This article analyzes the behavioral effects of cash transfer programs when jobless people need to have access to a minimum consumption level. Our model reconciles recent evidence about negligible or favorable effects of cash transfers on job-finding rates and the more standard view of negative effects. When unemployment compensation, if any, is low enough, we argue that cash transfer programs can raise the hiring probability. Our framework is flexible enough to generate the standard conclusion as well. Looking specifically at unemployment compensation, its optimal level is generally higher than when a lower bound on consumption is ignored.
- optimal insurance
Not much is known about the effects of cash transfers on joblessness duration in environments with little outside institutional assistance (see Section 2). In such environments, dealing with subsistence is plausibly a pressing and urgent issue. Our paper puts forward an intuitive extension of the standard job search model that takes seriously into account the presence and consequences of subsistence constraints. In this more general setting, we show analytically that cash transfers to jobless individuals can increase their chances of finding a job. An in-depth numerical analysis indicates that this property generally holds for low enough transfers. For higher levels, we retrieve the standard property that increasing generosity reduces hiring rates. Throughout the paper, we distinguish two types of cash transfer programs. The first one provides cash to eligible jobless people who continue receiving the transfer when they find a job (like in Franklin, 2018; Barrientos and Villa, 2015; Banerjee et al., 2017). The second type of transfer is conditional on joblessness and is an unemployment compensation scheme. In the latter case, we also look theoretically and numerically at the optimal level of the transfer. Compared to a framework where a minimum consumption requirement is ignored, the optimal replacement rate is generally higher.
The income of jobless people is not protected in a large number of countries (Vodopivec, 2013; Bosch and Esteban-Pretel, 2015) and where it is, the coverage and the level of benefits are sometimes low. According to the World Social Security Report (International Labour Office, 2010, p.60), 80% of high-income countries had a statutory program of unemployment protection, but only 39% of all the unemployed were covered. The coverage rates for other countries are substantially smaller. This raises the question of the subsistence of jobless people.
When public income protection against joblessness is low or absent, the unemployment risk is not covered by private insurers
According to Shah et al. (2012), Mullainathan and Shafir (2013), Mani et al. (2013), Shah et al. (2015), and Schilbach et al. (2016), who develop a number of experiments both in the US and in developing countries, the cognitive capacity or “bandwidth” of agents is limited. “Bandwidth measures our computational capacity, our ability to pay attention, to make good decisions, to stick with our plans, and to resist temptations” (Mullainathan and Shafir, 2013, p. 41). Finding a job and dealing with subsistence are processes that are absorbing cognitive resources. Performing the above-mentioned
The rest of the paper is organized as follows. We start with a literature review. Section 3 presents two standard properties in the job search literature. We introduce our baseline model and develop analytical results. Several extensions are also considered. In Section 4, we solve the baseline model and its extensions numerically. Section 5 concludes.
This section starts by summing up the empirical evidence that is related to our paper. First, the effect of cash transfers (that can be kept when the agent finds a job) on labor outcomes seems to depend on the availability and generosity of other forms of institutional assistance, like unemployment benefits (UB), and more broadly to the amount of wealth people have. Second, even though it is standardly found that higher UB have negative effects on job search, not much is known in setups in which the level of UB is low. We discuss the few papers we found that look at the effects of UB for low-income populations. Next, this section turns to the theoretical literature. First, we look at some extensions of the basic job search framework that are somehow linked to our approach. Finally, we mention some papers that look at the optimal design of unemployment insurance when agents have access to informal jobs.
According to Chetty (2008) for the US, Card et al. (2007) for Austria and Basten et al. (2014) for Norway, providing cash (in the form of a severance payment) increases the duration in unemployment. These analyses are performed in countries where agents, on top of the cash transfer, receive an unemployment compensation that ranges between 43% and 62% of the pre-unemployment wage.
On the other hand, there is recent evidence suggesting that when people are poor and have little or no public protection, providing money may help them to leave unemployment. Franklin (2018) develops an experiment in Ethiopia where he provides young jobless people with money (intended to cover transportation costs). He finds that four months after the start, people who received the subsidy were 7% points more likely to have a permanent work. The effect was stronger for relatively poor and cash-constrained people. Using a regression discontinuity design, Barrientos and Villa (2015) find that a conditional anti-poverty cash transfer in Colombia (conditional on maintaining kids in school) had positive effects on the level of employment of adult males. Banerjee et al. (2017) analyze the effects of seven different cash transfer programs on low-income families in developing countries. When pooling the samples, they do not find evidence of a negative effect on work outside the household. When treating each program separately, in some cases, they find a positive effect. For a recent survey of articles showing that cash transfers could have non-conventional effects on labor outcomes, see Baird et al. (2018).
