Could UBI be the antidote to chronic unemployment? (Credit: Joel Schalit/Flickr)
Could UBI be the antidote to chronic unemployment? (Credit: Joel Schalit/Flickr)

The concept of a universal basic income (UBI) is becoming increasingly popular in discussions about how to combat poverty. Advocates for UBI include not only leftists, but also neoliberals, who see it as an opportunity to reduce the role of the state, and techies eager to compensate for automation-induced unemployment.

Proponents of UBI believe it would free people from jobs they don’t like, allowing them to maximise their creative potential, which will have a positive impact on economic growth. UBI could also serve as an especially useful antidote to persistent unemployment, as it would support improved living standards and limit economic inequality.

UBI trials are currently underway in a number of countries, including the Netherlands, Kenya, the United States, Finland, India, and Namibia. Although they differ in important respects, all seek to analyse the impact of guaranteeing every individual a steady income.[1]

In this article, the arguments and the evidence for and against UBI will be examined. UBI’s potential as a replacement for socially equalising policies will be a particular point of focus, as will the political feasibility of implementing UBI.

Ongoing case studies

In Finland, €560[2] a month is being paid to 2,000 unemployed participants taking part in a two-year pilot scheme. Some social benefits, like housing allowances, are still paid for by KELA (the Finnish authority for social services). Finns taking part in the project will continue to receive the basic income even if they take on a part-time or a full-time job. The government’s aim is to incentivise the unemployed to take up employment, and to make the social benefit system more efficient and thereby cheaper (Finnish Employment Service, 2017). Outcomes are expected in mid-2019.

Y Combinator, a Silicon Valley-based start-up incubator, has launched a UBI project in Oakland, California, providing an unconditional income of $1,000 a month for a period of five years to 1,000 randomly chosen individuals. An additional control group of 2,000 people will receive $50 a month, for comparison (Browne, 2017).

 Experience from the past

The lack of completed UBI experiments poses a challenge for supporters of the concept. However, three major experiments previously conducted in North America provide a starting point: the Income Maintenance study conducted in three different American states during the 1960s (Brown & Munnell, 1988); the Great Smoky Mountains study; and the Canadian ‘Mincome’ experiment.

The earliest series of experiments involved around 4800 participating households at the end of the 1960s in Indiana, Seattle, and Denver in the US. They implemented a means-tested negative income tax targeted at low-income households. A subsequent reduction in working hours (17% among women, 7% among men) was observed. Additionally, according to the researcher Alicia Munell, “there was an increase in school attendance, but otherwise, no noticeable improvements to health and well-being and a negligible effect on homeownership rates” (Brown & Munnell, 1988).

The second major study demonstrated the effects of unearned cash transfers on the child psychology. The longitudinal Great Smoky Mountains Study of Youth began in 1993 and was designed to map out the mental health of 1,420 low-income children living in rural areas in North Carolina, some of whom lived on an Eastern Band of Cherokee Indians reservation.

In a development not planned by the study, in 1997, a casino opened on the reservation, providing a portion of its profits on a semi-annual basis to all enrolled tribal citizens, amounting to $4000 per person every year. For American Indians, the results show the “effect reduces behavioural disorders by 26.7 % of a standard deviation” and “increases conscientiousness by 42.8 % of a standard deviation” (Akee, Simeonova, Costello, & Copeland, 2015). Parental drug and alcohol consumption were also reduced.

Intriguingly, improvements in child health were not due to fewer parental working hours meaning more time was spent children, but resulted from improved family relationships (Akee, Simeonova, Costello, & Copeland, 2015, p. 38).

The Canadian ‘Mincome’ experiment was conducted between 1974 and 1979 in Dauphin, Manitoba, where 60% of the average national per capita income was given to low-income families and individuals. Every additional dollar earned by project beneficiaries resulted in the Mincome being reduced by $0.50.

Although the results of the experiment were never analysed by the original project team, Evelyn Forget, an economics professor at the University of Manitoba, later compared the population of Dauphin with other residents from Manitoba. She found that “new mothers and teenagers worked substantially less (reducing working hours by approximately 10%). [Married] mothers with newborns stopped working because they wanted to stay at home longer with their babies.”  Also, “a lot of people from low-income families, a lot of boys in particular, were under a fair amount of family pressure to become self-supporting when they turned 16 and leave school. When Mincome came along, those families decided that they could afford to keep their sons in high school just a little bit longer.” A subsequent upturn in graduation rates was recorded (Adam, 2015).

