Effect of public transfer on labor supply decision of households in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS  EFFECT OF PUBLIC TRANSFER ON LABOR SUPPLY DECISION OF HOUSEHOLDS IN VIETNAM BY NGUYỄN THỊ THANH HẰNG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2014 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS  EFFECT OF PUBLIC TRANSFER ON LABOR SUPPLY DECISION OF HOUSEHOLDS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY NGUYỄN THỊ THANH HẰNG Academic Supervisor: DR TRƯƠNG ĐĂNG THỤY Ho Chi Minh City, November, 2014 DECLARATION This is to certify that the thesis entitle “Effect of public transfer on labor supply decisions of rural households in Vietnam”, which is submitted by me in partial fulfillment of the requirement for the degree of Master of Art in Development Economic to Vietnam – The Netherlands Programme The thesis comprises only my original work and due supervision and acknowledgement have been made in the text to all materials used Nguyễn Thị Thanh Hằng i ACKNOWLEDGEMENT I would like to express my sincere appreciation to following persons without whom this thesis could not be finished My supervisor, Dr Trương Đăng Thụy, whose detailed and useful guidance, comments and advises have enabled me to go through my research question formation, data mining and thesis writing up Particularly, for his necessary push-ups, encouragements and patience during my writing process, I am indebted All lecturers and instructors from Vietnam-Netherlands Programme, for valuable knowledge and instructions that I have received during the period of my studying here My boss and my colleagues, for their supports of sharing my workloads and for their encouragement My friends: Nguyễn Thị Mỹ Hòa, my K18 classmates: Nguyễn Thị Ngọc Linh and Nguyễn Trường Toan, for their unconditional supports in methodologies, Stata application and paper formatting and valuable encouragements during my thesis process My family: my parents, my parents –in-law, my husband, with my special gratitude, for all supports, scarification and love that they gave me ii ABBREVIATION AFDC Assistance for Dependent Children AFDC-UP Assistance for Dependent Children-Unemployed Parents IPSARD Institute of Policy and Strategy of Agriculture and Rural Development CIEM Central Institute of Economic Management GSO General Statistics Office of Viet Nam HIV Acquired Immune Deficiency Syndrome IFAD International Fund for Agricultural Development ILSSA Institute of Labor Science and Social Affairs OLS Ordinary Least Square OXFARM Oxford Committee for Famine Relief N.G.O Non-government Organizations VARHS Vietnam Access to Resources Household Survey VHLSS Vietnam Households Living Standard Survey VND Vietnam Dong WB World Bank UNDP United Nations Development Program UNICEF Children’s Right and Emergency Relief Organization iii ABSTRACT This paper examines the effectiveness of public transfer of poverty alleviation programs on the labor supply behavior of rural households in Vietnam The labor supply decision is analyzed by employing the individual labor supply model on the basis of data from VARHS Analysis results show that the public transfer that the farm households receive in 2008 discourages the working efforts of households’ members in 2010 Though this effect is negative and statistically significant, its value is quite small with the marginal effect of public transfer (2008) on labor supply (2010) around 0.0004 to 0.0007 which means for each additional VND 1000 of public transfer that an household receives would lead to an decrease in number of working days of it members by 0.0004 to 0.0007day per year And from the results of each laborer in the households, it is concluded that the transfer the households get in 2008 lead to a reduction of working time of the households by 4.219 days/year/household and 2.411 days/year/household on average Keywords: public transfer, rural households, individual labor supply model iv CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABBREVIATION iii ABSTRACT iv CONTENTS v CHAPTER : INTRODUCTION 1.1 Problem Statement 1.2 Research objectives 1.3 Data and Methodology 1.4 Thesis Organization CHAPTER :LITERATURE REVIEW AND THEORY BACKGROUND 2.1 Individual Labor Supply Theory 2.2 The Agricultural