Everywhere you look, it seems, people are talking about a Universal
Basic Income (UBI)—a monthly cash benefit paid to every citizen that
would replace the existing means-tested welfare system.Supporters maintain that a UBI would not only provide income support to people in need, but would also increase work incentives. That is because, unlike the current welfare system, it would not claw back 50, 70, or even 100 percent of the earnings of low-income workers who make the effort to get a job. Opponents are more skeptical. They fear that if everyone were given a basic cash income with no requirement to work, people would quit their jobs in droves and we would end up with a nation of layabouts.
What the critics say
The fairest way to start is to let
UBI critics speak for themselves. Consider, for example, the views of Jim Mazi,
who contributed
recently to a recent discussion of basic income proposals on Cato Unbound.
Manzi notes, correctly, that “a major driver of welfare reform over decades has
been political resistance to work disincentives.” Taking an astonished tone, he
continues by saying, “It is fairly extraordinary to claim that the government
could guarantee every adult in America an income even if they did zero work of
any kind, and that somehow this would not reduce work effort.” He goes on to
cite the results of a series of income maintenance experiments carried out
between 1968 and 1980 in several US states. Those experiments, Manzi contends,
“consistently found that the tested programs reduce the number of hours worked
versus the existing welfare system.”
Pascal-Emmanuel Gobry is another UBI
critic. Writing recently for The Week, he notes that although a UBI has
become fashionable among progressives, it actually has a long history of
support from conservatives. “Indeed,” he says, “Right-winger that I am, I was
for a very long time a strong proponent of a UBI. But now I oppose it. . . What
happened? I looked at the best science and changed my mind.”
What kind of science? “Science,
properly understood, is the testing of hypotheses through rigorous
experimentation,” says Gobry. He points to the same randomized field trials
of alternative welfare systems as Manzi does. He shares Manzi’s conclusion that
under a UBI, “Millions of people who could work won't, just listing away in
socially destructive idleness (with the consequences of this lost productivity
reverberating throughout the society in lower growth and, probably, lower
employment, in a UBI-enabled vicious cycle).”
Conservative critics are not the
only ones who see work disincentives as a built-in feature of a UBI. Some
progressive supporters of the concept agree, with the twist that they, unlike
the conservatives, see a reduction in work as a virtue. For example, writing on
the website Liveable 4 All,
C.A. L'Hirondelle and J.S. Larochelle give ten arguments in favor of
their version of a UBI, which they call a Guaranteed Livable Income (GLI).
Several of the reasons anticipate reduced work effort:
A guaranteed livable income would prevent the destruction of the environment due to the attempt to grow the world's economy to create full employment. The loss of clean air, clean water, forests, arable soil, all forms of "wild" life cannot be measured. . . GLI is the quickest way to say "no" to environmentally harmful and wasteful practices and to put an end to over-consumption.
Millions of jobs depend on war. . . Historically, when people lose jobs and income and they demand their governments do anything, including build their military, to give them jobs. Only with a guaranteed income could we afford to end the war industries.
With a guaranteed livable income,
people will no longer be forced to 'make a living' regardless of the harm to
themselves, others, or the environment. It also creates a way to for people to
do beneficial (and essential) activities that are currently financially
penalized for being 'unproductive.' For example: work done by volunteers and
unpaid caregivers: people who take care of other people; who take care of their
own health (for some that is a full time task); or who take care of their
neighborhood, community or environment.
Based on these writers and on dozens
of comments from both conservative and progressive readers of my own posts, I
would go so far as to say that the default assumption among people who first
hear of the idea is that a UBI would severely reduce work effort. In this
series, I will take on the burden of proof in arguing that, to the contrary,
replacing our current welfare system with a UBI would substantially increase
incentives to work, especially among the low-income households that are the
greatest cause for concern. Here goes—theory first, evidence next time.
The effects of means-tested income
support
Let’s begin by looking at the work
incentives of introducing a generic means-tested income support (MTIS) policy
into a labor market that previously had no income support programs at all.
