Welfare measurement in labour supply models with nonlinear budget constraints

This paper is concerned with the measurement of individual welfare in labour supply models which allow for the impact of income taxation and income support schemes on labour supply decisions. The paper is motivated by the concern over the need to have measures which can be interpreted easily, which can be compared with net income, and which can be meaningfully aggregated. To illustrate the issues we use estimates of a discrete choice model of labour supply for United Kingdom lone mothers to compute alternative welfare measures which might be considered as having intuitive appeal to policy-makers. We compute welfare change based on these measures arising from a recent reform of the child support payments system.