“Hospital visits dropped by 8.5%, with fewer incidents of work-related injuries, and fewer emergency room visits from accidents and injuries. Additionally, the period saw a reduction … in the number of mental illness-related consultations with health professionals” (Belik, 2012).

These past experiences with limited cash transfers have been positive and have suggested that even in advanced economies, unconditional cash transfers to low-income families have the potential to improve physical and psychological health and graduation rates.

Outcomes for emerging economies

The Madhya Pradesh Unconditional Cash Transfers Project (MPUCT) is a notable pilot project based in rural Madhya Pradesh, India. Over 18 months, approximately 6,000 individuals received cash transfers of between €1.75 (for children) and €3.50 (for adults) per month (Standing, 2013), which supplemented the income of families living under the poverty line.

MPUCT’s outcomes were that “villages spent more on food and healthcare, children’s school performance improved in 68% of families, personal savings tripled, and new business start-ups doubled (Oliveboard, 2017). The study also observed an increase in economic activity as well as an increase in savings, an improvement in housing and sanitation, improved nutrition, less food poverty, improved health and schooling, greater inclusion of the disabled in society, and a lack of frivolous spending” (UNICEF, 2014, p. 5)

Notably, drug consumption did not increase. According to Guy Standing from the School of Oriental and African Studies, “perhaps the most important finding was the significant improvement in the average weight-for-age of young children (measured according to World Health Organization z-scores), and more so among girls” (Standing, 2013).

Another pilot scheme, the Basic Income Grant (BIG) project, was conducted from January 2008 to December 2009 in Otjivero-Omitara, a poor rural area about 100 kilometres east of Windhoek, Namibia. 1,000 residents under 60 years of age received a BIG (a supplement income) of N$100 per person per month, without any conditions being attached. A huge reduction in child malnutrition was observed: “the data shows that children’s weight-for-age has improved significantly in just six months from 42% of underweight children in November 2007 to 17% in June 2008 and 10% in November 2008”.

Before the start of BIG, 76% of residents lived under the food poverty line; this figure was reduced to 36%. The number of parents able to pay their children’s school fees doubled and the school drop-out rate decreased from 40% to 5%. Overall crime rates fell by 42% (Standing 2013). The proportion of people engaged in income-generating activities increased from 44% to 55%. A commonly-levelled criticism that BIG would lead to an increase in alcoholism was not supported by evidence (Haarmann, 2014).

Comparing emerging and advanced economies

For emerging economies, the benefits of cash transfer schemes are apparent from the examples above. Both studies demonstrated a sharp reduction in child malnutrition and improved school performance. Crime rates declined. Entrepreneurial activity increased significantly.

In advanced economies, the impact of UBI would be less profound. However, given the number of US households (5.7%) facing low food security, UBI’s potential for advanced economies should not be underestimated (Coleman-Jensen, Alisha Nord, Mark Andrews, Margaret S. Carlson, Steven J, 2012, p. 2).

Interestingly, although participants in advanced economies worked fewer hours, those in emerging economies generally redirected their energy into entrepreneurial activity, working either just as much or more so than before, but towards greater prospects for advancement.

A common outcome for both advanced and emerging economies is that higher parental incomes improved school attendance and educational attainment for children. In terms of long-term welfare and economic gains, this is one of society’s most rewarding investments and is especially advantageous in a digital age where lifelong learning is a prerequisite for labour market success.

Financing UBI: A microsimulation of its impact for advanced economies

It is often argued that societies don’t yet have the means to provide a $10,000 annual income to every individual. In the US, for example, this would mean adding $3.2 trillion to the federal budget. In Germany, a monthly UBI of between €750 and €1000 is supported by most research proposals.

In most financial models, UBI would be financed through savings on social benefits, higher taxes on capital profits, higher income taxes on the wealthy, a Tobin tax, and the cancellation of tax allowances. One frequently cited UBI funding source is the abolition or downsizing of the welfare system, which is seen to be costly and ineffective in terms of administration and eligibility checks. In the UK for example, the entire welfare budget distributed among 50 million citizens would amount to monthly payments of approximately €500 per person (Brown, 2017).

Suppose the entirety of German government spending (€1,658 billion) from 2005 was financed by an income tax, the implied flat tax rate would be 51%. According to a study by the Hamburg Institute for World Economy, if an €800 per month UBI and a €200 per month health insurance contribution was provided to every citizen, financed entirely through income tax, the tax rate would range between 61% and 78%. In this model, higher income groups would pay higher taxes and low-income groups would benefit from the additional unconditional income and have higher net incomes as a result. Based on the 61% income tax, a person with a gross monthly salary of €1,000 plus the €800 UBI would earn a net income of €1,190, compared to €890 today. Someone with a gross monthly salary of €5,000 plus the €800 UBI would have a net income of €2,750, compared to €2,800 today (Straubhaar, Hohenleitner, Opielka, & Schramm, 2008).

