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Cash Transfers to the Poor and the Labor Market: An Equilibrium Analysis

Listed author(s):
  • Tiago Cavalcanti
  • Márcio Corrêa

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.

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File URL: http://hdl.handle.net/10.1111/rode.12116
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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 18 (2014)
Issue (Month): 4 (November)
Pages: 741-762

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Handle: RePEc:bla:rdevec:v:18:y:2014:i:4:p:741-762
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