Welfare Cuts, Local Spillovers and Financial Fragility

Manuel Adelino and Jim Goldman

No 17219, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that shocks to social benefits have local multiplier effects that are borne primarily by economically fragile households. Using a large welfare reform in the UK, we document that recipients not only lose benefits income, but also experience a lower relative likelihood of employment following the cuts. Employment effects are concentrated in areas more severely affected by the cuts and in small firms in the non-tradable sector, suggesting that local demand spillovers are responsible for amplifying the initial shock. Affected households respond by increasing debt usage, are less likely to become homeowners after the reform and are more likely to experience financial distress.

Keywords: Austerity; Employment; Spillovers; Household finance (search for similar items in EconPapers)
JEL-codes: D14 G5 G51 (search for similar items in EconPapers)
Date: 2022-04
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