Household Model 13 2.3 Unitary and Collective Household Labor Supply Models 18 2.4 Review of empirical studies 20 2.4.1 Labor supply behavior 20 2.4.2 Factors affecting labor supply decisions 24 CHAPTER : METHODOLOGY AND DATA DESCRIPTION 26 3.1 Specification of the Labor Supply 26 3.2 Hypothesis Testing 30 3.3 Estimation 31 3.4 Data description 35 3.4.1 Vietnam Access to Resource Household Survey (VARHS) 35 3.4.2 Sample Description 37 CHAPTER : ESTIMATION RESULT 43 4.1 Bivariate Analysis 43 4.2 Regression Result 49 4.3 Hypothesis testing result 55 CHAPTER : CONCLUSION 57 REFERENCE 61 Appendix 1:Correlation matrix of labor supply function’ variables: 67 Appendix 2:Two-stage Estimation results for labor supply function: 68 Appendix 3:Alternative results of labor supply function 69 v vi LIST OF FIGURES Figure 2.1: The Budget Line And Indifference Curve Figure 2.2: Substitution Effect And Income Effect 10 Figure 2.3: The Backward Bending Characteristic Of Labor Supply Curve 11 Figure 2.4: Effect Of Non-Labor Income 12 Figure 3.1 Twelve provinces that VARHS is implemented 36 Figure 4.1 The association of working day and wage rate 44 Figure 4.2 The association between working day and children in the household 45 Figure 4.3 The association of an individual’s working day and the public transfers that the households receive in 2008 and 2010 46 Figure 4.4 The association between household’s gross nonlabor income and number of working day of a household laborer 47 LIST OF TABLES Table 1-1 Percentage of people living in poverty line Table 3-1 Key hypothesis of dependent variables 30 Table 3-2 Descriptive Statistics Data of Variables 40 Table 3-3 Dummy Variables 41 Table 4-1: Comparing mean working days of different groups 47 Table 4-2: Two-step estimation results for labor supply function 50 Table 4-3 Hypothesis testing result of the labor supply function specification 55 vii CHAPTER INTRODUCTION 1.1 Problem Statement For long, social assistance is believed to be an effective method for poverty alleviation Facing the fact that around 1.4billion people in developing countries living below poverty threshold (i.e.: under $1.25/day, World Bank, 2008), among which three out of every four people living in rural area and thousands of children dying each day due to poverty (IFAD, 2011; UNDP, 2007; Unicef, 2007) has put hard pressure on governments of many countries, especially developing countries, to reduce the poverty, and improve the people living standard Among policy recommendations, public transfer programs to vulnerable people, alleviating their vulnerable situations is one of the policy option commonly adopted by governments Public transfer programs such as cash aids to the poor, educational support for children, pensions for elderly, tax deduction for households below poverty line, insurance support and other conditional cash transfer programs has proved to be very effective in many countries The transfers have been very useful and effective in improving the living standard of beneficiaries (Saxena et al., 2004; Case and Deaton, 1998; Schubert, 2005; Barrientos and DeJong, 2006), reducing poverty rate (Shalom et al, 2011), increasing school enrollment of targeted children (Barrientos and De Jong, 2004; Slavin, 2010), supporting investments in agricultural activities (Frize, 2002; Schubert, 2005) or improving health status of program recipients (Barriestos and De Jong, 2004) A typical example of successful transfer program is the case of Mexican Progresa program which was too impressive that has attracted many countries to pursue similar programs It reduced the poverty gap by 36%, increased school enrollment of children (especially of secondary students), improved health status of program participants ( with reducing by 25% illness of new-born babies and 18% adult reported illness-day) Page 4.3 Hypothesis testing result Before testing the validity of labor supply, the validity of selection equation in first-stage estimation is certified with the null hypothesis that all coefficients in selection equation simultaneously equal to zero as follows is rejected at 1% H0 :1  3  n 0 H1:Otherwise Where 1 , 2 , , n are the coefficients of independent variables in selection equation The testing result means that jointly, all