Finland's Universal Basic Income experiment
By Scott Sumner
Finland has begun an experiment with a universal basic income (UBI) program:
Finland has started a radical experiment: It’s giving 2,000 citizens a guaranteed income, with funds that keep flowing whether participants work or not.
The program, which kicks off this month, is one of the first efforts to test a “universal basic income.” Participants will receive €560 ($587) a month — money that is guaranteed regardless of income, wealth or employment status.
The idea is that a universal income offers workers greater security, especially as technological advances reduce the need for human labor. It will also allow unemployed people to pick up odd jobs without losing their benefits.
The initial program will run for a period of two years. Participants were randomly selected, but had to be receiving unemployment benefits or an income subsidy. The money they are paid through the program will not be taxed.
If the program is successful, it could be expanded to include all adult Finns.
The Finnish government thinks the initiative could save money in the long run. The country’s welfare system is complex and expensive to run, and simplifying it could reduce costly bureaucracy.
The change could also encourage more jobless people to look for work, because they won’t have to worry about losing unemployment benefits. Some unemployed workers currently avoid part time jobs because even a small income boost could result in their unemployment benefits being canceled.
Many free market economists favor this sort of program, partly for reasons outlined above. And it’s very possible that the program would constitute an improvement over Finland’s current welfare system. But I’d also like to offer a few words of caution.
Although I am all for evidence-based policymaking, including policy experiments, this evidence needs to be viewed with caution. For instance, consider a UBI that equaled 80% of the monthly earnings of low skilled labor. A policy experiment lasting two years might yield very different results from a permanent shift to a UBI, for two reasons. First, workers may be reluctant to give up low skilled jobs to live off the UBI, because they fear the program would end after two years, and they might not be able to get their old jobs back. Under a permanent UBI, they might quit the job and make up the 20% earnings shortfall with a bit of part time work. In that case, the UBI would increase leisure time and reduce GDP. Second, a permanent UBI would gradually lead to cultural change, which would lessen the stigma of living on “welfare”. That’s less true of a two-year experiment.
So what’s wrong with a bit of extra leisure time? If freely chosen, I have no objection. But a UBI program tends to reduce the incentive to work. There is a risk that providing an income to people who chose not to work will lead to this sort of outcome (from a Reason article describing coal country in West Virginia):
I ask FACES’ Whitt why so many young unmarried women in the county become pregnant. She sighs and notes that birth control is freely available at school. Most of the girls and women are “on medical cards” (that is, enrolled in Medicaid) that would pay for contraception as well. It doesn’t matter. “There are no consequences to pregnancy–they get immediate access to a medical card, food stamps, a check, WIC, and home visits,” she explains. “They have all the welfare benefits as long as their kids are not adopted, plus there’s no babysitting, since the grandparents will look after the kids.”
FACES organizes a Second Time Around support group for folks who are raising their grandkids or great-grandkids. It meets once per month. Slagle notes that her friend and her friend’s husband are raising two of their grandkids despite health problems. “Neither one of them is able to do it,” Slagle says. “You know, if I weren’t rooted here, I would take the kids and go.”
So why don’t people just leave? That question is actually surprisingly easy to answer: They did. After all, 80 percent of McDowell’s population, including my grandparents, cleared out of the county to seek opportunities elsewhere during the last half-century.
But as the mines mechanized and closed down, why didn’t the rest go, too? Reed, Whitt, and Slagle all more or less agree that many folks in McDowell are being bribed by government handouts to stay put and to stay poor. Drug use is the result of the demoralization that follows.
A well-constructed UBI can provide more incentive to work than our current welfare programs, which sometimes leads to implicit marginal tax rates of above 100%. But I would argue that a well-constructed wage subsidy program is even better.
In the end, it’s likely the case that a very small UBI, combined with a wage subsidy, is better than either program in isolation. That’s because a very small UBI would not stop very many people from working, but would be easier to administer than an equal size wage subsidy. So you might want to provide a minimal UBI, topped off with a more generous wage subsidy program.
I don’t know much about the Finnish economy, but $587/month sounds like it’s not high enough to cause very many people to stop working. Hence I expect the experiment will be a “success”. On the other hand, if you really wanted the UBI to replace all welfare programs, the monthly stipend would have to be much larger. And the long run impact of that sort of UBI is much less clear.
A wage subsidy tends to encourage people to work more hours. It also tends to discourage the acquisition of human capital. However, that disincentive is largely offset by massive subsidies to education at all levels of government.