Figure 1 illustrates that case. (This figure and those that follow take an
approach used by Robert Moffitt,
an economist cited favorably by UBI critic Manzi. I have modified the geometry
of Moffit’s diagrams in a way that, I hope, makes them more intuitive. I should
also mention that although Moffitt considers several varieties of income
support policy, he does not explicitly examine a UBI.)
The horizontal axis in Figure 1
represents earned income while the vertical axis shows disposable income, that
is, earned income plus benefits. To keep things simple, we will assume no
income or payroll taxes on earned income—an assumption that I will briefly
return to near the end of the post. The dashed 45o line shows that
earned and disposable income are the same when there are no taxes or income
support. The solid red line shows the relationship between disposable and
earned income with the MTIS policy.
This generic MTIS policy has three
features:
- A minimum guaranteed income, G, that households receive if they have no earned income at all.
- A benefit reduction rate (or effective marginal tax rate), t, indicted by the angle between the 45o line and the red MTIS schedule. The fact that t is greater than zero is what we mean when we say that the program is means tested. As the figure is drawn, t = .75, that is, benefits are reduced by 75 cents for each dollar earned.
- A break-even income level, beyond which benefits stop. Past that point, earned income equals disposable income.
The figure is very general. It could
represent a conventional cash welfare program like Temporary Assistance to
Needy Families (TANF), an in-kind program like SNAP (food stamps), or a
negative income tax, which would have cash benefits in the form of refundable
tax credits administered through the Internal Revenue Service. The existing
welfare system of the United States is, of course, more complicated. It is a
combination of many state and federal programs, some with in-kind benefits and some
with cash benefits; some with narrower eligibility requirements than others;
some with benefit reduction rates of 100 percent or more and one, the earned
income tax credit, with negative benefit reduction rates for some households;
and some with income limits where benefits cut off abruptly, causing “notches”
in the disposable income schedule. (For details, see this earlier post.)
Despite its simplicity, the generic
program illustrated in Figure 1 is sufficient to support our first important
proposition:
Proposition 1: Any means-tested
income support program will unambiguously reduce average work effort.
The numbered arrows in Figure 1 show
why. Begin with Arrow 1, which shows how the program affects your work
incentives if your earned income is initially below the break-even level.
First, you can see that regardless
of how much you work, you will receive some benefit from the government, so your
disposable income will rise. Other things being equal, people tend to “spend”
part of their increased income on increased leisure, in the form of shorter
hours, longer vacations, a longer time in school, earlier retirement, or longer
breaks between jobs. Economists call that the income effect of a higher
income.
Second, the income support program
changes the tradeoff you face between additional work and additional earned
income. Suppose your best available job pays $10 per hour. Without the MTIS,
one more hour of work brings you $10 of added disposable income. With the MTIS,
one more hour of work raises your disposable income by only $2.50, because the
$10 you earn is offset by a loss of $7.50 in benefits. In effect, the program
reduces the “price” (more properly, the opportunity cost) of leisure, so
you are more likely to substitute leisure for work and the disposable income it
brings in. Economists call that the substitution effect of the program.
Below the break-even level of
income, the income and substitution effects work in the same direction, so
there is an unambiguous incentive to work less. Some people might stop working
altogether. Some might reduce their hours, take longer vacations, or spend more
time between jobs. Whatever the specifics, the average response will be a
reduction in work hours. Even if some people have employers who allow no
flexibility in hours worked, the average response for the whole population to
whom the policy applies will be zero.
Next, suppose your initial earned
income is higher than the break-even level. If it is far above B, the program
will probably not affect your work effort at all. Suppose, though, that your
initial income is only a little above the break-even level. In that case, you
may be tempted to cut back your hours of work by enough to qualify MTIS
benefits. Arrow 2 shows that possibility. If you follow the arrow, you give up
a little bit of disposable income, but you gain quite a bit more leisure—a
tradeoff between work and leisure that is better than you faced before the MTIS
program came into force. Not everyone will take advantage of this opportunity,
but if at least some do, while others do not change their work habits, then the
average work effort of people whose initial incomes were higher than B will decrease.
In short, introducing a MTIS into an
economy where previously there was no income support will tend to reduce the
work effort of most people whose incomes were initially below the break-even
point and of some with incomes just above break-even. Average work effort for
the population as a whole will decrease.
