June 2023 TAKING CONTROL: HOW FINANCIAL INCLUSION IMPACTS LABOR SUPPLY GENDER INNOVATION LAB Authors: Eliana Carranza, Aletheia Donald, Florian Grosset, Supreet Kaur1 The Gender Innovation Lab (GIL) conducts impact evaluations of KEY MESSAGES development interventions in Sub- • Social and familial financial transfers are common in low-income Saharan Africa, seeking to generate communities and have positive social effects. However, pressure to share evidence on how to close gender income with others could discourage workers from engaging in the labor gaps in earnings, productivity, market. In our study setting of Côte d’Ivoire, 77% of female factory workers assets, and agency. The GIL team is believe that if they started earning more because they worked harder, they currently working on over 80 impact would be subject to more transfer requests. This phenomenon—which we evaluations in more than 30 countries call ‘the social tax’—has the potential to negatively impact overall welfare. with the aim of building an evidence • To address this challenge, we designed and implemented a financial base with lessons for the region. innovation to lower redistributive pressure among female cashew- The impact objective of GIL is processing workers: a blocked savings account into which gains in workers’ earnings get transferred. To pinpoint the role of redistributive increasing take-up of effective policies pressure, we offered workers either a private savings account or one by governments, development visible to their social network. organizations, and the private sector to address the underlying causes of • Take-up of the private account was substantially higher at 60%, gender inequality in Africa, particularly compared to 14% for the non-private account. in terms of women’s economic and • Being offered a private account increased workers’ attendance by social empowerment. The Lab aims 9.7% and earnings by 11.4%. These gains occurred without decreases to do this by producing and delivering in redistribution to others. Treatment effects were highest among workers a new body of evidence and who faced more redistributive pressure at baseline and were primarily developing a compelling narrative, driven by pressure to share earnings with other households (as opposed geared towards policymakers, on to within the household). what works and what does not work • Our estimates imply that workers face a 9-23% social tax rate, and that in promoting gender equality. the welfare benefits of informal redistribution may come at the cost of depressing labor supply and productivity. 1 Nelsy Affoum contributed to the preparation of this policy brief. https://www.worldbank.org/en/programs/africa-gender-innovation-lab CONTEXT HERE’S WHAT WE DID In low-income communities, people frequently transfer We developed a causal test to examine the impact of money within social and family networks. The full-time redistributive pressure on labor supply. To do so, we female cashew-processing workers participating in our worked with Banque Populaire, one of the largest banks study reported transferring 25-35% of their income to in Côte d’Ivoire, to develop a new direct-deposit savings others outside their household on average, and 77% account into which increases in workers’ earnings (above made at least one transfer in the past 3 months. a personalized threshold set by the worker) would be transferred for 3-9 months. This design left workers with Such financial transfers within social networks can at least the same amount of disposable cash for their improve welfare by substituting for missing insurance daily expenses and redistribution to others but increased markets. However, they can also disincentivize work— the likelihood of them retaining productivity gains for their dampening labor supply and consequently earnings future use. among the poor—if these transfers act as an informal ‘tax’ on income. In fact, international data shows that In a first phase, we offered this account to randomly work hours tend to be negatively correlated with the selected women working at cashew-processing plants prevalence of transfers within social groups across a run by the large transnational firm Olam, who were paid diverse range of settings (Figure 1). piece-rate (that is, based on how many cashews they This can have consequences for structural transformation. peeled that day). In a second phase, we varied whether we offered this same private account or a non-private 74% of respondents in our study agreed with the account (whose existence and unblock date would be statement that “if someone in the community decides to revealed to the worker’s social network). If redistributive start working in a factory or another formal job, people pressure acts as a social tax, then workers in the private would start asking that person more often for financial account group would increase their labor supply—and help.” Predicting this, workers may be less motivated to therefore their total earnings—relative to those in the non- shift to formal jobs. Women’s inferior social and political private or control arms. A total of 474 full-time