The labor supply curve under income maintenance programs

The paper is a theoretical analysis of the supply curve of labor under the particular nonlinear budget constraint arising from earnings-tested income maintenance programs. The joint effects of the income benefit, the implicit tax on earnings and the earnings disregard are analyzed, demonstrating that the individual supply curve must have a backward-bending section and a discontinuity; that changes in the tax above some critical rate have no effect on labor supply, and that the aggregate effect of a reduction in the tax below the critical rate is ambiguous. In the absence of an earnings disregard, the benefit may constitute a fixed cost of labor force participation, causing a higher reservation wage and a discontinuity of supply at that wage.