LABOR SUPPLY AND SOCIAL-WELFARE WHEN UTILITY DEPENDS ON A THRESHOLD CONSUMPTION LEVEL

This paper examines labour supply and social welfare, following Lewis and Ulph (1988), in a model in which individuals gain a utility premiu m if they raise their net income up to or above a threshold level. It may thus be worthwhile for some individuals to avoid poverty by supply ing a higher amount of labour than in the standard model. Over a range of wage rates, labour supply falls as the wage increases. In this fra mework, poverty is integral to a social welfare function because it ma tters to individuals. A special case leads to the use of the headcount poverty measure in an abbreviated social welfare function.