October 25, 2021 | 4:00 pm

October 25, 2021 | 5:15 pm

Supreet Kaur from University of California, Berkeley will present "The Social Tax: Redistributive Pressure and Labor Supply".

The Social Tax: Redistributive Pressure and Labor Supply


In developing countries, financial transfers within kin and social networks are frequent. We test whether redistributive arrangements dampen the incentive to work— distorting labor supply and earnings—among full-time piece-rate factory workers in Côte d’Ivoire. We offer workers blocked savings accounts, into which they can deposit incremental earnings increases over 3-9 months. The accounts vary in whether their existence is draft or known to other network members, altering the likelihood of transfer requests against increased earnings. This changes the effective “social tax” on income gains—enabling us to isolate substitution effects on effort. When the accounts are draft, account demand is substantively higher: 60% vs. 14%. In addition, workers increase labor supply and effort, resulting in 9% higher attendance and 14.5% higher output and earnings. Because our design leaves liquid cash-on-hand unchanged, we find no decline in transfers to others, indicating that income gains did not come at the expense of lower redistribution. Our estimates imply a 26% social tax rate on earned income. Our findings suggest that the potential welfare benefits of redistributive arrangements may come at an efficiency cost of lower output and earnings.