Abstract:
While the sluggish labor supply response to welfare reform has received much attention in economic research, there is no evidence on the role of information vs. labor market frictions in shaping the response. This paper helps fill this gap by assessing the importance of information about the tax and benefit schedule in the context of a welfare-to-work reform in Norway. Using a regression discontinuity design to estimate the effects of a targeted information treatment, we find that labor supply is quite sensitive to information about work incentives. Our findings suggest that individuals respond by either re-negotiating work contracts with current employers or by switching to a new employer offering more desirable contracts. Our evidence indicates that information frictions are key to understand the gradual labor supply adjustments to welfare reforms.