Workforce or Workfare? The Optimal Use of Work Requirements when Labor is Supplied along the Extensive Margin

Abstract

This paper explores the use of workfare as part of a tax mix when labor supply responses are along the extensive margin. In an economy where the government has a priori chosen any tax-and-benefit schedule, we show that, despite their common goal of providing additional incentives for individuals to enter the labor force, workfare and an earned income tax credit are at odds with each other. In the presence of an optimal nonlinear income tax, we also show that introducing unproductive workfare is always suboptimal when individuals face the same disutility of being on workfare. When this disutility is heterogeneous, unproductive workfare may be a useful policy tool. We also provide a sufficient condition for productive workfare to be optimal.