It is true that Barrientos and Villa (2015) and most of the programs analyzed by Banerjee et al. (2017) impose that the recipient’s children attend school, and this could potentially affect their labor supply decisions. Nevertheless, as stated by Banerjee et al. (2017), “in general, it is important to note that there is considerable variation in how stringent conditions are enforced across countries, so that even in programs that are conditional ‘on the books’, beneficiaries may still receive the full stipend amount regardless of whether they meet them”. Mesén Vargas (2018) focuses on a subsample of the recipients of PROGRESA (a large cash transfer program in Mexico analyzed by Banerjee et al., 2017) that is not affected by the conditionality of the program. She finds that the effects are overall similar to those for the total sample, that is, the transfers do not have negative effects on work outside the household.
Turning to the impact of unemployment compensation, it is typically found that people stay jobless longer when the generosity of UB increases (see e.g. Tatsiramos and van Ours, 2014 for a survey). However, to the best of our knowledge, none of the original studies this paper cites has focused on the effects of UB when they are low and there is little outside institutional assistance.
A limited amount of knowledge is nevertheless available for low-income populations. LaLumia (2013) estimates a hazard model for a sample of people eligible to the earned income tax credit (EITC) in the US. In all, 23% of the unemployment spells in her sample involve the receipt of UB. On average, individuals in her sample are eligible for about $150 weekly UB measured in 2007 real dollars. She finds that the effect of UB on women unemployment spells is not significant. For men, in some of her specifications, the effect of UB on the hazard rate is positive and significant.
Kupets (2006) develops a duration analysis for Ukraine. The level of UB is low, approximately 25%–28% of the official average wage. Only 4.6% of the sample reported UB as their main source of support. In all, 13.9% of the sample states that casual activities or subsistence farming constitute their main source of subsistence. She finds that receiving UB does not decrease the reemployment probability. Moreover, she finds a negative effect of the presence of casual work on the job-finding rate. In other fields than economics, in-depth interviews suggest that cuts in low levels of benefits are harmful to the job search process (see e.g. Morris and Wilson, 2014).
This contrasting empirical evidence suggests that the effect of cash transfers on the probability of finding a job may vary with the wealth of people.
Even though the existence of daily subsistence constraints has been recognized in the economic literature, In the literature of development economics, see for instance Dercon (1998) and Zimmerman and Carter (2003) about the role of subsistence constraints on assets accumulation for the poor and Bhalotra (2007) about the link between subsistence constraints and child work. In the literature on social insurance, it has been mentioned by Chetty (2006) and Chetty and Looney (2006). As will soon be clear, this goes beyond the assumption that the marginal utility of consumption becomes huge when the level of consumption tends to zero. Pavoni (2007) analyzes the design of optimal unemployment insurance when the planner must respect a lower bound on the expected discounted utility of the agent. The unemployed agent decides whether to search or not (binary decision) subject to the scheme proposed by the planner.
In the literature of development economics, see for instance Dercon (1998) and Zimmerman and Carter (2003) about the role of subsistence constraints on assets accumulation for the poor and Bhalotra (2007) about the link between subsistence constraints and child work. In the literature on social insurance, it has been mentioned by Chetty (2006) and Chetty and Looney (2006).
As will soon be clear, this goes beyond the assumption that the marginal utility of consumption becomes huge when the level of consumption tends to zero. Pavoni (2007) analyzes the design of optimal unemployment insurance when the planner must respect a lower bound on the expected discounted utility of the agent. The unemployed agent decides whether to search or not (binary decision) subject to the scheme proposed by the planner.
The framework in which job search requires both money and effort (or time) has been introduced by Barron and Mellow (1979), Tannery (1983), and Schwartz (2015). The two first papers assume that search requires time and money but assume no complementarity between them. Schwartz (2015) assumes that looking for a job requires effort and an investment in search capital. He develops a theoretical analysis in a two-period setting and numerical experiments.
Ben-Horim and Zuckerman (1987), Decreuse (2002), and Mazur (2016) consider that job search requires only monetary expenditures. These papers, as ours, highlight the positive effect that UB can have on the duration in unemployment. Nevertheless, with their specification, providing cash to the agents always The effect of providing cash to the agent, regardless of the employment status, is in principle ambiguous. Nevertheless, one can show that for a utility function that exhibits constant relative risk aversion (CRRA), providing cash to the agent increases job search effort and therefore decreases the expected duration in unemployment. If the utility function exhibits constant absolute risk aversion, providing cash to the agent has no effect on job search effort. These results are available from the authors upon request.
