Cash Transfers and Labor Supply in Peru

(Editor’s Note: The following post was written by BGSE alumnus Fernando Fernandez (Economics ’13). Fernando is currently a Research Fellow at the Inter-American Development Bank in Washington, D.C.)

The paper:

What do you do when you receive your monthly payment? Do you leave the office a bit earlier and have some drinks with your friends? Now, imagine you are a self-employed, non-paid, agricultural worker who works to support your family in the Andeans regions of Peru. Moreover, suppose you are credit constrained and with limited access to markets. What would you do if you start receiving monthly cash transfers from your generous government? Would not you take a break? After all, you work very hard and need some rest, right?

Such a program does exist and is named JUNTOS (“together” in Spanish). It gives around US $40 per month to mothers of poor children if they send their kids to school and to health centers on a regular basis. The objective of the program is to reduce current and future poverty through cash transfers and investments in children’s human capital.

Labor economists would say that JUNTOS generates an income effect: if your income is higher you would consume more leisure and work less (assuming that leisure is a normal good). However, most of the empirical literature on cash transfers and labor supply find no effects on participation in the labor market, hours of work, and earnings. This literature relies on comparisons between households who receive the transfer to households who do not. Does this mean that labor supply does not respond to cash transfers?

In a recent article, my colleague Victor Saldarriaga and I addressed this research question taking a different approach. On the one hand, we did not aim to estimate the average treatment effect of CCTs on labor supply. Instead, we were interested in exploring whether benefit recipients change their labor supply after they receive the cash transfer. On the other hand, we adopted a novel empirical strategy which exploited exogenous variation in the difference between the program’s pay dates and interview dates of a household survey. The combination of pay dates and interview dates allowed us to compare beneficiaries’ labor supply before and after receiving the cash transfer.

We found that cash recipients (female household heads) hours of work are reduced by 6 hours in the week following the pay date. This reduction was rather large, since it implied a decline of roughly 20% of their weekly hours of work. Moreover, this decrease in hours of work was larger for married women and mothers with children aged 5 or less. These findings suggest that poor people behave as some of us: they simply decide to work less after receiving some extra money.

The process:

We began this project in May 2012, just before I entered the master in economics at BGSE. We received a research grant from CEDLAS to conduct the project and were supervised by Leonardo Gasparini. In October 2012, we had a first draft of the paper which was published as a working paper of CEDLAS.

In June 2013, thanks to Prof. Libertad Gonzalez, I had the opportunity to present the paper at the Labor/Public/Development student workshop at UPF. This presentation was crucial to improve the objectives of the paper and helped us to identify its strengths and then focus on them. Professor Albrecht Glitz gave me very useful suggestions that were included in a later version of the paper.

After graduating from BGSE, we presented the paper in other conferences and seminars looking for more feedback. We were also invited to the IZA conference on Employment and Development which took place in Bonn-Germany but we could not attend. However, a good thing came out of it: the editor of the IZA Journal of Labor & Development read our paper and invited us to submit the document to the journal.

In October 2013 we submitted the paper and received a positive reaction from the editor and an anonymous referee. They asked us to introduce some additional empirical tests and improve other sections of the document. After including their suggestions in a revised version, we re-submitted the paper and then they accepted the paper for publication on early February 2014.

The articles published by the IZA Journal of Labor & Development are made freely and permanently accessible online so I invite you to check out the paper here!