Social Assistance and Informality: Examining the Link in Colombia

This paper presents evidence on the labor market effects of social assistance programs in the short and medium run. We evaluate the impact of a Conditional Cash Transfer —cct— program “Familias en Accion” on informality at the individual level in Colombia. We include three different perspectives on informality that capture different aspects of the problem. We argue that, even though it is not a desirable result, being a beneficiary of social programs may create perverse incentives towards informality. We used survey data from the “Familias en Accion” program to identify whether the program had any effect on workers’ propensity to participate in the informal labor market in Colombia, both one and four years after the program’s implementation. To overcome the problem of unobserved time-invariant differences, our empirical strategy includes a combination of matching algorithms and difference-in-differences methodology. Our results show that worker’s informality condition may be affected by receiving cct income.