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Special Covid grants not only provided income relief – they also improved labour market outcomes

Special Covid grants not only provided income relief – they also improved labour market outcomes
Citizens queue for Social Relief of Distress (SRD) grants at Maponya Mall on 3 September, 2021 in Soweto, South Africa. Research findings suggest that the SRD grant played a key role in improving the labour market outcomes of recipients (Photo by Gallo Images/Fani Mahuntsi)

While the Social Relief of Distress grant’s primary aim was to provide income support to a vulnerable population, it is plausible that it also played an important role in aiding economic recovery through its effects on labour market behaviour.

South Africa’s Social Relief of Distress (SRD) grant, introduced in response to the Covid pandemic and subsequently extended, was the first in the country to target unemployed adults. Its main aim was to provide income support to a large, vulnerable group previously not covered by existing social grants during the pandemic and associated lockdown regulations.

Now for the first time, our research — supported by the Agence Française de Développement, the Presidency of South Africa and the European Union Delegation — showed that the grant also played a key role in improving the labour market outcomes of recipients.

Extremely high unemployment has, of course, persistently plagued the South African economy, but the unprecedented crisis caused by the pandemic aggravated this.

Hence, the government’s introduction of the SRD grant played an important role in complementing the temporary increases to existing social grants — at the onset of the pandemic — in that it targeted those individuals who neither had access to income from the labour market nor from existing social grants and other forms of state assistance.

The grant thus provided income support to millions of vulnerable, previously unreached individuals in a relatively short space of time, as highlighted in some of our previous work.

While the grant’s primary aim was to provide income support to a vulnerable population, it is plausible that it also played an important role in aiding economic recovery through its effects on labour market behaviour.

Indeed, anti-poverty programmes and economic recovery policies need not be mutually exclusive. Until now, however, there has been no causal evidence of the effects of the grant on any outcome, and it is plausible that such effects may vary from those of pre-existing grants that are characterised by markedly different eligibility criteria.

There’s a reason for this lack of causal evidence: establishing a causal effect is difficult. Without a randomised experiment, simply comparing outcomes between grant recipients and non-recipients and attributing any difference to grant receipt is not a credible way of conducting causal inference.

This is because recipients and non-recipients differ in many ways other than just receipt (what microeconomists call “selection”).

For instance, SRD recipients are more likely to be young and have less than a complete secondary-level education. In this case, these differences in themselves may explain any difference in outcomes between recipients and non-recipients, rather than receipt itself.

What if we alternatively compare the same group with itself over time; that is, compare the outcomes of recipients from before the grant and after it was introduced? While this takes care of the “selection” problem described above, it would also be inadequate given that many factors other than grant receipt may influence outcomes over time.

So how might one isolate the causal effect of the SRD grant? In our new paper, we overcome this problem by using one of the most popular causal inference methods used by quantitative social scientists. Simply put, this method combined the between-group and between-period comparisons described above to estimate “counterfactuals” — the average outcomes of SRD grant recipients if the SRD had not been introduced.

Comparing average actual outcomes to counterfactuals allowed us to arrive at average causal effects. We used this “natural experiment” method on nationally representative labour force data, which followed the same individuals during 2020 and 2021, to investigate the effects of receipt of the grant on the probabilities of job search, trying to start a business and employment. 

Despite the relatively small size of the SRD (equivalent to less than 10% of median earnings in the labour market), we found that the grant had notable, albeit small, labour market effects.

Our analysis showed that receipt of the grant increased the probability of employment by just under three percentage points. These results made it clear that receipt of the grant did not deter participation in the labour market, but enabled it, contrary to what many believe.

We showed that these employment effects were driven by effects on wage employment (that is, working for someone for pay) in the formal sector — two labour market characteristics associated with higher-quality jobs.

Notably, these positive effects took place in the context of the pandemic and lockdown regulations in 2020 and 2021. Effects very well may be different in the “non-lockdown” environment; however, further work first needs to be done to confirm this.

We also analysed how effects vary depending on how long an individual has received the grant. These dynamics then allowed us to understand whether the grant is seen as a temporary or more permanent change in income.

We showed that the above employment effects were larger when individuals first received the grant, but steadily reduced to zero with additional periods of receipt. Indeed, the estimate even becomes negative after one complete year of receipt.

This is suggestive of stronger labour market effects of the grant in the short term, but longer-term exposure to the grant may not have such a significant employment-inducing impact. We found an even smaller effect (a 1.2 percentage point increase) on the probability of trying to start a business, and no effect on the probability of engaging in a job search.

The above set of results has a number of important policy implications.

The results suggested that the SRD played a crucial and positive short-term role in supporting the employment prospects of its recipients.

It is important, however, not to be selective in our evidence: our results also showed that with time, the positive labour market impact of the grant dissipated and, one year on, may become negative.

Also, our results implied that the grant would seem to be an inappropriate instrument for aiding job search, at least on the extensive margin, as well as encouraging self-employment.

On balance, one could argue that the SRD remains a crucial, short-term, anti-crisis policy tool for government.

A final complementary policy note: these results must not be interpreted in isolation from arguments around the fiscal affordability and broader macroeconomic effects of the grant, around which our paper is silent.

The short-term positive effects of the SRD cannot and should not be taken as implying that fiscal space for such a grant is automatically available. DM

Prof Haroon Bhorat is Director of the Development Policy Research Unit, School of Economics, University of Cape Town.

Timothy Köhler is Junior Research Fellow and PhD candidate at the Development Policy Research Unit, School of Economics, UCT.

David de Villiers is Junior Research Fellow at the Development Policy Research Unit, School of Economics, UCT; and a PhD candidate, Department of Economics, Stellenbosch University.


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