Cash Transfers and Formal Labor Markets : Evidence from Brazil : Cash Transfers and the Local Economy: Evidence from Brazil

Cash transfers have been adopted worldwide and credited with significant reductions in poverty. However, their economy-wide effects continue to spark heated debates, particularly due to potential adverse effects on the labor market. This paper studies the impact of a flagship government-run program—Bolsa Família in Brazil—on local economies in a context where such concerns are particularly strong, as eligibility is means-tested. The study finds that an expansion of the program positively affected local economic activity using variation in the size of the reform across municipalities. The results are consistent with cash transfers stimulating local demand, despite means testing. These economy-wide effects substantially increase the marginal value of public funds of the reform, raising it above the value of a non-distortionary transfer.