Discussion Papers 2021

CIRJE-F-1164	"Transfer Benefits, Implicit Taxes, and the Earnings of Welfare Recipients: Evidence from Public Assistance Programs in Japan"
Author Name	Hayashi, Masayoshi
Date	April 2021
Full Paper	PDF file
Remarks

Abstract
In this study, we investigate the impact of a transfer program on the earnings of welfare recipients. The case we consider is Public Assistance (PA) in Japan where we can utilize a dataset that contains complete observations of its recipients along with detailed information on their characteristics. Following the literature on the elasticity of taxable income, we also exploit the 2013 reform of the PA system to construct instruments to estimate the earnings responses of PA recipients. With some exceptions, we find small positive price effects and large negative income effects, the latter of which suggests that PA recipients are quite responsive to lump-sum changes in PA benefits. Our study thus highlights the importance of the income effect when we consider earnings responses in the lower tail of income distribution.
Keywords: public assistance, elasticity of taxable income, welfare effects, labor supply

Abstract

In this study, we investigate the impact of a transfer program on the earnings of welfare recipients. The case we consider is Public Assistance (PA) in Japan where we can utilize a dataset that contains complete observations of its recipients along with detailed information on their characteristics. Following the literature on the elasticity of taxable income, we also exploit the 2013 reform of the PA system to construct instruments to estimate the earnings responses of PA recipients. With some exceptions, we find small positive price effects and large negative income effects, the latter of which suggests that PA recipients are quite responsive to lump-sum changes in PA benefits. Our study thus highlights the importance of the income effect when we consider earnings responses in the lower tail of income distribution.

Keywords: public assistance, elasticity of taxable income, welfare effects, labor supply