The Impact of Recent Welfare Reforms on Labor Supply Behavior in New Zealand

Abstract

New Zealand recently initiated sweeping reforms to its social welfare program by cutting benefits and tightening eligibility criteria. One of the objectives of these reforms was to provide incentives for people to enter or re-enter the labor force. Econometric analysis is used in this paper to isolate the actual effects of these benefit reforms on labor supply. Previous research has often failed to accurately measure the extent of these work disincentives, or to observe variation in these programs that would allow this empirical analysis to take place. The structure of the benefit programs and the nature of the reforms in New Zealand offer a unique opportunity to identify these behavioral responses. Quarterly random samples of individuals over the period 1987–1995 are used to isolate the effects of the reforms. This study finds compelling evidence that the recent benefit reforms in New Zealand increased both labor force participation and hours of labor supplied at the aggregate level.