Combatting the disincentive effects of welfare

LISER study examines the effect of social benefits on youth employment

LISER study examines the effect of social benefits on youth employment.

How do work incentives change when there is a guaranteed minimum income? This is the question addressed in a paper co-authored by LISER researcher Karina Doorley and published in the Journal of Human Resources. Using census data from France, Doorley examines the effect of the ‘Revenu Minimum d’Insertion’ (RMI), a last resort benefit which was available until 2009, on work incentives. She finds that for youth employment the benefit discourages young people to work and that the 'demotivating' effect is largest for those with no formal qualifications. This group were found to be roughly 7% less likely to work when eligible for the RMI.

In 2009, the RMI was replaced by the ‘Revenu de Solidarité Active’ (RSA) which allows recipients to work and still retain some of the benefit payment. Doorley finds that this reform, which provided small monetary benefits to youth who work for low pay, restored incentives to work so that the roughly 7% drop-off rate from the labour market is no longer in evidence among the low educated who are eligible for the benefit.

Ongoing work at LISER will investigate whether the Luxembourgish ‘Revenu Minimum Garanti’ (RMG), which is similar in nature to the French RSA, may be responsible for similar inactivity traps in the Grand Duchy.