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Faculty of Economics

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Cavalcanti ,T.V.D and Correa, M.

Cash transfers to the poor and the labor market: an equilibrium analysis

Review of Development Economics

Vol. 18(4) pp. 741-762 (2014)

Abstract: This paper studies the effects of cash transfers to the poor on the labor market. This is investigated in a matching model with endogenous labor market participation and job destruction. Depending on their productivity, workers might want to stay in the job, become unemployed, or leave the labor market; in addition, workers out of the labor force might decide to search for a job. Cash transfers are introduced to all agents with income below a given level. Two qualitative results are found: (i) The size of cash transfers has a negative effect on the employment rate, but an ambiguous effect on the unemployment rate; and (ii) the coverage of this welfare program has a positive effect on the employment rate, and an ambiguous effect on the unemployment rate. The numerical simulations also show that: (i) if the government target is to reduce inequality and poverty, the more efficient policy is to increase the level of benefits instead of increasing the eligibility of the program; (ii) compared with a welfare program that condition eligibility to labor market participation, the “unconditional” cash transfer program has a stronger impact on inequality and poverty, but with a reduction in labor market participation and output.

Author links: Tiago Cavalcanti  

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