From health protection to labor incentive: health and economic impacts of Medical Financial Assistance in rural China

Medical Financial Assistance (MFA), a key safety net for low-income groups in China, may exert incentive or welfare dependency effects on non-farm labor supply, an issue critical to assessing the effectiveness of medical security policies. Using two-wave household panel data, this study employs two-way fixed effects models to evaluate MFA’s impact on the non-farm labor supply (participation rate and working time) of low-income rural households, distinguishing between the effects of eligibility attainment and increased assistance amounts. The results show that: (1) MFA eligibility significantly enhances non-farm labor participation (by 2.0 percentage points) and working time (by 4.87 days), confirming an incentive effect with marked localization bias (no significant impact on non-local employment); (2) increased assistance amounts have a negligible marginal incentive effect, reflecting a threshold characteristic where eligibility is the critical trigger; (3) policy effects are heterogeneous: Eligibility boosts participation rates most among older adult households (3.6 percentage points), households with major diseases (9.5 percentage points), and those without employment assistance (2.5 percentage points); (4) for working time, prime-age households (6.49 days), households with major diseases (36.00 days), and those with employment assistance (4.55 days) benefit the most. A limitation is MFA’s insignificant effect on non-local non-farm employment and weak marginal effects of increased assistance. Based on microdata from deep poverty areas, this study reveals MFA’s labor supply incentive effects, localization bias, and threshold characteristics, providing Chinese empirical evidence for understanding the labor market consequences of medical security systems in developing countries and informing health and social care policy design.