Universal Basic Income

Earlier this month, Finland became the first European country to offer its unemployed citizens a monthly unconditional income of €560 as part of a two-year pilot program aiming to reduce poverty and unemployment.[1] Similarly, the councils of Fife and Glasgow in Scotland[2] piloted analogous programs this year, while similar universal basic income (UBI) schemes can also be found in Canada[3] and Silicon Valley.[4]

The UBI concept works on the premise that individuals are guaranteed a minimum regular payment unconditionally. Although not new in its inception, the recent resurface of UBI is underpinned by significant advancements in the automation of the production process, which, according to UBI proponents, are likely to severely impede labour market security and stability. To this end, advocates of UBI schemes point to the fact that in 2014 alone, robotics sales rose by 29 per cent, the highest year-on-year increase ever, being mainly driven by automotive parts suppliers and the electrical/electronics industry. Similarly, annual robotics patent filings have tripled over the last decade.[5]

Confronted with the above trends, the reasoning behind UBI in Finland was that the incumbent social security system, designed for an industrial society, has become dysfunctional and complex, leading to severe poverty traps. Moreover, the UBI is suggested by its proponents to have the potential to increase incentives to self-employ or take low-wage jobs.[6] Thus, an important question that needs to be assessed is whether a UBI could become a viable alternative to social security systems.

Overall, historical precedents[7] of the application of UBI point to two positive effects:

• welfare benefits — i.e. improved nutrition, health and schooling.[8]
• equity benefits — the UBI helped more the disabled, women and scheduled caste households by enhancing their relative bargaining position in the household. [9]

It is therefore not surprising that advocates of such schemes – irrespective of political beliefs – argue that a UBI would:

• support those who contribute societal value which cannot be priced (e.g. the positive externalities produced by street artists);
• help the poor bypass the vicious and often bureaucratic procedures of the welfare state (and/or private borrowing) that can entrap them in long-lasting poverty;
• incentivise young people to not solely study lucrative subjects but rather follow careers of their true liking; and
• restore people’s economic stability against disruptive innovations/novel business models that are already manifesting today (e.g. the sharing economy), limiting unions’ capacity to protect workers.

However, as UBI concepts have returned, so has resistance from both the right and the left side of the political spectrum. In particular, opponents of UBI systems point to:

• the infeasibility of financing such schemes without severely damaging the private sector;
• UBI potentially resulting in considerable inflationary pressures;
• the negative effects of a potential deterioration of work incentives on productivity.
• the existing ambiguity over the economic benefits of UBI is rather mixed. On the one hand, some evidence from experimental studies suggests that UBI might have positive effects on labour supply. Microsimulation studies, on the other hand, suggest that the UBI might reduce labour supply due to the income effect of the transfer and the substitution effect of the higher taxes needed to finance the transfer.[10]
• the potential weakening of ongoing efforts to improve working conditions;
• the possible erosion of existing collective-bargaining rights and of the welfare state;
• potential passive citizenship behaviours that may manifest.

Overall, UBI is a radical social program aiming to subsidise new technologies and become a “consolation prize” for those whose lives have been severely affected. Nevertheless, several issues remain as imposing a UBI should not be perceived as a panacea to the symptoms of economic inequality, or technological progress. While funding UBI is still under heated debate,[11] it is not the sole aspect of such schemes that is still amidst disagreement and controversy. As empirical work on the effects (mainly economic) of UBI is rather scarce, more research is needed, particularly on the impact of the pilot programs currently being instigated, in order to draw safe and robust conclusions as to whether UBI could one day become a viable policy scheme.

[1] See http://www.independent.co.uk/news/world/europe/finland-universal-basic-income-pilot-ubi-560-euros-a-month-helsinki-poverty-unemployment-a7506696.html

[2] See http://www.independent.co.uk/news/uk/home-news/scotland-pilot-universal-basic-income-ubi-snp-fife-and-glasgow-scheme-a7505411.html

[3] See http://www.independent.co.uk/news/world/americas/canda-universal-basic-income-prince-edward-island-pilot-programme-a7462916.html

[4] See https://www.theguardian.com/technology/2016/jun/22/silicon-valley-universal-basic-income-y-combinator

[5] See European Parliament (2016) “Draft report with recommendations to the Commission on Civil Law Rules on Robotics”.

[6] Proponents of UBI argue that a guaranteed basic income constitutes a safety loading beyond which individuals’ earned income can be taxed at the standard rate of tax. That would increase the incentive to take low-wage jobs by disincentivising people to prefer to remain dependent on welfare programs due to low-paid work causing little increases in overall income. See http://basicincome.org/bien/pdf/munich2012/parncutt.pdf

[7] These include an experiment in the Canadian town of Dauphin and several negative income tax experiments in the US also in the 1970s and, more recently similar experiments have been conducted in Namibia and India.

[8] See, Forget, E. (2011) “The Town with No Poverty: The Health Effects of a Canadian Guaranteed Annual Income Field Experiment” Canadian Public Policy Vol 37, No 3, p.283-305.

[9] See http://isa-global-dialogue.net/indias-great-experiment-the-transformative-potential-of-basic-income-grants/

[10] Seehttp://wol.iza.org/articles/is-unconditional-basic-income-viable-alternative-to-other-social-welfare-measures/long

[11] Current proposals include replacing existing welfare schemes, taxation and returns on capital.

Article written by Europe-Economics