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a blog from young economists at Nova SBE

Unconditional basic income: More harm than good?


What would you do if you were guaranteed a fixed amount per month in addition to your wage and regardless of your working situation? You would have to think about this question if an Unconditional Basic Income was approved in your country. But, what is that? Basically, an Unconditional Basic Income (UBI) “is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways: it is being paid to individuals rather than households; it is paid irrespective of any income from other sources; it is paid without requiring the performance of any work or the willingness to accept a job if offered” (Basic Income Earth Network, BIEN). Looking at the BIEN definition it would be reasonable to claim that intuitively the majority of the people would prefer this type of system instead of receiving, for instance an unemployment benefit because, besides other facts, the search for a job is not required. However, one needs to be careful when judging the UBI. A discussion on some of the relevant arguments that play a role in the debate of the UBI follows.

Many claim that the discussion about UBI had a great impact in recent years because there is an inability to fight unemployment using conventional means. Therefore, will UBI actually fight unemployment? First of all, the UBI can have some consequences, namely disincentive work and affect labor supply. Thinking about the well-known income effect (i. e. the fact that the additional income provided by the UBI can influence the number of working hours), individuals may prefer to spend their additional income on more leisure and thereby decreasing working hours instead of continuing to work the same number of hours. Furthermore, the degree of desincentive to work is influenced by the generousity of the income, which means that it is expected that the higher the income, the higher the desincentive to complement it with a wage. Indeed, an experiment has been made in Canada („Mincome“, experimental guaranteed income program between 1974 and 1979) and this has shown that total working hours fell by 5% on average, thereby supportting the theory.

On the other hand, UBI has the potential to enhance entrepeneurialism by giving individuals the opportunity to start a small business. This fact would partially contradict the desincentive to work argument. What is important to highlight here is that entrepeneurialism would increase economic activity. Such conclusions are supported by the Namibian pilot project implemented in 2008 and 2009 in the Omitara village.

Second of all, there is a welfare effect. Now, if one thinks about who will gain and who will lose with UBI, one needs to distinguish between three types of individuals: the unemployed, the individuals who don’t like their jobs and the individuals who have good labor market perspectives. The effect on the first group will depend on the difference between UBI level and the level of unemployment benefit. Individuals will be able to increase their earnings with UBI only if the UBI is greater than the level of unemployment benefit. Otherwise, individuals with high wages (i.e. „high“ unemployment benefit) will lose with UBI (assuming here that UBI<unemployment benefit). The effect on this group and particularly on the individuals that have high wages is further influenced by the duration of the unemployment benefit. The lower the duration of the unemployment benefit, the higher the positive effect of UBI. The second group will more easily quit the labor market since they have an income they can live with until they find a job they like more. The last group will probably lose their non-monetary compensations. So, a Pareto improvement is only likely to happen under specific assumptions. Moreover, individuals, particularly women, taking care of children or elderly people, would benefit more from UBI since they would receive an income.

Finally, UBI would also influence wage levels. Thinking about the fact that individuals can leave their jobs more easily, employment in less attractive fields may suffer. Firms in these fields may have to increase their wages and, in contrast to this situation, firms with attractive job offers may be able to decrease their wages.

In conclusion, a quick economic analysis of the UBI allows the evaluation of some costs and benefits of this measure. In general, one can state that UBI has both negative and positive employment effects and that identifying winners and losers of the UBI depends both on the individual‘s employment situation and on the type of job the individuals currently has. It is also reasonable to claim that the effects of the UBI are different among countries as both mentioned experiments have shown. Therefore, the effect of this type of income is ambiguous.

Joana Samagaio, 755


Author: studentnovasbe

Master student in Nova Sbe

2 thoughts on “Unconditional basic income: More harm than good?

  1. Pingback: Group Health Insurance And Exclusions | AnjumsList

  2. so, what should we do about it? are you in favour of having this sort of instrument, or not? can it be welfare improving despite (potential) adverse effects on employment?