The effect of providing cash to the agent, regardless of the employment status, is in principle ambiguous. Nevertheless, one can show that for a utility function that exhibits constant relative risk aversion (CRRA), providing cash to the agent increases job search effort and therefore decreases the expected duration in unemployment. If the utility function exhibits constant absolute risk aversion, providing cash to the agent has no effect on job search effort. These results are available from the authors upon request.
Finally, some papers look at the design of unemployment insurance (UI) when hand-to-mouth jobless people can have access to informal jobs. Alvarez-Parra and Sanchez (2009) study the optimal time profile of UB when job search effort and in-work effort in the hidden labor market are private information and perfect substitutes. A key result of their paper is that at the start of the spell, the optimal level of UB should be generous enough to deter participation to the hidden economy. Gonzalez-Rozada and Ruffo (2016) extend the study of Shimer and Werning (2007) to the case where all insured unemployed have an additional exogenous source of untaxed income. They also develop a sufficient statistics approach. Long and Polito (2017) look at the time profile of UB when the marginal cost of job search is higher if the unemployed work informally. Some other papers adopt a Mortensen–Pissarides framework in the presence of an informal sector and look at the impact of the introduction of UI on equilibrium unemployment and on the share of formal, informal wage employment and self-employment (see e.g. Margolis et al., 2014; Bosch and Esteban-Pretel, 2015; Charlot et al., 2016).
This section first recalls two standard results of the literature obtained in a very stylized setting. Then, we move to our baseline model, which incorporates subsistence requirements and a subsistence activity. We provide conditions under which increasing the generosity of the cash transfer reduces the effort put in the subsistence activity. Finally, we briefly introduce three extensions to our baseline model and discuss an alternative framework that generates properties that are similar to those of our baseline model.
Before introducing our baseline model [BM], let us look at the “standard model” [SM], a simple theoretical setting leading to the standard properties summarized at the end of this section, which are questioned by our [BM]. The [SM] is a partial equilibrium job search model in a stationary discrete-time setting. Infinitely lived, homogeneous, and hand-to-mouth unemployed workers only have one decision variable: their search effort intensity, For any function Below we interpret As in Chetty (2008) or Hopenhayn and Nicolini (1997), we consider a degenerate distribution of wage offers. Furthermore, the net wage is high enough so that the probability of acceptance of an offer is 1. These assumptions are relaxed in Subsection 3.3.
For any function
Below we interpret
As in Chetty (2008) or Hopenhayn and Nicolini (1997), we consider a degenerate distribution of wage offers. Furthermore, the net wage is high enough so that the probability of acceptance of an offer is 1. These assumptions are relaxed in Subsection 3.3.
In the [SM], the lifetime value
We recall two standard properties of an interior solution to the [SM]:
Our [BM] incorporates four differences into the [SM]. First, we assume a Stone–Geary utility function of consumption Imposing a unique daily minimum consumption level is of course a simplification.
Imposing a unique daily minimum consumption level is of course a simplification.
We keep the short notation Otherwise devoting effort to the subsistence activity would have negative effects on the productivity of the employed agent, and this should also be analyzed. In such a setup, the probability of losing the job,
Otherwise devoting effort to the subsistence activity would have negative effects on the productivity of the employed agent, and this should also be analyzed. In such a setup, the probability of losing the job,
All along the paper, in accordance with Alvarez-Parra and Sanchez (2009) and contrary to Long and Polito (2017), we assume that On the difficulty of observing job search effort without errors, see for instance Cockx et al. (2018).
On the difficulty of observing job search effort without errors, see for instance Cockx et al. (2018).
In the [BM], the Bellman equations in unemployment and in employment can be written as:
The first-order conditions (FOCs) of this maximization program, if the solution is interior, are: Corner solutions are discussed in Appendix A.1.
Corner solutions are discussed in Appendix A.1.
See Appendix A.1.
Consider now the right-hand side (RHS) of the inequality:
See Appendix A.1. The LHS of this condition makes sense if
This subsection briefly introduces three extensions to [BM], which we use later on in the numerical analysis. These extensions introduce one by one some realistic features that are absent in the [BM]. In all the extensions, time is finite and the agent lives for
Moreover, another setup can generate similar comparative statics properties in the absence of a minimal consumption level
Looking for a job requires both an amount of money
There is neither subsistence requirement (
The job-finding probability
Then, the lifetime value in unemployment now solves:
It can be checked that the effect of
Notice that if
We do not question the idea that finding a job requires some expenses. However, we do not put forward the setup introduced here for the following reason. The implications of a monetary cost of job search are arguably more substantial among the population that struggles with subsistence. However, if we remove Assumption(2) mentioned above and introduce
Since analytical results are ambiguous, we first take the [BM] and show that the relationship between the exit rate
In this section, contrary to what was done in Section 3.2, we analyze budget-balanced changes in Chetty (2008) calibrates his model for the US to have an average unemployment duration of 15.8 weeks.
