Peter Spittal (External Seminar)

Title: Benefit salience and labour supply

Abstract: I study the salience of dynamic features of the welfare system. I estimate labour supply responses to a large, lump-sum and foreseeable reduction in benefit income arising from children ageing out of eligibility for Child Tax Credit—a major welfare programme in the UK. I show that the rules governing eligibility are non-salient, despite the high financial stakes, and that claimants learn about them through experience. The results also rule out a broad set of alternative mechanisms which are indistinguishable from salience effects in static settings. I then develop a structural life-cycle labour supply model in which individuals may be unaware of the benefit eligibility rules, using the empirical results to identify key parameters in the model. The model estimates suggest that nearly 82 percent of claimants are initially unaware of the benefit eligibility rules. And the resulting optimisation errors have substantial welfare costs—equivalent to a 14 percent reduction in income from the programme, with no offsetting benefits to the government. The findings identify a new source of inefficiency in the welfare system, and highlight the importance of recognising that dynamic features of policy may be non-salient.

Watch the recording