factory status may put them at greater risk of such taxation: the workers, of which 464 were women, participated in this micro-entrepreneurship literature has found that women’s study. incentive to invest and expand their economic activity is lower if they anticipate that a share of their income will be captured by others (Campos and Gassier 2017; Friedson-Ridenour and Pierotti 2020). FIGURE 1: WEST AFRICA (LEFT) & INDONESIA (RIGHT) 80 42 Average hours worked per week Average hours worked per week 75 40 Slope = -1.91 70 38 Slope = -4.17 65 36 0 .2 .4 .6 .8 .4 .6 .8 1 Provided any money to family or friends Provided any economic support to family or friends Country-region-ethnicity-level regression. N= 1010 Municipality-ethnicity-level regressions. Source: LSMS surveys; y-axis is total hours worked among adults aged 18-65 in a household Source: IFLS Wave 5, adults aged 25-55 FIGURE 2: TAKE-UP OF BLOCKED ACCOUNTS Phase 1 Phase 2 70 60% 60 50 43% 40 30 20 14% 10 0% 0 Private Control Private Non-Private Notes: Means and 95% CIs. SEs clustered at the worker-by-phase level. Phase 1: N = 354 workers. Phase 2 = 317 workers. WHAT WE FOUND found that impacts were present even among workers Worker demand for private accounts was high—increasing who didn’t have a partner or spouse—highlighting that over the course of the experiment—and workers were more attention needs to be paid to redistributive pressure over 4x as likely to take up a private account compared outside of the household, beyond the well-researched to a public account (Figure 2). 96% of workers who didn’t mechanism of intra-household bargaining power, for take up the non-private account said it was because explaining women’s labor supply. Our estimates reveal network members’ knowledge of the account would lead that the social tax rate faced by the average worker in our to an increase in net transfer requests. sample is 9-14%, and 19-23% for the subset of workers who actually took up the private accounts. Relative to the control or non-private group, being offered a private account increased workers’ total output, and consequently earnings, by 11.4%. Most of this impact came from reducing absenteeism, not improvements in productivity while on the job. Because almost all workers had no earnings outside the factory, these treatment effects constitute increases in workers’ total income. In addition, workers offered private accounts did not decrease transfers to their networks, so the private accounts led to aggregate earnings gains. Consistent with redistributive pressure as a main driver of these effects, treatment impacts were concentrated among workers who faced more redistributive pressure at baseline. We also ran additional checks to understand the relevance of other mechanisms (e.g., whether workers’ behavior after being offered the non-private effects could be explained by privacy concerns unrelated to social CONCLUSIONS pressure) and were able to rule them out. In addition, we Our findings show the importance of social taxation in explaining labor supply across low-income communities, and of how reducing this taxation can lead to overall earnings increases. They can also help us understand why take-up and labor productivity within formal jobs is low in places like sub-Saharan Africa. Beyond helping us understand constraints to structural transformation, our results also suggest that redistributive pressure could help explain low levels of investment in human capital or in adopting new technologies. This study highlights the importance of financial inclusion in providing private and secure ways to save, and of developing scalable tools to lower social taxation without undermining risk-sharing arrangements. It also highlights how improved safety nets can improve economic growth: by shifting the responsibility for redistribution from the individual to the state, safety nets can unlock the productivity of workers who face redistributive pressure. Since women’s labor force participation and earnings are generally lower compared to men’s, improving access to formal safety nets and financial products that shield women from redistributive pressure may be important avenues for economic development. For more information, access the full paper HERE FOR MORE INFORMATION, PLEASE CONTACT Africa Gender Innovation Lab afrgenderlab@worldbank.org Aletheia Donald adonald@worldbank.org Eliana Carranza ecarranza@worldbank.org Photo credit: George-Alleyne / World Bank, Sarah Farhat/ The World Bank, George-Alleyne / World Bank, Arne Hoel 1818 H St NW Washington, DC 20433 USA This work has been supported through generous contributions from the World Bank’s Umbrella Facility for Gender Equality (UFGE), the World Bank’s Jobs Umbrella Multidonor Trust Fund, and the National Science Foundation (Kaur’s www.worldbank.org/africa/gil CAREER award SES 1848452). We thank Innovations for Policy Action (IPA), especially Nicolò Tomaselli, Henriette Hanicotte, Samuel Kembou Nzalé, Mireille Nuguhe Gbagbo and Augustin Kouadio for assistance with implementation. This project is a product of the World Bank’s Africa Gender Innovation Lab and Jobs Group.