Sweetening the program
Next, consider the effects of
sweetening the MTIS by increasing the minimum guaranteed income or reducing the
benefit reduction rate. Figure 2 shows the effects of both changes together.
The old program is the same as shown in Figure 1. The new program has a higher
minimum guarantee G2 and a lower benefit reduction rate of 0.5, shown by t2.
The arrows show three possible
cases.
First, suppose your initial earned
income is below B1, the break-even level for the old program. You now have an
increased incentive to work because you get to keep 50 cents of each dollar you
earn, rather than 25 cents as before. At the same time, however, your income
will be higher, which by itself, will give you an incentive to work less. Since
the two effects work in opposite directions, whether you work more or less will
depend on whether the income effect or the substitution effect is stronger. As
we will see in the next post, evidence from the experiments of the 1970s and
1980s suggests that for most people in this category, the income effect will
prevail, so that average work effort will increase, as shown by Arrow 1.
However, it is likely that some individuals will work less, and it is theoretically
possible that average work effort for people in this group would be less.
Second, suppose that your initial
earned income is slightly higher than the new break-even level B2. In
that case, as in our first example, you might decide to cut back your work
hours by enough to qualify for benefits, as shown by Arrow 2. Not everyone will
do so, especially if their incomes are far higher than the break-even level.
Still, the average effect for this group will be at least a slight reduction in
work effort.
Third, suppose your initial earned
income is between B1 and B2—too high to qualify for the old program but low
enough to qualify for the new one. In that case, the new, more generous, MTIS
will increase your disposable income, which, by itself, would cause your work
effort to decrease. At the same time, you now face the 50 percent benefit
reduction rate of the new program, whereas before you faced no benefit
reductions at all. The substitution effect of the benefit reductions provides
second disincentive to work. With both effects working in the same direction,
you have a double reason to reduce your desired level of work, as shown by
Arrow 3.
Taking the three cases together, we
can see that formally speaking, the effects of sweetening the MTIS are ambiguous.
Some people (Arrow 1) will increase their work effort, while some (Arrows 2 and
3) will reduce theirs. It would not be at all surprising if the negative
effects on work to outweighed the positive effects, but we can’t be sure on
theoretical grounds alone. Ultimately, the average response for the whole
population will depend on the number of people in each group and the relative
strength of the income and substitution effects. We can formalize this result
as follows:
Proposition 2: The effects on work
effort of “sweetening” a means-tested income support program by raising the
minimum income guarantee, lowering the benefit reduction rate, or both, are
ambiguous.
Replacing a MTIS with a UBI
Now we come to the heart of the
issue we set out to discuss. What will be the effect on work incentives if we
replace a pre-existing means-tested income support program with a universal
basic income that is not means tested at all? Figure 3 illustrates this
possibility. The MTIS is the version from Figure 1, before sweetening. The UBI
grant, Gu, is set at a level slightly below the minimum guaranteed
income under the original MTIS, Gm. (We will consider the effects of a
change in the relative levels of Gu and Gm shortly.) The
benefit reduction rate for the UBI is zero, so the UBI schedule is parallel to
the original earned income line and lies above it by the amount of the UBI
grant, Gu.
The arrows show four possible
responses, according to the original level of income.
First, suppose that your original
earned income is below the crossover point of the UBI and the MTIS schedules.
Now you have two incentives to work more: you can now keep more of each added
dollar you earn, and at the same time, unless you increase your work effort,
you face a decrease in your disposable income. For this group, the substitution
and income effects work together to encourage work effort, as shown by Arrow 1.
Second, suppose your original earned
income is a little above the crossover point of the MTIS and the UBI schedules.
As in the first case, the substitution effect is strong because you are no
longer subject to the 75 percent benefit reduction rate of the MTIS. At the
same time, you face a negative work incentive from the income effect, since
your income will rise a little even if you don’t work more. In practice,
though, the income effect is likely to be weak, because it applies only to the
difference between the UBI and the MTIS benefits, not to the full value of the
UBI. On balance, you will probably want to increase your work effort, as shown
by Arrow 2.
