Welfare Benefits and Labor Supply: Evidence from a Natural Experiment in Japan

Abstract

We use municipal amalgamations implemented in Japan between 2000 and 2005 as a natural experiment to identify the impact of welfare benefits on labor supply. In Japan's Public Assistance (PA) program, the maximum benefit level for a person with zero income depends on the recipient's residency area. Each municipality is assigned to one of six class-areas, each with different benefit levels. In the case of an amalgamation among municipalities that belong to different class-areas, the highest among them must be applied to the new municipality, as per governmental notification. Exploiting this event, we use a difference-in-differences approach to identify the effect of the increase in PA benefits after the municipal amalgamations on the labor supply. The results show that the increases in PA benefit levels raised the recipient rate, but did not affect the employment rate of the working-age population on average. However, the analysis by demographic group shows that these effects are substantial and strongly significant for prime-age unmarried males and females. The exogenous increase in public assistance benefits in the 2000s decreased the employment rate for those who are likely to receive public assistance benefits by at least one percentage point, and perhaps by as much as two percentage points.