An €800 per month UBI microsimulation, solely financed by a flat tax rate of 70%, was run by Viktor Steiner in order to determine the impact of UBI on single breadwinner households, both with and without kids (Jessen, Rostam-Afschar, & Steiner, 2015).[3] Analysis showed overall income shifted from single breadwinner households without children to single breadwinner households with children. Moreover, monthly hours worked by single parents with children declined. Overall, women tended to reduce their working hours more than men.

Steiner’s project showed that households with a monthly income of less than €2,500 after tax would generally gain from the introduction of UBI, whereas income groups above the €2,500 monthly ceiling would see their income gradually fall. In real terms, this means that the lower 50% of household incomes would rise, while the upper 50% would see their median income decline (e.g., an annual income of €50,000 falls by €10,000). At the same time, the richer 50% would reap marginal welfare gains by virtue of high income taxes reducing working hours.

UBI: An alternative to social policies?

UBI would have numerous repercussions for society, with policy implications far beyond fiscal changes.

Arguments that UBI would have a positive effect on gender equality are based around the idea that it offers men and women a choice between a “mix of paid work, care, and leisure that best meets their needs at any given time” (Zellecke, 2005, p. 1). A large proportion of work (e.g., unpaid care work or volunteer work) is unpaid, despite its benefits for society. UBI is therefore regarded as one of the most suitable redistributive schemes for transforming the relationships of “men and women to the provision of care and to the world of paid employment” (Zellecke, 2005, p. 1).

Low-income households are also said to benefit. UBI’s argue increases in bargaining power giving those on lower incomes more choice over the work or care they want to do.

Opponents of UBI think it would dis-incentivise people from working, and thereby be detrimental to psychological health (Kingma, 2016). Although undoubtedly a major change – working due to necessity compared with working on what one would genuinely like to do – surveys suggest that only a small percentage of people would stop work altogether. Prior to a referendum on the introduction of UBI in Switzerland, which ultimately rejected the idea, a 2016 opinion survey revealed that merely 10% of respondents would stop working altogether (Grundeinkommen – würden Sie noch arbeiten?, 2016). Surprisingly, a 2017 German opinion survey had a similar outcome, finding 9% of the workforce likely to stop working (Splendid Research, 2017).

Another important argument against UBI is that it falls far short of giving people a just share of profits from productivity gains. Although widespread productivity growth is debatable, the rising profits of numerous corporations have only been distributed to shareholders for decades. Relative to the wealth sharing that true redistribution of productivity gains would involve, UBI cash transfers are small. Income and wealth concentration could proceed even with UBI in place.

Potential employer responses have also concerned some, in that with basic needs met by UBI, the fear is that employers would be able to pay lower wages and would also have less of an incentive to invest in employee training, especially in low-wage professions where labour is increasingly seen as a dispensable or exchangeable – and not a key – resource.

Conclusion

It is definitely possible to finance UBI through high incomes taxes, but in the financial models reviewed above, UBI is likely to lower middle and upper-class incomes substantially. The redistribution of wealth this would involve makes supportive parliamentary majorities unlikely. Especially where state legislatures are seen as biased in favour of wealthier social groups (see Elsässer, Hense, & Schäfer [2017] regarding Germany), political decisions are unlikely to promote UBI where it is seen in terms of conflicting rich and poor interests.

The fear that most people would stop working seems overstated and largely unfounded. Opinion surveys and experiments provide evidence that only a fraction of people would choose not to work at all.

In emerging economies, where the risk of job automation is higher than in wealthy countries and where social institutions are at a relatively formative stage, the gradual introduction of some form of cash transfer or universal basic income promises effective poverty reduction. Increasing wealth concentration in emerging countries (India’s richest 1% own 58% of national assets) points to an urgent need for equality-inducing distributive mechanisms (India’s rising income, 2017). The standout question is that of political feasibility, given UBI’s redistributive nature.

