Adjustments to Reduced Cash Transfers: Religious Safety Nets and Children's Long-Term Outcomes

This paper examines how access to informal insurance shapes family responses to reductions in social welfare benefits, and how these adjustments affect children's development. In 2003, Israel reformed its child allowance program, significantly reducing unconditional cash benefits for large families. Using a sharp date-of-birth cutoff introduced by the reform, we show that Jewish families substituted for the loss in government benefits by enrolling their school-aged children in ultra-Orthodox religious schools. These schools provide valuable services unavailable in mainstream public schools but focus primarily on religious studies over secular subjects. In the long run, this shift resulted in lower educational attainment among Jewish students and steered them toward a more religious lifestyle. The safety net provided by religious schools prevented Jewish parents from having to reduce their completed fertility or to increase their labor supply. In contrast, Arab families—who lacked access to comparable informal insurance—responded by reducing completed fertility and increasing paternal employment. Consequently, we find little evidence that the decline in transfers negatively affected the education or labor outcomes of Arab children.