Aubane Wauthier

Aubane Wauthier

Columnist

aubane.wauthier@edhec.com

Focus on Macro

Other ways have been mentioned to fight poverty and inequalities, but during the last few years, Universal Basic Income (UBI) has become a popular politician concept. When he was still minister of the Economy, Emmanuel Macron stated, “I don’t believe in egalitarianism, rather I believe in equal opportunities; and the idea of basic income or basic capital for all goes in this direction and I’m interested in this.” Universal Basic Income is discussed today as a way to fight poverty but would also affect our Labor Markets.

Rationalization of Universal Basic Income

In 2017, a Canadian province, Ontario, implemented a trial on Universal Basic Income. The purpose was to find how to end poverty and inequalities but also to reduce the complexity of the bureaucratic welfare system. For a long time UBI has been seen as a Utopia, but since 1960s and 1970s many western countries have been trying to make it real. The concept has supports from liberals and conservatives bastions even if it is perceived as a social action.

Why some conservatives support Universal Basic Income? The main reason is that the UBI can be a way to make state step out of the labor market. Classics designed our main concept of the labor market where workers are the supplies, firms are the demands and the wage is the price. This market as well as the others should work with perfect competition, meaning that nothing, especially not the state, should intervene in the market. So, by setting a minimum wage, governments affect the labor market and prevent the invisible hand to regulate disequilibrium like unemployment.  In my opinion, the labor market is more complicated than classics thought and state intervention is necessary to regulate some rational choices. For instance, it is totally rational for companies to seek for the minimum possible costs, as a consequence, the lowest wages. Today, employers have a stronger bargaining power for many reasons such as the decline in unionization, the globalization pressure or the gloomy economic situation. Workers, especially those with insecure works, have not enough power to negotiate on their own, so, state intervention is necessary to guarantee decent payments and reduce poverty. With UBI, minimum wage will lose interest because state wouldn’t have to intervene the market anymore, the intervention will take place before the entry into the labor market. It would be the end of the minimum wage. If we listen to the common opinions, UBI should advantage workers in the labor market by changing their incentives and opportunity costs. Free from the fear of precarity, workers would select only jobs with high remuneration. It would be the end of painful and precarious works, and wages would increase.

Someone says in a society, where people use the money they do not own for leisure purpose and not for basic needs, UBI will create a society full of lazy unemployed persons. I strongly disagree with this idea and find it paradoxical because when you ask people if they would stop any job and just enjoy the free cash, the answer is rarely “yes”. They often want to start their own business or be involved in more voluntary work for example. In Kenya, a 12-year experiment is carrying out on the effects of UBI in poor communities. Even if the experiment is still on process, the short-term results suggest that the majority tends to use the money for basic needs : paying for kids school fees, medicine, food or even starting a business and grow their wealth.

New understanding towards “Work” will change the way we think UBI

In western countries where basic rights such as education or health are guaranteed, how would the money be used? The main idea is that work will not be anymore an obligation but a choice. Young could pursue their studies longer, parents could stay at home and take care of their children if they want to, people can choose to have their own business, or they could be involved in artistic and social action. Should taxpayers or state fund these choices? It is less painful to pay tax when you know that they are used to projects which contribute to the society (e.g. education or road infrastructure). Paying to maintain the livelihood of a housewife or an artist, on the contrary, seems unfair. Besides, who would pay tax? Would tax be enough to maintain the system? I think UBI would always be seen as a waste if we do not change our understanding of work or at least value those activities as we value work. Why taking care of your child is not a real work when paying someone else to do so is?

Changing what we call work or including more activities could become unavoidable. Several times Elon Musk had stated that UBI would be necessary in our close future societies since automation will change dramatically our economies. It is the elder fear that robots will take our jobs. A 2018 OECD report warms us on the replacement of 66 million jobs by robots, especially in manufacturing and farming industry and some services sectors. Jobs like check-out cashiers or railway station ticket sellers are threatened, however, qualified jobs can be threatened too. Recently, Japan announced that news would be presented by a robot. Assuming that it is true and only a few human jobs will remain in our future, UBI would be a way to continue stimulating the national demand. People will still consume, and the economy will still grow.

I think the fear of automation is understandable but alarmist. First because not every job can be replaced by robots, for example healthcare workers, teachers or computer system analyst. The latest shows that the development of automation will also create new jobs. The World Economic Forum argues that 133 million jobs will be created thanks to rapid technological advance in the workplace in the next decades. Of course, not every worker who loses their jobs because of automation could be reallocated to these highly skilled jobs. So, would UBI be the solution for this part of the population?

Figure 1: At current spending levels, a basic income would be well below the poverty line

Even if we focus only on poor and people affected by automation (often the same population), one of the major concerns we can have about UBI is the way states can fund it. Indeed, to be really effective UBI need to be high enough to cover someone’s basic needs (rent, food, health) but in reality, the amounts are low, for instance in Finland it was €560. In addition, if the implementation of the UBI caused the suppression of some welfare benefits, the state should find a way to include some risk in the UBI. How can we compute people social risk? Are we going to give the same amount to everybody regardless their expose to some specific risk? The reasonable solution will be to maintain some welfare benefits and to end all the income welfare benefits. Even in this case the only UBI states would afford could not end poverty. The only UBI we can afford in reducing welfare benefits would only jeopardize the poorest. Without welfare benefits and with a low UBI, workers would have to work, it would not be a choice as expected. Besides, the minimum wage would be necessary to protect workers on the market because they will not have any market power anymore.

