1 Introduction
The Great Recession has placed additional strain on public programs that provide
transfers to individuals. On the one hand, increased levels of unemployment have added
to the need for welfare and related benefits. On the other, many governments face con-
siderable budget deficits, making funds increasingly scarce. It is little wonder, therefore,
that the proper design of benefit programs is high on the policy agenda. (OECD, 2009)
In Britain, for example, legislation was tabled in February, 2011 with the intent of com-
pletely overhauling that country’s benefits programs. (Government of Great Britain,
2011)
Against this backdrop, it seems appropriate to re-visit the role of workfare — the
practice of requiring those who receive public benefits to spend time on some mandated
activity — in the policy mix. In this article, we offer some results on when and how
workfare can fit into the policy mix and argue that the case for workfare is weakened if
earned income tax credits are part of the optimal policy mix. We do so in a model of
labor supply choice along the extensive margin in the tradition of Diamond (1980) and
more recent elaborations by Saez (2002) and Chone and Laroque (2005).
Private individuals in our model differ along two dimensions, labor market skill and
preference for leisure. The labor market is perfectly competitive so that market wages
are the respective skill levels. Given these wages and the tax-transfer program adopted
by the government, individuals choose whether to work or not work. All workers are
assumed to provide a fixed quantity of labor supply. The tax-transfer program might
include the requirement that anyone who does not work must spend time in workfare
activities. Given heterogeneity in preferences, some portion of workers of each skill type
(those with the least taste for leisure) choose to work. The others remain out of the labor
force and receive public benefits. The government chooses an income tax schedule for
those in work, the level of the public benefit and the intensity of workfare to maximize
a utilitarian social welfare function subject to a government budget constraint.
We derive conditions under which the addition of a completely unproductive workfare