In-kind benefits, incentives, and labor supply

Policies dedicated to directly increasing the material well-being of poor people can broadly be ranked in three categories. The first category is the direct money transfers to poor people. The second category is the subsidy to prices of goods that are consumed by poor people. The third category is the in-kind transfers, that is, the free provision of goods to poor people. The goods that are typically provided to poor people are health care, food, housing and childcare.[1]

The relative merits of the three categories of policies have since long been debated. There is no final consensus on that question, as it is illustrated by the fact that European states resort typically more often to money transfers whereas in-kind transfers seem to be more popular in the US.

Three main justifications of in-kind transfers are usually discussed. The first justification works as follows. There is a risk that poor people “misuse” the money they receive. Assuming that the service providers know better than the poor people themselves what is good for them, it is more effective to provide the necessary goods directly rather than transferring money. This is the paternalistic justification. It is a challenge to the moral autonomy of poor people. This justification is less and less used, and, to our opinion, it is fortunate.

The second justification is based on the so-called self-selection issue. It is related to the objective of poverty policies that only those who really need welfare benefits receive them. While simple money transfers are believed to give incentives to non-poor people to claim to be poor in order to receive the money, there are theoretical arguments and there is some evidence that it is less the case with in-kind transfers. Those who do not really need them are less willing to try to obtain them, as these transfers are of low value to them.

The third justification is a political feasibility argument. Even if policymakers and scientists are less and less paternalistic, voters still believe that poor people are likely to make “wrong” use of their money. As a consequence, in-kind transfers are easier to justify in front of the voters than money transfers.

As a matter of fact, the long debate on the optimal shape of welfare programs has led to the existence of massive in-kind transfer programs. In a fascinating review, Janet Currie and Firouz Gahvari discuss a very long list of theoretical and empirical works that assess the justifications, merits and consequences of in-kind programs (see J. Currie and F. Gahvari, “Transfers in cash and in-kind: Theory meets the data,” NBER Working Paper No 13557). Their review focuses on evidence from the US.

One important dimension of the empirical assessment of in-kind transfers is their influence on labor supply. Evaluating the influence of a welfare program on labor supply is important because it is often claimed that a welfare program should not be implemented if it gives the incentive to the poor people to decrease their labor supply, and therefore, to undermine their ability to get themselves out of poverty.

How could welfare programs in general, and in-kind transfers in particular, affect the poor people’s labor supply? First, welfare programs may increase the well-being of the families, and make working less necessary. Second, these programs may decrease the uncertainty associated with material well-being, and free the adults from the fear of falling into deep deprivation and from very short term subsistence behavior, so that it is easier for them to look for regular jobs. Third, the goods that are provided in-kind may be complement to labor, for instance because they decrease the cost of looking for jobs or the cost of having a job.

There are many technical difficulties to estimate the effect of in-kind transfers on labor supply, and, naturally, the literature has concentrated on identifying ways to circumvent them. Here we review some of the main lessons that the evidence allows us to draw.

Medicaid, the free provision of health care to poor families, is a major in-kind transfer program. This is a means tested welfare program, which means that there is a threshold of financial resources above which families are no longer eligible for the program. There is no clear evidence that it affects the labor supply. A major fear associated to that program was that parents just below the threshold would be reluctant to accept jobs and be excluded from the program. This does not seem to happen, among other things because employment often goes together with private health insurance.

Food stamps are another in-kind transfer program. In this case, it is very difficult to estimate the effect of the program, as food stamps typically go together with other (cash) programs. All in all, in studies in which the effect is significant, it is negative: the incentives to stay out of the labor market are stronger than the assistance to look for jobs.

Providing public housing is another major in-kind program. There is surprisingly not much research on this theme, neither in the US nor in Europe, in spite of the general prevalence of housing programs. The studies did not succeed in identifying any significant effect. This is partly due to the fact that providing public housing goes together with asking people to live in a specific area, and living in this area may by itself help or make it more difficult to find a job.

The last major in-kind program that Currie and Gahvari review is the childcare program. Many studies have estimated the effect of making childcare more easily available on labor supply of, especially, young mothers. One dimension of free public childcare is determined by the cutoff age for eligibility for Kindergarten. Policies affecting that cutoff age have given the opportunity to researchers to estimate that free childcare for at least one half of the day increases labor supply of young mothers by a small but statistically significant amount.

More research needs to be done. Nevertheless, a general conclusion can already be drawn. It concerns the claim often made by policymakers or observers that welfare programs are bad for poor people. The argument is that these programs lower the incentives that poor people have to look for jobs and to work. The evidence just described teaches us that such a claim is largely exaggerated.

[1] Education is another good that is freely provided by the State. We don’t include it in the list here, because public schooling is provided to all citizens and it is not targeted towards poor people. Also, the arguments that justify free and public provision of education are based on the special nature of that good (the many externalities associated to it), which make it different from the goods we are interested in.

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