From experiments to reality: (quasi-)UBI system in developed and developing countries

But can we afford the UBI? It could work in rent economies (small population and the UBI is a rent) but the counterpart would be inflation (huge national demand).  Michael Bohmeyer has founded in 2017 his version of the universal income in the form of a lottery. With crowdfunding, he succeeded in financing 1000 euros per month for a year for the lucky one. It is not a means-tested minimum income system as the price is given according to a lottery wheel and even children can be designated. Last year, 85 people have benefited from the platform. This social experimentation has led him to a conclusion far from the detractors of the universal income. Those who have benefited of it, have shown motivation towards more creative activities like writing a book, activities that are not immediately profitable but that are of great importance for the society. Not only did they work more but they also did it with pleasure, less anxiety and even started training to find a new job.

In 2016, this system has seduced more than 40% of the German population. This could be the answer to poverty or the disruptions caused by the digital area. The universal income would cost three times the budget of Germany. But the cost may be worth the challenge given such effect can be provided. Such costs also need to be undermined as the country spends 8 million in social security benefits and with the UBI this kind of government spending can be redefined.

In order to afford such a system, we may need to tax the rich fairly. By implementing taxes on unearned revenues (i.e. rent, shares, inheritance) we could be able to raise the necessary amount of money. However, these taxes have decreased dramatically in the last 40 years along with the corporation tax. Reducing the corporation tax has been justified with the idea that it would be invested in the real economy, but we have seen instead that it has been delivered away in tax heavens. The Land Tax Value has been discussed a lot over the years because, not surprisingly, a significant proportion of the rent landlords collect is down to their property’s location and its relationship with infrastructure resources. For example, the transport and cultural venues that everyone has paid for. To afford the UBI, it seems that we need to completely change our perception and the way our economy works. 

The universal income is undeniably a media success but seems to fail to answer substantive issue. Its financing seems also impossible on a global scale. Even Michael Bohmeyer confesses that 20 employees take 60% of the donation. The major question of it is the choice of qualification and job that the beneficiaries will do if they are ensured having this on a lifetime basis. Who will take care of manual and hard jobs like dustman or taking care of ageing people? The defender of the universal income argues that these types of jobs will be automated in the coming years and I think that a vocational retraining toward high skills jobs can be very hard to achieve.

The idea of implementing taxes on financial markets for example is also hard to do in reality. As we live in an open economy, we have some economics and political imperatives that we already struggle to meet. For example, the GDP, which has been largely criticized is still of a great importance in our economy.

However, could this system be the solution in emerging countries? Finland is one of the rare countries where the majority of its citizen receive the universal income. The country has led a concrete experimentation which has demonstrated itself to be efficient as there are less disease or stress and students are graduating with a higher probability under the system. Canada has done the same thing for 5 years, with the same positive result. But what can the UBI achieves in emerging countries?

There are two common arguments for the adoption of a UBI. It can be a more effective way of supporting low-income households when existing safety net programs are inefficient, and it can generate broad support for structural reforms.

In 1997, the Targeted Public Distribution System (TPDS) was implemented in India. The states had to implement effective arrangements for the partitioning of households above and below the poverty line. The household above-poverty-line card had lower quantities of subsidized food than those who were below-poverty-line. In terms of coverage, targeting households and progressivity we can compare the performance of the UBI and the TPDS. A UBI would outperform the TPDS program in terms of coverage as it covers all households. However, improved coverage under the UBI comes at the expense of a slight deterioration in benefit and generosity at the bottom (due to greater  leakage of benefits to top income groups). A UBI would leave benefits’ progressivity virtually unchanged. The losses for some households could be further reduced by relaxing the objective of universality by somehow excluding the top income groups from the UBI.

In India, energy subsidies are a very inefficient way of providing income support to the poor. Richer households benefit disproportionately from these subsidies reflecting the high underlying income inequality and the fact that they consume a relatively high share of total energy consumed: while households in the bottom four income deciles receive a lower percentage of total energy subsidies. Replacing these subsidies with a UBI in a budget neutral way would therefore result in a substantial redistribution of benefits from higher to lower income groups and a substantial increase in benefit generosity for lower income groups.

Conclusion

Against the argument that this popular concept creates a disincentive to work, we think that UBI could be an answer in the future with the automation for example. However, its price could be prohibitive, and its benefit restricted even in emerging countries.I further consider that the economic variations (both the up and down side) would prove less intense as we move forward. Economic cycles are losing momentum since the end of the 20th century as we converge towards what economists refer to as « secular stagnation »: a post-Industrial era of flat growth where the norm is 0.1 or 0.2 growth rate.

Sources:
  • The Financial Times, OECD, The Guardian, Bloomberg, The New York Times,

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