Social Benefit Formalization Disincentive (Welfare Trap)
Observational StudyReview
Targeted cash assistance programs that restrict eligibility exclusively to informal or unemployed citizens inadvertently penalize beneficiaries who transition into formal jobs.
Picture this
Think of a safety net that disappears the moment a worker steps onto a tightrope. If stepping onto the formal job tightrope risks losing guaranteed family safety-net payments, the worker will remain safely grounded in informal employment.
What the evidence says
Monthly cash transfers restricted to non-formal workers created a statistically significant disincentive for program beneficiaries to accept formal employment contracts.
- Who was studied
- Informal workers with children in Argentina eligible for Universal Child Allowance (AUH) (Garganta and Gasparini, 2015).
- How
- Quasi-experimental difference-in-differences impact evaluation.
What to do
Design social protection transfers with gradual benefit roll-offs or universal coverage guarantees that persist regardless of formal employment status.
From the source
"The results suggest that this policy disincentivized the beneficiaries of the program from formalizing their employment in the labor market."
JOI_Brazil_Evidence_in_Labor_Market_Policies_and_Implications_for.pdf