Working Paper: CEPR ID: DP17219
Authors: Manuel Adelino; Jim Goldman
Abstract: This paper shows that shocks to social benefits have local multiplier effects that are borne primarily by economically fragile households. Using a large welfare reform in the UK, we document that recipients not only lose benefits income, but also experience a lower relative likelihood of employment following the cuts. Employment effects are concentrated in areas more severely affected by the cuts and in small firms in the non-tradable sector, suggesting that local demand spillovers are responsible for amplifying the initial shock. Affected households respond by increasing debt usage, are less likely to become homeowners after the reform and are more likely to experience financial distress.
Keywords: Austerity; Employment; Spillovers; Household Finance
JEL Codes: G5; G51; D14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| welfare reform act of 2012 (I38) | reduction in benefits income for affected households (H53) |
| reduction in benefits income for affected households (H53) | reduction in employment income (J65) |
| reduction in employment income (J65) | lower probability of employment (J68) |
| local demand spillovers (R22) | exacerbation of employment effects (J68) |
| welfare cut intensity (I38) | decrease in employment probability (J68) |
| welfare cut intensity (I38) | decrease in employment probability for individuals receiving benefits (J68) |
| welfare cuts (I38) | greater reliance on debt among affected households (G51) |
| greater reliance on debt among affected households (G51) | increased financial distress (G33) |