independent variables of selection equation are statistical valid (Table 4-3) Table 4-3 Hypothesis testing result of the labor supply function specification .95 DF Prob>  149.48 0.000 1  2   i  1   j  215.98 13 0.000 1    5  15.66 0.0013       i      251.94 20 0.000 No Function Null hypothesis Selection function 1  2  3   n  Labor supply function Labor supply function Labor supply function value Then, after the validity of the selection is ensured, the testing for the validity of the labor supply function is done with the result also rejects the null hypothesis for the variable coefficients supply function that all coefficients equal to zero It means that the chosen of variables are satisfied and thus, the estimation of labor supply is valid The F-test also ensures for the joint significance of own wage rate effect Moreover, the testing results shows that effect of household’s characteristics as well as Page 55 pooled non-labor income and transfers on an individual labor supply decision, jointly, are statistical significant at 1% To summarize, the validity of selection equation, labor supply equation, effect of own wage rate and households’ pooled conditions and characteristics are satisfied, and thus, the estimation of individual labor supply function are consistence and trustworthy Page 56 CHAPTER CONC LUS ION This study aims at analyzing the effect of public transfer on the poverty reduction, and the key of poverty reduction lies on the working effort of recipient households In the light of this idea, the individual labor supply theory is employed, through which, the work effect of transfers to households is analyzed Due to the existence of nonparticipation problem, Heckman two-stage procedure is applied to avoid selection bias and inconsistent result rather than utilizing the normal Tobit estimation From the empirical test of labor supply function, some conclusions are extracted First, it is found that the own daily wage rate and spouse’s daily wage rate affect on the labor supply of laborers of rural households The own daily wage rate affect positively on the working days and the spouse’s wage rate affect negatively on the days of work of a laborer Both are significant at 1% However, the magnitude of own wage rate effect is not too large Though the own wage rate and spouse’s wage rate affect on the days of work of an individual, the estimation cannot find the effect of the gross wage rate of other members on the choice of how much to work of a household member It could be concluded that the labor supply decision of a laborer is only affected by his/her own wage rate and partner’s wage rate, not the wage of other family members Second, it is found out that the health condition of the laborers affect on the days of work Of course, unless the health status is good enough, laborers could not take part in normal activities But here the issue is that in rural areas, people tend to less care of their health (the proof is that nearly fifty percent of the sample got sickness in 2010), if it is the case, it will affect not only on their working but also on their access to other resources Thus, the living condition of them will not be improves if social programs merely aim at giving money to them to escape poverty and neglect the healthcare issue Page 57 Third, gender is found to make a difference in the choice of working time of the laborers Regression results demonstrate that men work more than women approximately 19 to 20 days per year However, in reality, particularly in rural areas, women housework, child rearing and caring and those activities are neglected in earning time calculation I believe if the time for housework is included in the working time calculation, the result shall be altered which should be the case Forth, the presence of children has different effect on the working time Although it is expected that children under has significant effect on the working time allocation, only children from 6-15 years old are positively related to days of work The effect of children from 6-15 might be reasonable since children in such age range could help family in housework and taking care of smaller children leaving more time for the adults to work Yet, it could not be concluded anything with the presence of