Scandinavian Working Papers in Economics

Working Paper Series, Center for Labor Studies,
Uppsala University, Department of Economics

No 2011:7: The marginal propensity to earn and consume out of unearned income: Evidence using an unusually large cash grant reform

Niklas Bengtsson ()
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Niklas Bengtsson: Uppsala Center for Labor Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: We use a rapid introduction of an unconditional cash grant (child support) in South Africa to estimate the marginal propensity to consume and earn out of unearned income. We find that the marginal propensity to earn is about –0.3 and the marginal propensity to consume about 0.7. Nothing of the grant appears to be saved; if anything, households dissave against future grant payments. The marginal propensities estimated here are similar to those reported in comparable papers using US data. However, they stand in contrast to some results on conditional cash transfers in other developing countries.

Keywords: Child support; Labor supply; Robust regression; Least absolute deviation; South Africa

JEL-codes: H31; J22; O23

31 pages, April 18, 2011

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