Research Highlights Featured Chart

October 30, 2024

Social safety nets and long-run outcomes for children

The effects of welfare cuts in Denmark.

Tyler Smith

Source: abrosimovae

Welfare benefits may encourage some recipients to work less or stay out of the workforce all together. To correct for such undesired incentives, countries have, in recent years, implemented or proposed cuts to their social safety nets. But welfare reductions may backfire by harming the children of poorer families.

In a paper in the American Economic Journal: Applied Economics, Christian Dustmann, Rasmus Landersø, and Lars Højsgaard Andersen show that welfare cuts in Denmark led to lower grades and reduced education levels among young children. And led to lower employment and earnings and higher rates of criminal convictions for adults.

The authors drew their conclusions from studying the Danish “Start Aid” reform enacted in 2002. The reform reduced cash transfers to newly arrived refugees by 40 percent on average, with reductions of up to 50 percent for families with children.

Using a regression discontinuity design, the authors compared the outcomes of refugee children whose parents gained Danish residency just before and after the reforms.

Figure 3 from the authors’ paper shows what happened to the GPAs, years of schooling, earnings, and criminal convictions of children exposed to the welfare reform.

Figure 3 from Dustmann et al. (2024)

Panel A plots the standardized GPA of refugees who were 7 years old or younger when they gained residency. Panel B plots the fraction of teenage refugees who had a criminal conviction some time in the first 10 years after they gained residency. Panel C plots the average years of schooling in 2020 for refugees who gained residency when they were 7 to 14 years old. Panel D plots the average earnings (in thousands of US dollars) of refugees 15 to 16 years after gaining residency when they were 7 to 14 years old. (The solid black lines are lines of best fit before and after the welfare cuts.)

The chart suggests that there is a substantial discontinuity in the outcomes of children whose parents became residents just after the “Start Aid” reforms went into effect.

Overall, the reforms reduced ninth-grade GPAs by 0.18 standard deviations and total years of schooling by more than half a year. In adulthood, children exposed to the welfare cuts had crime rates that were nearly double those of their peers. Their earnings, too, were roughly 25 percent lower than refugees who were not exposed to the reforms when they were children.

The authors calculate that the welfare cuts resulted in some short-run gains, in the form of adult refugees working more. However, the long-term harm to refugee children outweighed these benefits.