Does the unemployment trap still exist? The case of the Italian minimum income scheme

Abstract

The question of whether welfare benefits imprison recipients in unemployment traps has been at the centre of academic and political debates in recent decades. Empirical evidence at the micro level supports the existence of work disincentive effects of welfare benefits, although of a small magnitude. However, the question of whether this translates into lower aggregate employment remains unsettled. This study innovates the existing literature by providing an estimation of the impact of the monetary component of the Italian minimum income scheme (MIS) on the employment rate. Isolating this impact from the spurious pro-work effects of the Active Labour Market Policies embedded in every contemporary MIS is possible because in the Italian case, in the first quarters of implementation of the policy, the activation side was not operating. We adopt a difference-in-differences method and find that the impact of the monetary component of the Italian MIS on the employment rate is not statistically significant. The finding is robust to different treatment definitions, different specification models and weighted and unweighted econometric analysis. We then carry out a heterogeneous analysis and find that the impact, despite being indistinguishable from zero on average, is significant and negative for provinces with weak labour demand.