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
Publisher's Link: http://onlinelibrary.wiley.com/doi/10.1111/rode.12116/abstract 
