time since the day only has 24 hours. It's important to note that both effects occur marginally since total utility must not decrease according to rationality. About EITC, I'm not quite sure how it would work in Brazil where there is a significant share of informal workers among the poor. It's something to think about! Thanks again for the comments!

Posted by Clarissa Gondim Teixeira on July 11, 2009 at 12:44 PM BRT #

First of all, thanks for the comments! It's nice to see others are interested in this matter. About paragraph 6, yes, "sector" refers to formal, informal and self-employed people. In what concerns paragraph 2, I believe the grant changes the price of leisure. By definition, the shadow price of time is determined by the marginal utility of time divided by the marginal utility of income. The grant reduces the marginal utility of income consequently increasing the shadow price of leisure. Thus the substitution effect exists. On the other hand, I agree that the income effect is sufficient to promote an increase in non-paid time in detriment of paid time since the day only has 24 hours. It's important to note that both effects occur marginally since total utility must not decrease according to rationality.About EITC, I'm not quite sure how it would work in Brazil where there is a significant share of informal workers among the poor. It's something to think about!

Posted by Clarissa Gondim Teixeira on July 11, 2009 at 12:46 PM BRT #

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