Chetty (2008) calibrates his model for the US to have an average unemployment duration of 15.8 weeks.
Functional Forms and Parameters
|Utility function||Chetty (2008)|
|Cost of search effort||Cockx et al. (2018)|
|Subsistence production||Our choice|
|Probability of finding a job||Our choice|
|Job destruction rate||0.00443||Shimer and Werning (2007)|
|Interest rate||0.001||Shimer and Werning (2007)|
|Discount rate||0.999||1/1 + |
|Coefficient in front of ||0.2|
|Exponent of ||0.5|
|Exponent of ||0.5|
|Relative risk aversion (RRA)||1.75||Chetty (2008)|
|Parameter of ||0.3|
|Parameter of ||0.3|
|Scale parameter of ||22|
|Exponent if ||0.8|
In the left panel of Fig. 1, when
For higher values of
The level of
Is the hump-shaped property robust to another specification of
Both of them, as well as the one we chose in Table 1, are such that
In this section we show that the hump-shaped profile of The same qualitative profile holds later in the spell.
The same qualitative profile holds later in the spell.
The agent is entitled to a flat benefit Both
We assume that the agent starts the unemployment spell with an exogenous level of assets
We consider the case in which the distribution of offers is not degenerate. We assume that wage offers follow a Pareto distribution with minimum possible value
The robust hump-shaped exit probability that we find is compatible with the empirical results mentioned in Section 2 (for low levels of
As cash transfers of this type are in practice financed by various public means, changes in
We now check whether the above numerical properties are robust in two senses. First, Fig. 7 has been derived for a cash transfer of 10. Its qualitative properties hold true as long as the transfer to wage ratio
Our findings are consistent with the empirical evidence surveyed in the introduction. When the level of
This section characterizes and quantifies
Appendix A.2 shows that in the setting [BM],
Its interpretation is standard. The LHS of the equation is equal to the marginal In a setup with home production, Arslan et al. (2013) find a similar result.
In a setup with home production, Arslan et al. (2013) find a similar result.
Fig. 2 displays different indicators. “Gross RR*” is the optimal gross replacement rate,
Fig. 2 indicates that the optimal gross replacement rate is, in most cases, between 0.55 and 0.72. Several other studies have computed the optimal value of
Higher levels of
To discuss the link between self-insurance
Our numerical exercise shows that the optimal gross replacement rate in the [SM] is 0.57 under the assumptions in Table 1. In all cases but one, the optimal replacement rate is higher or equal in the [BM] as compared with that in the [SM] setting (see Fig. 2). The only exception is the case in which
It is generally accepted that providing additional cash to jobless people lowers their chances of finding a job. This is the common wisdom whether the cash transfer is conditional on being unemployed or can be kept when a job is found. However, not much is known about the effects of cash transfers in environments with little institutional assistance. There is nevertheless some recent evidence suggesting that cash transfers in these contexts could have negligible or even positive effects on people’s probabilities of finding a job. In this paper, by extending the standard job search model, we formalize an intuitive mechanism that helps to rationalize why cash transfers can both stimulate and slow down the recipients’ probability of finding a job.
The stylized nature of job search theory sets aside a number of day-to-day problems encountered during joblessness. This paper has put forward the need to consume a minimal amount in an otherwise standard job search problem. Under realistic assumptions such as the absence of private unemployment insurance and imperfect capital markets, a minimal consumption level cannot be guaranteed when benefits are very low or absent (a feature shared by many countries and relevant for various subpopulations in rich countries). Jobless people then depend upon a range of “subsistence activities” to make ends meet. However, performing these activities limits cognitive resources (or time) available for job search. Providing cash can then relax the constraints imposed by these limits.
We have shown that a cash transfer program can raise the hiring probability. This is true whether the funds are transferred conditional on being unemployed (take the form of an unemployment compensation) or whether the person keeps them once a job is found (unconditional transfer). This property is established numerically in a range of job search settings. Qualitatively, it is verified when both the levels of unemployment compensation and the unconditional transfer are low enough (one of them being possibly nil). Common wisdom however holds above some threshold. Finally, in comparison with a standard job search model, our numerical exercise indicates that the optimal replacement ratio is typically higher in our setting.
Functional Forms and Parameters
|Cost of search effort|
|Subsistence production||Our choice|
|Probability of finding a job||Our choice|