Effects of Social Grants on Labor Supply and Food Security of South African Households: Is There a Disincentive Effect

This study assesses impacts of social grants on labor supply and food security of South African households. We use a unique set of data collected in rural Eastern Cape in 2011. We highlight the interaction of two key household endowments, gender and human capital, in catalyzing or retarding the effects of grants on household welfare. First, our inquiry explores whether social grants create disincentives in labor supply. We control for endogeneity of social grants by running a Newey two-step efficient estimator– implemented on an instrumental variable (IV) Tobit regression for labor supply. Using household pension income as the primary measure of social grants, we find that pensions have a disincentive effect on labor supply in off-farm, agriculture, natural resource, and domestic work. However, there is heterogeneity in pension impacts across gender and education profiles. The disincentive effect of pensions is less for men compared to women. On the other hand, pensions have a complementary effect on labor supply amongst individuals with higher education. This complementarity between social grants and human capital overcomes the disincentive effect on labor supply. We also find that other types of grants do not have any impacts on labor supply. Second, we assess whether per capita consumption expenditures on food increase when households receive grants. We use a linear IV regression to analyse impacts on consumption expenditures. We find that pensions have a positive impact on food consumption expenditures. The effect of pensions on food consumption expenditures does not change with gender and education. The inclusion of in-kind consumption in measuring consumption expenditures shows that other types of grants also have a positive impact on consumption expenditures. The marginal propensity to consume out of pensions and other social grant income is higher compared to other income.