Does social assistance disincentivise employment, job formality, and mobility?

Abstract

How do cash transfers affect employment, job formality, and mobility, especially in times of crises and economic recovery? I examine this question in the context of Indonesia’s major unconditional cash transfer (UCT) programmes, rolled out in a targeted manner in response to adverse economic shocks. Identification is based on a generalised difference-in-differences with propensity score matching approach exploiting three waves of nationally representative longitudinal data on household transfer receipts and labour market outcomes. Annual retrospective data in each survey wave allows me to look at immediate effects, potentially important due to the transient nature of the transfers. Consistent with the income and substitution effects, when cash transfers are distributed using a more precise proxy-means test and current, dynamic welfare information, beneficiaries are more likely to adjust their labour supply in order to qualify for or maintain their benefits. Individuals with lower skill levels show a more pronounced response, with a significant decrease in both employment and job formality. The larger effect on job formality highlights the importance of the adjustment margin through the substitution effect associated with the targeting design.