LABOR SUPPLY AND TARGETING IN POVERTY ALLEVIATION PROGRAMS

The introduction of variable labor supply raises some fundamental issues in analyzing the targeting of poverty alleviation programs in developing countries. It forces a reconsideration of the standard objective function, which is based on income or expenditure and so makes no allowance for the effort made in earning that income. We show that alternative views on the appropriate valuation of effort have very different implications for commodity-based targeting rules. We also establish a benchmark for marginal effective tax rates (inclusive of benefit withdrawal) in income-tested schemes and show that indicator targeting rules may also have to be modified significantly when labor supply responses are recognized.