When Income Effects are Large: Labor Supply Responses and the Value of Welfare Transfers

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 01.10.2019, 12:15 - 13:30


Presentation by 

Giulia Giupponi (Institute for Fiscal Studies, London)


The effect of income on labor supply is a parameter of great importance for both theory and policy analysis. In this paper, I provide new estimates of the income effect of welfare transfers on individual labor supply. I leverage novel social security administrative data on the universe of survivor insurance payments in Italy, and useful quasi-experimental variation in the benefits received by surviving spouses on the basis of their spouse's death date. I implement a regression discontinuity design in spousal death date to identify the effect of unearned income on labor supply, earnings and program substitution. Benefit losses trigger tantamount increases in earned income, implying a marginal propensity to earn out of unearned income of approximately -1. Extensive-margin responses -- in the form of both increased labor-market entry by younger survivors and delayed retirement by older survivors -- emerge as the main driving force behind the income response. Program substitution also appears to be a relevant margin of adjustment. I consider alternative explanations for the large income response. Finally, I discuss the normative implications of my findings. I propose a revealed-preference approach to estimate the value of transfers based on participation responses. I demonstrate that large participation responses to realized benefit drops are revealing of large implicit valuations of welfare transfers in the widowhood state, and of substantial welfare gains from more generous survivor insurance.

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