Making work pay for the indebted? Assessing the effects of debt services on welfare recipients

an article by Pierre Koning (VU University Amsterdam, IZA and Tinbergen Institute, Amsterdam, The Netherlands) published in Labour Economics Volume 34 (June 2015)

Abstract

This paper investigates the effects of an intervention that was targeted at a specific group of Dutch Social Assistance (SA) recipients with debt problems. Since a large share of the income gains of work resumption is earmarked for creditors, these individuals generally experienced a strong a priori disincentive to resume formal work.

The intervention had three aims: restructuring personal debts, preventing the occurrence of new debt problems, and increasing the direct incentives to resume work.

The paper uses the Timing-of-Events method to identify the effects of debt programs on SA spells.

Our main finding is that the debt program substantially increased the exit out of the SA schemes, but this was mainly due to exits out of the labor force.

With a large share of assigned individuals who did not participate in the scheme, it appears that individuals perceived or experienced the program as unpleasant and opted to exit without work. Our results suggest the presence of threat effects, particularly for individuals who were assigned by their caseworkers but did not participate in the debt program.

JEL codes: C21, D14, H75, I38, J18, K35

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