An in-work payment with an hours threshold: Labour supply and social welfare

Abstract

This paper examines the effect on a measure of social welfare of an in-work payment, involving a discontinuity at an hours threshold. Social welfare is defined in terms of individuals' utilities, which depend on leisure and net income. The in-work payment augments a modified minimum income guarantee having two tax rates. Numerical simulations, which ensure that a fixed amount of net revenue per person is collected by the government, show that social welfare falls systematically as the extent of the discontinuity increases, and as the hours threshold, at which the jump in net income occurs, increases. Eliminating the discontinuity resulting from the in-work payment, therefore, improves social welfare. © 2005 The Economic Society of Australia.