Economics, Policy and Value Chains: Effects of Social Grants on Labor Supply and Food Security of South African Households: Is There a Disincentive Effect?

Effects of Social Grants on Labor Supply and Food Security of South African Households: Is There a Disincentive Effect?

Presented By Patrick V. NdlovuWith co-authors Marty Luckert and Sandeep Mohapatra

International Food Security Dialogue: Enhancing Food Production, Gender Equity and Nutritional Security in a Changing World

April 30-May 2, 2014, University of Alberta, Edmonton, Canada

This research is supported with a grant from the International Development Research Centre (IDRC), Ottawa, Canada, www.idrc.ca

Special acknowledgement to University of Alberta (hosts) and IDRC/DRATD (sponsors)

Background• In South Africa, social grants play a central role in

government’s efforts to alleviate poverty • These are unconditional Cash Transfers– Government expenditure on social grants is substantial– There is a significant number of social grant beneficiaries

Social grants coverage• 16.1 million people received grants in 2012• US$11.7 billion spent (10% of govt spending) in 2012 • Beneficiaries expected to reach 16.8 million by 2015. • Government spending on social grants is projected

to rise further

Types of grants and coverage CHILD GRANTS OLD AGE PENSION

Extensive Coverage: 2.7 million recipients: R1080 (US$103)(targeted at people above 60 years)

Extensive Coverage: 11 million recipients: R260 (US$25)(targeted at vulnerable children under 18 years)

Pressing policy issueAre social grants an effective tool to alleviate

poverty?• One view: social grants can promote employment

by nurturing human capital accumulation (e.g. Samson et al., (2008); Surender et al., 2007; Edmonds et al., 2006).

• Other view – more contentious issue: social grants create disincentive effects on households’ labor market behaviour (e.g. Bertrand et al., 2003; Lam, et al., 2005; Ranchorhod, 2006).

Objective of study• There is a large literature on identifying effects of

social grants on household economic outcomes – e.g. identifying impacts on labor supply and food security– but results of studies are mixed!!

Overall goal of thesis is to contribute to this literature1. Assess effect of grants on labor supply:– Do social grants create disincentives in labor supply?Broader definition of labor supply incl. home production

2. Assess effect of grants on food security:– Does per capita consumption expenditures on food

increase when households receive grants? Broader measures of consumption incl. in-kind consumption

Data and Methods

Data and Methods• A unique set of data collected in rural Eastern Cape in 2011 is

used– 2 rounds of household surveys

1. A model for labor supply is estimated (1st objective)– Full information MLE– implemented on IV Tobit regression.

2. A model for food security is estimated (2nd objective)– Linear IV regression.

We focus on the interaction of two key household characteristics: gender and human capital

—in catalyzing or diminishing the effects of grants

Empirical model for Labor supply

Dependent variable: # of hrs worked in one dayExplanatory variables: • A: Type of work — off farm ,on farm, natural

resources, domestic• G: Amount of grants — pensions is main variable• I: Individual characteristics— educ, gender…. • G X I and G X J: Grant Interaction terms• H: Household characteristics — assets, hh size• X: Other controls

Objective 1: Assess effect of grants on labor supply:𝒀= 𝑨𝜷𝒋 + 𝑮𝜷𝑮+ 𝑰𝜷𝑰+ (𝑮× A)𝜷𝐆𝐉+ (𝑮× 𝑰)𝜷𝑮𝑰+ 𝑯𝜷𝑯+ 𝑿𝜷𝑿+ 𝜺

Dependent variable : log hours worked in 1 day coeff. s.e Activity fixed effects (A) off farm work -2.672*** 0.142 agricultural work -2.565*** 0.135 natural resource work -2.502*** 0.129 Individual characteristics (I) gender of person (1=male, 0=female) -0.196* 0.122 education (1=completed 7th grade, 0=otherwise) -0.999** 0.422 Social grants income (G) pension amount x 1000 -0.757** 0.326 other grants -0.133 0.168 Grant interaction effects (GA and GI ) pensions × off farm activities -0.109 0.152 pensions × agricultural activities -0.148 0.147 pensions × natural resources activities -0.151 0.137 pensions × gender of person(1=male, 0=female) 0.323** 0.162 pensions ×education(1=completed 7th grade, 0=otherwise)

1.374** 0.582

constant 2.444*** 0.351 N 2744 left censored 1827 Prob>Chi 0.000 Chi test of exogeneity 0.060 Test of overidentifying restrictions 0.032

—Individuals do less income earning work relative to domestic work

—males work less—educated work less

—With pensions males work more—educated work more:

Effects of pensions• To illustrate pension effects:1. Identifying labor supply for a set of benchmark

individuals (regression constant term)2. Use as a reference or comparison group– Benchmark : females who are less educated,

supplying labor in domestic work, who live in households with no pensions, children or savings

Expected Labor Supply𝐸(𝒀|𝑃𝑒𝑛𝑠𝑖𝑜𝑛,𝑍𝑖) = 𝛽𝑜 + 𝛽× 𝑃𝑒𝑛𝑠𝑖𝑜𝑛+ 𝛿𝑖𝑍𝑖 + 𝛾𝑖𝑃𝑒𝑛𝑠𝑖𝑜𝑛× 𝑍𝑖 where Zi is an individual specific attribute e.g. gender, education

Labor supply :Benchmark case

If one household member receives pensions, their labor supply decreases by 35% (for all labor activities)

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females (benchmark) males

Without pensions males work 8% less Disincentive effect is lower for males; the gender

difference gets bigger with higher pensions

Labor supply : the effect of gender

Pensions have a less negative impact on males’ labor supply. If one household member receives a pension, male individuals supply 11% more labor compared to females.

Labor supply :the effect of education

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Labor supply : the effect of educationWithout pensions the more educated work 41% less

Big incentive effect for the more educated individuals

There are Complementarities between social grants and educationWhen a household member receives a pension, educated individuals supply 36% more labor than the less educated

Summary1. Effects of grants on labor supply:a) Pensions have a disincentive effect on labor supply– The disincentive effect is not activity specific i.e. same effect in

off-farm, agriculture, natural resource, and domestic work. – Other types of grants have no impact on labor supply

b) However, there is heterogeneity in pension impacts across gender and education profiles. – The disincentive effect of pensions is less for men compared to

women. – Pensions are strongly complementary to education. This

complementarity effect overcomes the disincentive effect on labor supply.

Summary2. Effects of grants on food security:a) Pensions have a positive effect on food consumption

expenditures– The effect of pensions does not change with gender and

education.

b) Inclusion of in-kind consumption in measuring consumption expenditures reveals some important impacts. – e.g. other types of grants also have a positive impact on

consumption expenditures that include in-kind food consumption.

Thank You