Unintended Labor Supply Effects of Cash Transfer Programs: Evidence from South Africa's Old Age Pension

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Using South Africa’s first nationally representative panel data set, I find that the presence of pension recipients in the household reduces the probability of employment of both previously employed and unemployed prime-aged adults. Adverse employment effects are found for both salaried and self-employed workers, making it unlikely that liquidity constraints explain low rates of entrepreneurship. Exploiting institutional features of the disability grant to isolate the pension’s income effect suggests that the effects operate through the income mechanism by increasing reservation wages and reducing hours worked.

Last updated on 10/14/2014