The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High

The disincentive effects of social assistance programs on registered (or formal) employmentare a first-order policy concern in developing and middle-income countries.We study the impact of a conditional cash transfer (CCT) program in Uruguay on theemployment of adult members in beneficiary households in a context of high informality.Our research design relies on the sharp discontinuity introduced by program eligibilityrules around a poverty score threshold combined with longitudinal administrative data.We find reductions of about 6 percentage points (a 13% drop) in formal labor force participationamong all beneficiaries and of 8.7 percentage points (a 19% drop) for singlemothers. The implied elasticity of participation in the formal sector with respect to thenet-of-tax rate is about 0.78 for the full sample and about 1.3 for single mothers. Thereduction in labor supply is stronger among individuals who have a medium propensityto be formally employed, with a smaller reduction in the case of infra-marginal individuals.We also present suggestive evidence that the reduction in formal employmentincreases inactivity and informal work in equal proportions. Finally, despite pervasiveinformality in the context of the Family Allowance assistance program (AFAM), theprogram's marginal value of public funds of 0.61 implies an efficiency cost within therange of cash transfer programs targeted to families in the United States