Events at CERGE-EI

Marcelo Barbosa Ferreira

Princeton University, United States

Abstract: This paper provides estimates of income effects on labor supply by studying a large, permanent, and unconditional monthly cash flow. I leverage a unique setting in Brazil where adult daughters of military personnel receive a lifetime pension after their parent's death. This transfer is exceptionally large, the median pension payment is 282% of the national median earnings, and truly unconditional, available regardless of their employment, earnings, or marital status. Using administrative pension records matched to linked employer-employee data, I find that this transfer induces a 10% decrease on the extensive margin of labor supply after seven years, with no effect on the intensive margin, and a marginal propensity to earn (MPE) of -0.08 after seven years. Labor supply adjusts gradually, driven by a large temporary increase in the hazard of separation and a persistent moderate reduction in the job finding rate. The marginal propensity to earn is greater for larger pension payments, consistent with adjustment costs, and larger for older daughters, consistent with binding liquidity constraints and desire for early retirement. Using a sufficient statistics model, our MPE estimate of -0.08 implies that the redistributive gains from a UBI in Brazil would outweigh its efficiency costs, resulting in net welfare gains, as long as the uncompensated elasticity of labor supply is less than 0.38, consistent with microeconomic evidence.

Full Text: Labor supply responses to a Very Large Income Shock: Evidence from Daughters of Brazilian Military Officers