DP17219 Welfare Cuts, Local Spillovers and Financial Fragility

Author(s): Manuel Adelino, Jim Goldman
Publication Date: April 2022
Keyword(s): austerity, employment, household finance, Spillovers
JEL(s): D14, G5, G51
Programme Areas: Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17219

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.