The labour market effects of cash transfers to the unemployed: Evidence from South Africa

This paper considers the labour market effects of an unconditional cash transfer targeted at the unemployed in a context of extreme unemployment. Using a staggered, heterogeneity-robust difference-in-differences design applied to panel labour force survey data, we estimate the contemporaneous and dynamic effects of a new transfer introduced in South Africa, the Social Relief of Distress grant, the first labour market-linked transfer in the country’s history. We find that, on average, receipt has positive effects on the probabilities of job search, trying to start a business, and employment. The latter effects are driven by effects on wage and informal sector employment. We show that employment effects are positive for the unemployed who are either actively searching for work or trying to start a business, as well as for those who are not, but they are substantially larger for the former. This indicates that the transfer both encourages and improves the efficiency of labour market activity by addressing labour market constraints, but highlights the importance of active labour market engagement for improving employment prospects through the transfer. However, these employment effects are non-linear, in that they are evident in the short-term but quickly become and remain null in the longer-term. These results suggest that cash transfers can help reduce labour market constraints but such gains need not translate into better longer-term employment prospects in high-unemployment contexts. • We estimated the labour market effects of an unconditional cash transfer targeted at the unemployed in a context of extreme unemployment. • Receipt had positive average effects on job search, trying to start a business, and employment. • Employment effects were explained by increased participation alongside increased efficiency of participation, but more so the latter. • Employment effects were non-linear: evident in the short-term but quickly became and remained indistinguishable from zero in the longer-term. • Overall, cash transfers can reduce constraints but not necessarily improve longer-term employment prospects in high-unemployment contexts.