Incentive Effects of Social Assistance: A Regression Discontinuity Approach
by Thomas Lemieux and Kevin Milligan
Business and Labour Market Analysis Division
Analytical Studies Branch Research Paper Series, No. 280
Context
Links are often drawn between labour market behaviour and the generosity and structure of the transfers paid to those not working. For example, the impetus for many of the changes to welfare programs in the United States since 1967 was a concern about disincentives to work embedded in the programs. In Europe, the 'eurosclérose' problem of persistent high unemployment compares unfavourably to the experience in the United States. Certain studies contend that the ongoing reform of European unemployment insurance systems and the introduction of in-work tax credits have improved, but not yet resolved the problems affecting European labour markets. Thus, the strength of the incentive effects of transfer policies continues to be vital to the design of policy and to the understanding of labour market behaviour.
Objective(s)
Before 1989, childless social assistance recipients in Quebec under age 30 received much lower benefits than recipients over age 30. The study uses this sharp discontinuity in policy to estimate the effects of social assistance on various labour market outcomes using a regression discontinuity approach.
Findings
The study finds strong evidence that more generous social assistance benefits reduce employment. The estimates exhibit little sensitivity to the degree of flexibility in the specification, and perform very well when we control for unobserved heterogeneity using a first difference specification. Finally, it shows that commonly used difference-in-differences estimators may perform poorly with inappropriately chosen control groups.
Data source(s)
Most of the analysis relies on data from the 1986 and 1991 Censuses. Some time series data from the Labour Force Survey (LFS) completed the data used.
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