Governments worldwide use financial transfers to address poverty and social exclusion. In developing countries, unconditional support programs have become increasingly popular. Removing any conditions on beneficiaries’ actions is often motivated by arguments such as lower program costs and the psychological benefits of self-determined spending. Evaluations have shown that such programs improve health, education outcomes, and psychological well-being, but their labor supply effects are small or absent.
While the impacts of unconditional transfer programs in developing countries are well documented, little is known about their effectiveness in higher-income countries. This could be due to differences in labor markets and economic institutions and the existence of extensive safety nets.
In a recent IZA discussion paper, Timo Verlaat, Federico Todeschini, and Xavier Ramos studied the employment effects of a generous and unconditional cash support program called B-MINCOME, targeting economically vulnerable households in disadvantaged neighborhoods of Barcelona. The cash transfer, which depended on household income, size, and composition, averaged roughly €500 ($792 PPP) per month, which is about half the monthly statutory minimum wage and approximately 90 percent of households’ monthly income before the start of the program. Beneficiaries were assigned to different activation plans and benefit withdrawal rates. This antipoverty program was implemented using a two-year randomized controlled trial.
The researchers found that the program has significant and adverse employment effects on average. Two years after the start of the program, main recipients in treatment households are 20 percent less likely to work compared to their counterparts in control households. Likewise, treatment households are 14 percent less likely to have at least one member working compared to households assigned to the control group. Notably, adverse employment effects persist six months after the last payment.
Since the program randomly assigns different withdrawal rates to beneficiaries, the researchers examined whether the rate at which earned income reduces cash benefits affects their employment decisions. They found that a more lenient benefit reduction rate attenuates but does not eliminate the negative employment effects of the unconditional cash transfer. This result conforms with the predictions provided by standard labor supply models, where a more severe withdrawal regime provides stronger work disincentives.
These results differ from the negligible employment effects found for similar programs in Finland and Italy. A possible reason could be the large income effect brought about by comparatively generous transfers. B-MINCOME transfers range from 70 percent (€564 ($894 PPP)) per month for single-person households to 130% of the statutory minimum wage (€1,062 ($1,683 PPP)) per month for households with five or more members. In contrast, the Finnish basic income experiment simply replaced minimum unemployment benefits with an unconditional transfer of equal size while cash transfers in the Turin program ranged from €2,500 to €3,500 per year. Moreover, B-MINCOME effects were possibly amplified by substitution effects, as transfers were subject to a withdrawal scheme.
These adverse effects seem to be driven by households with care responsibilities. While employment effects are largely absent among households without children, they are significant and negative among households with children living at home. Hence, a potential mechanism explaining the results is that recipients substitute labor for care tasks. If this is so, improvements in children’s outcomes, such as education, health, or risky behaviors, may be expected. Follow-up research is needed to examine program effects in such domains and to come to conclusions about broader welfare effects. Further research should also examine employment effects longer than six months after the last payment.