DP275 The Poverty Trap and the Laffer Curve: What Can the GHS Tell Us?

Author(s): Paul Ashton, Patrick Minford
Publication Date: December 1988
Keyword(s): Labour Supply, Poverty, Tax Rates, Unemployment
JEL(s): 824
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=275

Budget constraints are drawn up for annual hours and net pay, typically composed of two linear segments: 'benefit-constrained', where extra work forfeits benefit and 'normal', where extra work is subject to the standard marginal tax rate. There are additional linear segments for those on upper tax rates. By ordering males according to the ratio of their maximum net earning power to that when totally unemployed, we establish the appropriate cut-off point for the poverty trap and upper rate segments, from which we estimate labor supply responses to slope and intercept variables. The results suggest high substitution elasticities for those who experienced unemployment during the previous year and those on higher incomes; for average employed men the elasticity was quite l.