Nss Longman Economics Question Bank

We also show that factors other than the type of transfer influence its success in promoting economic growth. We find that the effect of transfers is most effective in countries where income inequality is high, where governments are relatively weak, where institutions limit the ability of governments to weaken wage bargaining, and where labor market conditions are tight. Our results are in keeping with recent studies that indicate that the impact of transfers increases with economic development, and with the degree of wage rigidity. Thus, our findings suggest that it is possible to design effective transfers to the poor.

In this paper, we address these issues by measuring the impact of income transfers on (i) participation in the labor force, (ii) employment, (iii) wages, and (iv) consumption. Using data from the World Bank’s World Development Indicators (WDI), we show that income transfers have a positive and significant impact on all three outcomes. For instance, transfer coverage increases employment by more than 1 percent on average, leading to wage gains of nearly 10 percent in developing countries. In addition, we find that poor households are disproportionately affected by transfers, with low-income households benefiting from a larger effect than high-income households. Moreover, we find that the impact of transfers on employment is higher for the poor than for the nonpoor, and that these effects are stronger than those associated with other policies such as improved access to credit or public health. These findings suggest that the poor are a prime target for income redistribution, and that the poor are at least as likely to benefit as the nonpoor from policies that redistribute income.

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