For advanced economies with more established social policies, a reform agenda focusing on improvements to existing structures and addressing the negative effects of income and wealth concentration is preferable. Important and well-functioning social policies and institutions should be preserved, but changes are necessary. Governments should shorten the working week to 30 hours without permitting corresponding pay cuts; provide better care for children and the elderly; dramatically improve support for the working poor and unemployed; stop sanctioning welfare recipients, who refuse to engage in occupations far below their qualification; improve pension schemes; and reform healthcare to prevent the better-off from creating parallel structures. Only once such steps have been taken and reviewed – and once recently started UBI experiments have been properly evaluated – will it make sense to discuss the necessity of more drastic measures.

 

Klemens Witte

Research Associate, DOC Research Institute

 

References

Adam, A. (2015, July 2). How Canada tried to eradicate poverty with guaranteed income. Public Radio International.

Akee, R., Simeonova, E., Costello, E. J., and Copeland, W. (2015). How Does Household Income Affect Child Personality Traits and Behaviors? NBER Working Paper, 21562.

Belik, V. (2012, May 10). A Single Program That Could Eliminate All Other Welfare Programs. Centives.

Brown, C. V. (1988). Lessons from the Income Maintenance Experiments: Proceedings of a Conference held at Melvin Village, New Hampshire, September 1986 by Alicia H. Munnell. The Economic Journal, 98(392). DOI:10.2307/2233937

Brown, E. (2017, October 5). Universal Basic Income: How to Fund UBI Without Increasing Taxes or Inflation (PUBLIC FINANCE). The Vermont Independent.

Browne, R. (2017, September 21). This Silicon Valley giant will give some $1,000 and others $50 a month to trial basic income.

Coleman-Jensen, A., Nord, M., Andrews, M., Carlson, S. (2012). Household food security in the United States in 2011. Economic Research Service. Washington, DC: US Dep. of Agriculture. 

Elsässer, L., Hense, S., and Schäfer, A. (2017). „Dem Deutschen Volke“? Die ungleiche Responsivität des Bundestags. Zeitschrift für Politikwissenschaft27(2), pp. 161-180.

Forget, E. (2011). The town with no poverty. Manitoba: University of Manitoba.

Grundeinkommen – würden Sie noch arbeiten? [Web log post]. (2016, January 27). 

Haarmann, C. (2014). Basic Income Grant Coalition – Namibia. 

Hamilton, T. (2016, June 21). The Netherlands‘ Upcoming Money-for-Nothing Experiment. The Atlantic.

Jessen, R., Rostam-Afschar, D., and Steiner, V. (2015, September 15). Welche Effekte hätte ein bedingungsloses Grundeinkommen für Deutschland? oekonomenstimme.org.

India’s rising income inequality. (2017, January 16). Times of India.

Infoecology. (2016, January 1). Infoecology: This is important: Statistics of stress and depression.

KELA (Finnish Employment Service). (2017, January 1). Basic Income Experiment 2017–2018.

KELA (Finnish Employment Service). (2015, September 29). Strong support for basic income is expressed.

Kingma, L. (2016). Universal Basic Income: The Answer to Automation? Futurism.

McFarland, K. (2017, November 17). US/KENYA: GiveDirectly Officially Launches UBI experiment. Basic Income News.

Splendid Research. (2017, November 23). Studie: Mehr als die Hälfte für Bedingungsloses Grundeinkommen.

Standing, G. (2013). Unconditional Basic Income: Two pilots in Madhya Pradesh. Conference paper.

Straubhaar, T., Hohenleitner, I., Opielka, M., and Schramm, M. (2008). Bedingungsloses Grundeinkommen und Solidarisches Bürgergeld – mehr als sozialutopische Konzepte. Hamburg Institute for World Economy. Hamburg University Press.

Oliveboard. (2017, March 20). Universal Basic Income In India: Pros & Cons. Oliveboard.

UNICEF. (2014). A little more, how much it is. Available at http://unicef.in/Uploads/Publications/Resources/pub_doc83.pdf

Zelleke, A. (2005). A feminist critique of reciprocity and conditionality. Conference presentation. Available at http://www.usbig.net/papers/113-zelleke-Feminist-Conditionality.doc

 

[1] Studies focus on Utrecht in the Netherlands (Hamilton, 2016); unemployment in Finland (Finnish Employment Service, 2017); rural villages in Kenya (McFarland, 2017); and Oakland, California in the US  (Browne, 2017).

[2] In an opinion survey conducted in Finland, respondents (1006 in total) expressed the view that €1,000 would be a reasonable amount. Unfortunately, no precise response figures are given by KELA (Finnish Employment Service, 2015).

[3] The study assumes preferences for leisure time and income remain unchanged.

 

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