This paper presents evidence on the labor market effects of social assistance
programs in the short and medium run. We evaluate the impacts of a
Conditional Cash Transfer program (Familias en Acción) on informality in
Colombia. We exploit an exogenous shock linked to cash transfer benefits that
the government provides to poor people to evaluate the effect of these benefits
on informality. We argue that being a beneficiary of social programs may
create perverse incentives that drive people towards informality through a
substitution effect. Survey data of “Familias en Acción” program was used to
identify whether the program had any effect on workers’ labor decisions
concerning participation (or the lack thereof) in the informal labor market in
Colombia after one and four years after its implementation. We apply matching
algorithms and difference-in-differences estimations to evaluate the effect of
the program. We find that a worker’s informality condition may be affected by
receiving CCT income and by the structure of the colombian health system.