Cash transfers reduce employment when not linked to work

By Angela Rachidi of AEI.

"A new study of a conditional cash transfer program in New York City and Memphis, Tennessee, raises questions about the employment effects of government transfers that are not tied to work.

Family Rewards 2.0 was a conditional cash transfer program that offered participants financial rewards for achieving certain milestones, such as seeking health care, attending school, and sustaining full-time employment. It was implemented in New York City (the Bronx) and Memphis, Tennessee and was a follow-up to a previous program (Family Rewards 1.0) that found some promising, although limited, results. A randomized controlled trial was conducted by MDRC and the results were released this month.

The findings show that Family Rewards 2.0 led to reductions in work according to data from UI records and had no effect on work reported in the survey.
Other incentives programs that have focused solely on work have found that increasing the reward to work can lead to increased employment. However, the work incentives here were part of a larger program of rewards. It is likely that the income families received from the education and health rewards allowed some parents to reduce work or delay entry into the workforce through what is often called an “income effect.” These negative effects on work were somewhat larger for parents not working at study entry, and thus more marginally connected to work.

Participants in the study had fairly low overall employment levels, with 49.6% of the treatment group and 52.2% of the control group employed each quarter in years 1-3 of the study. This suggests that the cash rewards had a negative effect on already low levels of employment, and that even the rewards provided for work ($150 per month if they sustained employment) were ineffective in offsetting these other effects.

This might give pause to proposals that increase income transfers to poor families without linking them to work. This includes major overhauls such as a universal basic income, but also smaller proposals such as increases to food assistance or creation of a child allowance similar to what some European countries offer."