children under years old, and in case of time allowance, this issue shall be deeply explored in the future Then, although theoretically the non-labor income reduces the working effort of an individual, the data not support for this hypothesis The problem might be on the skewness of surveyed data Thus, it could be seem as one limitation of this paper And finally, it is proved that the public transfer discourages the working effort of households’ laborers Each VND1000 of the transfers that a household receives make household’s working members reduce 0.0007 day/ year/ person (with both the presence of S08 and S10 are considered) or 0.0004 day/year (with only S08 effect is considered) From these values, it is found that the public transfer that households receive in 2008 has reduced the working time of households by 4.219 days/year/household and 2.411 days/year/household on average, respectively These results lead to the corresponding foregone earning of households by VND 443,694/year/household and VND 253,540/year/household Nonetheless, if we compare these foregone earnings with the average transfer of VND 2,096,582 that the households receive in 2008, the benefit of transfer is still larger than the earning lost due to the reduced working time Thus, it is reasonable to conclude that although the work disincentive effect of the transfer exists, Page 58 the public transfer is still an effective tool in poverty alleviation by expanding the income constraint to households These results contribute to the transfer programs design and implementation in several ways First, the result of health effect on labor supply suggests that healthcare issue of rural people should be paid more attention as well as public communication on the importance of healthcare enhanced so that rural people could understand more of the importance of health Unless good health is ensuring, the access to resources as well as poverty escape effort is limited Second, the results of household’s characteristics such as number of children, spouse wage rate or household pooled income and the validity of the inclusion of household characteristics in an individual which is tested lead to a suggestion that the household’s characteristics should be an essential element to be considered in an individual’s labor supply analysis Further, the disincentive effect of transfers on working efforts of households’ laborers could not be concluded that the government should stop providing the transfers Rather than giving money to the poor unconditional, the government t should move toward short-term training or vocational training for those who have true incentive to escape poverty by working This change is hoped to create multiplier effect which could help the poor to get better life better And the social cost for training support might less than providing cash for the poor and then investing in monitoring the effectiveness of the programs Although great efforts have been made during the analytical process, this paper still bears some limitations Despite the transfers is found to alter the working decision of households, the pooling of data of several transfer programs make the estimates not satisfied enough If VARHS data allows for categorize the transfers based on their objectives, we can test the labor supply effect for each transfer category separately because it is expected that investment support might affect on the labor supply decision of households though multiplier effect which is different from poverty reliefs Final limitation of this paper is that the coefficient figures collected from the regression result of important factors that could affect labor supply behavior including own wage rate, spouse wage rate and the public transfers is not too large And due to the Page 59 multicollinearity of age and 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0.077 -0.005 0.050 0.003 -0.009 -0.009 0.043 child5 -0.004 -0.003 -0.091 0.027 0.005 0.061 0.053 0.042 -0.018 child15 0.043 0.010 0.095 0.0004 -0.042 -0.057 -0.068 -0.060 -0.020 Gnonlabor child5 child15 child5 child15 -0.004 Page 67 CHAPTER APPENDIX 2: TWO-STAGE ESTIMATION RESULTS F OR LABOR SUPP LY FUNCTIO N: Heckman selection model two-step estimates (regression model with sample selection) Coef Std