Third, suppose you are one of those
people who would have earned an income above the break-even level B if there
had been no MTIS, but who cut back your work effort to qualify for the MTIS--the
case shown by Arrow 2 in Figure 1. Now that the old program is gone, you will
increase your hours of work again. This variant is shown by Arrow 3 in Figure
3.
Fourth, suppose your earned income
is far above the break-even level for the MTIS. In that case, the UBI has no
substitution effect at all, so you have no incentive from that source to work
more. Since your income will rise by the amount of the UBI, you have a small
incentive from the income effect to work less, as shown by Arrow 4. Again, though,
the effect on your work effort is likely to be slight, because the higher your
original income, the smaller the percentage increase from the UBI. If you have
a middle-class income to begin with, a few thousand dollars extra from the UBI
is unlikely to have a big effect on your work habits.
Keep in mind, though, that the
effects of replacing a MTIS with a UBI depend on the relationship of the UBI
grant Gu to the MTIS minimum Gm, and also on the benefit
reduction rate of the MTIS. The more generous the minimum guarantee of the MTIS
relative to the amount of the UBI and the higher its benefit reduction rate,
the more likely it is that replacing an MTIS with a UBI will increase work
effort.
We can summarize these effects as
follows:
Proposition 3: Replacing a
means-tested income support program with a UBI would substantially increase
work incentives for low-income households while having small disincentive
effects, if any, for middle- and upper-income households.
Policy implications
The most important implication of
the preceding analysis is that we can intelligently discuss the incentive
effects of a UBI only if we specify what we are comparing it to.
If we were to introduce a UBI where,
previously, there was no income support program at all, the UBI would
presumably decrease average work effort. In that case, UBI critic Manzi would
be right to think it “extraordinary to claim that the government could
guarantee every adult in America an income even if they did zero work of any
kind, and that somehow this would not reduce work effort.”
Similarly, we could expect a
negative effect on work effort if we were to “sweeten” the existing welfare
system by adding a UBI on top of all the programs we now have. The work
disincentives of the current high benefit reduction rates would remain in
force. Adding the UBI would have only an income effect, which, by itself,
would tend to reduce work effort.
However, the policy change proposed
by most UBI advocates—especially those who approach the idea from a
conservative or libertarian perspective—is to replace the means-tested
welfare system we now have with a UBI. In that case, the favorable substitution
effect of a UBI would be strong and the unfavorable income effects would be
weak. In that situation, it would “extraordinary” if the UBI did not increase
work effort.
Some caveats
The preceding discussion comes with
several caveats.
First, theory alone is not
conclusive. We also need to look at the empirical evidence provided by the
income maintenance experiments of the 1970s and 1980s and by other sources.
Second, the work incentive effects
of a UBI would depend, in part, on how it was financed. In my view, we should
avoid financing a UBI by raising marginal tax rates on middle- and upper-income
households, since doing so would produce negative work incentives for those
groups that would, at least in part, offset the positive incentive effects for
the poor. Also, to minimize negative work incentives, a UBI should replace not
just existing antipoverty programs, but also “middle class welfare” in the form
of tax loopholes, and it should be properly integrated with income support
programs aimed at the general population, such as Social Security retirement
and disability benefits . This previous post outlines an approach to financing a UBI that would
incorporate these principles.
Third, as noted above, the effects
of a UBI on work incentives depend, in part, on how generous it would be. My
own preference would be for a modest UBI that falls well short of offering a
life of middle-class ease and comfort. Instead, I see it as providing a minimal
but secure platform on which lower income households could build a better life
for themselves through work.
Finally, I would like to emphasize
that I argue only that replacing the current welfare system with a UBI would
increase work efforts on average. There is no guarantee that every
individual would react by working more. Many critics are troubled that a UBI
does nothing to exclude people who are able to work but who choose not to. That
concern raises the important issue of the inevitable tradeoffs in the design of
any income support program between its effectiveness in aiding those who are
seen as “deserving” and its effectiveness in barring aid to the “undeserving.”
A thorough exploration of those tradeoffs will have to wait for a future post.
Continue to UBI and Work Incentives. Part 2 Evidence
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