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Dr. Manuel Adelino
Associate Professor of Finance
Fuqua School of Business
Duke University

This paper shows that reductions in benefits have both direct and indirect effects on economically fragile households. Using a large welfare reform in the UK, we document that recipients not only lose income from benefits, but also experience a lower relative likelihood of employment following the cuts. Employment effects are larger in areas more severely affected by the reform and in small firms in the non-tradable sector, suggesting that local demand spillovers are responsible for amplifying the initial shock. Affected households respond by increasing debt usage, are less likely to become homeowners after the reform and are more likely to experience financial distress.