Labor Supply and Targeting in Poverty Alleviation Programs

The introduction of variable labor supply raises some fundamentalissues in analyzing the targeting of poverty alleviation programsin developing countries. It forces a reconsideration of thestandard objective function, which is based on income or expenditureand so makes no allowance for the effort made in earning thatincome. We show that alternative views on the appropriate valuationof effort have very different implications for commodity-basedtargeting rules. We also establish a benchmark for marginaleffective tax rates (inclusive of benefit withdrawal) in income-testedschemes and show that indicator targeting rules may also haveto be modified significantly when labor supply responses arerecognized.