Income Tapering Disincentive Effect
RCTClinical Trial
Phasing out social benefit payments as earned income increases creates an implicit marginal tax on labor earnings, reducing short-term work incentives. Jobseekers receiving temporary financial assistance face reduced net monetary gains from taking full-time work, leading to temporary reductions in employment supply.
Picture this
Think of a store that gives a $250 monthly discount coupon, but reduces the coupon value by 24 cents for every dollar spent on groceries using earned wages. If a customer works to earn extra money, nearly a quarter of their earnings is canceled out by a loss in coupon value. Because working more reduces the net reward, the customer chooses to work fewer hours in the short term.
What the evidence says
Monthly cash benefits were reduced linearly against labor earnings up to the minimum wage (€1,050/month), creating an implicit tax rate of 24%. During the first six months, full-time employment declined significantly by 3 percentage points (ITT -0.18 months of total employment from a control mean of 2.41 months, p < 0.05; TOT -0.21 months, p < 0.01), though this negative employment effect disappeared by the second year.
- Who was studied
- N = 5,498 young jobseekers aged 18–22 across 82 Job Youth Centers in France.
- How
- Randomized controlled trial (RCT) with monthly retrospective employment tracking over 24 months via 12-month midline (N = 3,413) and 24-month endline (N = 2,310) surveys.
What to do
Structure benefit taper rules with lower implicit tax rates or lump-sum retention bonuses so that entering full-time employment yields immediate, un-penalized net income gains.
From the source
"Moreover, in the first six months, there is a decrease in full-time employment equal to three percentage points. This effect is consistent with the disincentives traditionally associated with transfer payments and taper rules."
Conditional_Cash_Transfers_on_the_Labor_Market_Evidence_from_Young.pdf