Cash transfers are becoming an increasingly common tool to support poor households across the developing worlds. At scale, these policies have positive impacts that reach beyond their effects on direct recipients of the transfer (Egger et al., 2022). Yet, little is known why large-scale transfers are so effective at raising economic well-being in receiving regions. The researchers investigate the role of persistent labour market slack as a key reason why economic expansion takes place without added inflation in response to the influx of cash. By combining new data collection with a macroeconomic model, the authors ask what are the origins of persistent slack and its role in generating large cash transfer multipliers?
The data collection consists of a survey of small firms in Western Kenya on the extent to which the inputs they use are fully utilized. With this new data, it becomes possible to study how slack varies by firm size, across villages with different access to regional trade and across seasons. These data will be the key input to estimate a macroeconomic model capable of generating persistent underutilization. Through the lens of this model, idle capacity in micro enterprises arises from the indivisibility of the owners’ labour input. While the owner may be able to meet demand in a few hours of work, a large chunk of the day may be spent waiting for customers. The project starts from the conjecture that this indivisibility constraint can generate substantial labour market slack given the large number of micro enterprises in the region. In the presence of such underutilization, cash transfers can have very positive effects since additional demand can easily be met by enterprise owners, without the use of additional inputs or the need to raise prices.
This project hopes to provide policymakers with a better understanding of the underlying causes of labour market slack and the channels through which it amplifies the wider economy impacts of cash transfer programs. In recent years, numerous Sub-Saharan African governments have implemented such welfare programs, to varying degrees of success. Gaining a deeper understanding of how cash transfers transform local economies will allow policymakers to better target such programs in the future. In particular, the researchers’ structural model will enable counterfactual policy simulations varying the size and recipient population to trace out the optimal cash transfer policy.

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