Err z Number of obs Censored obs Uncensored obs = = = 6076 239 5837 Wald chi2(13) Prob > chi2 = = 215.98 0.0000 P>|z| [95% Conf Interval] d logW1 logW2 logW3 logW1logW2 logW1logW3 Gnonlabor S_10 S_08 S_08_10 health gender child5 child15 _cons 8.454778 20.88099 0570342 -2.840096 -1.006065 -.0000126 -.0000934 -.0006841 9.66e-09 25.36307 19.9457 2.342204 4.850754 96.32206 3.160739 4.627475 2.936022 7853526 6374386 0000277 000224 0003554 5.38e-09 3.280077 3.332209 3.378948 2.329975 20.00585 2.67 4.51 0.02 -3.62 -1.58 -0.46 -0.42 -1.92 1.80 7.73 5.99 0.69 2.08 4.81 0.007 0.000 0.985 0.000 0.114 0.649 0.677 0.054 0.073 0.000 0.000 0.488 0.037 0.000 2.259844 11.8113 -5.697464 -4.379359 -2.255422 -.0000669 -.0005324 -.0013807 -8.84e-10 18.93424 13.41469 -4.280411 2840873 57.11131 14.64971 29.95067 5.811533 -1.300833 2432915 0000417 0003456 0000125 2.02e-08 31.7919 26.47671 8.96482 9.41742 135.5328 2003314 0211219 -6.63e-07 6.91e-06 -6.95e-06 -.064373 1922089 1527812 0806589 1.304369 0184191 0116888 3.63e-07 5.58e-06 2.74e-06 0643447 0592903 0433945 0632832 0755016 10.88 1.81 -1.82 1.24 -2.54 -1.00 3.24 3.52 1.27 17.28 0.000 0.071 0.068 0.215 0.011 0.317 0.001 0.000 0.202 0.000 1642306 -.0017878 -1.38e-06 -4.02e-06 -.0000123 -.1904864 076002 0677296 -.0433739 1.156388 2364322 0440315 4.93e-08 0000178 -1.59e-06 0617403 3084158 2378328 2046916 1.452349 lambda 122.4543 84.4332 1.45 0.147 -43.03175 287.9403 rho sigma 1.00000 122.45428 work1 logW2 logW3 Gnonlabor S_08 S_10 health child5 child15 gender _cons mills Page 68 CHAPTER APPENDIX 3: ALTERNATIVE RESULTS OF LABOR SUPPLY FUNCTION The column Reg1 shows the estimation results of full labor supply function 3.1 Column Reg2 showing the estimated results of the function if negative wage rate is dropped The results of DropS10_1 and DropS10_2 are for the labor supply function with ommited S10 and with and without negative wage rate Similarly, the results of DropS08_1 and DropS08_2 are also obtained from the ommited S08 labor supply function with and without negative wage rate Variable Reg1 Reg2 8.4547777 20.88099 05703424 -2.840096 -1.0060652 -.00001263 -.00009344 -.00068407 9.663e-09 25.363067 19.945699 2.3422045 4.8507538 96.322056 DropS10_1 DropS10_2 DropS08_1 DropS08_2 8.4743357 20.566962 73934212 -2.7515255 -1.1606328 -.00001269 -.00009711 -.00067931 9.668e-09 25.508268 19.999628 2.372604 4.9016928 95.672232 8.373668 18.809572 -.24184961 -2.7150047 -.97468698 -4.866e-06 8.3907236 18.499931 44113753 -2.6257109 -1.1300261 -4.922e-06 8.558437 21.901683 18573453 -2.8909203 -1.0124747 -.00001597 -.00013499 8.5802266 21.587476 85994415 -2.8037384 -1.1649662 -.00001602 -.00013677 -.00036723 -.00036573 25.870953 19.288209 96876296 3.811566 106.03128 26.018889 19.33973 1.0045006 3.8700572 105.35031 25.218843 20.357716 2.977483 5.4705724 89.820432 25.362172 20.412122 3.0029594 5.5151353 89.199815 20033143 02112189 -6.628e-07 6.914e-06 -6.954e-06 -.06437304 19220892 15278121 08065887 1.3043685 20017384 02150372 -6.638e-07 6.898e-06 -6.965e-06 -.06503407 19199675 15229931 08127006 1.3044112 19984658 0207942 -6.512e-07 -1.233e-06 1996854 0211804 -6.522e-07 -1.261e-06 20001675 02072034 -6.648e-07 1998609 02109919 -6.658e-07 -.06492551 18371866 15511291 08140115 1.2937953 -.06558967 18349625 15462869 08202368 1.293818 -4.743e-06 -.06298308 19192632 15120098 08028652 1.3121486 -4.758e-06 -.06363999 19171531 15072609 08089081 1.3121762 122.45428 124.79074 62.838536 65.356062 152.442 154.59564 d logW1 logW2 logW3 logW1logW2 logW1logW3 Gnonlabor S_10 S_08 S_08_10 health gender child5 child15 _cons work1 logW2 logW3 Gnonlabor S_08 S_10 health child5 child15 gender _cons mills lambda Page 69 ... agricultural households, assumed on the integration of production and consumption/ labor supply into single decision From the assumption of non-separativity, rather than using the market wage for labor supply. .. by investigating the effect of such transfers on working efforts of rural households Page The main questions of this paper area follow:  Are public transfers affect on the working decisions of. .. of poverty alleviation programs on the labor supply behavior of rural households in Vietnam The labor supply decision is analyzed by employing the individual labor supply model on the basis of