“The concept of Universal Basic Income has gained traction among some politicians and interest groups,” says Dr Christopher Rauh, Assistant Professor at the Faculty of Economics. “But the question is, how effective would it be?”
In the working paper ‘How do transfers and universal basic income impact the labour market and inequality?’ Christopher Rauh from the University of Cambridge and Marcelo Santos from INSPER show that for an economy without unemployment insurance, income inequality first falls slightly for low levels of Universal Basic Income (UBI) and then increases as UBI becomes more generous.
The research indicates that existing transfers to poorer households help buffer economic shocks but result in the poor being less inclined to look for a job or to save. “Quite simply, if the unemployed receive transfers, they can cope better when things go wrong. Unfortunately, under the existing framework a proportion may be less likely to look for employment.”
In 2017 the United States spent nearly 2 trillion USD on means-tested transfer programs, and most of these transfers go to poor households. “Given the magnitude, transfer programs are likely to have first-order effects on labor supply, inequality, and savings,” he says. “A key concern about transfers is the potential disincentive to search for work, especially at the bottom of the income distribution.”
Few government programs are as controversial as those designed to aid the poor, including Food Stamp programs in the US, housing programs, and other means-tested programs that ‘transfer’ money from richer to poorer, such as the Medicaid program, the Earned Income Tax Credit scheme, and the Supplemental Security Income Program, in the United States.
Dr Rauh has modeled the impact of existing transfers and what the impact would be of abandoning them. “Of course, there are negative effects on welfare. On the other hand, removing transfers boosts the economy but leaves the average person worse off due to the extremely low consumption associated with unemployment.”
Universal Basic Income has become a much-discussed policy option with little real world evidence to draw from. “We simulated an economy in which we withdraw all existing transfer programs and replace them with different levels of UBI. When paired with unemployment insurance, we find that economic activity across all dimensions drops rapidly as the level of UBI increases,” he says. However, when removing unemployment insurance as well, economic activity flourishes as there is no penalty from taking up a job. This also makes it more attractive for employers to search for workers.
“UBI is costly for university graduates, who have to finance a large share of the assured flow of cash to society as a whole. Gains in welfare are heavily concentrated amongst the less educated and the unemployed. Nevertheless, overall economic output would actually be slightly higher than if it was not introduced.”
The full paper is available at: https://www.econ.cam.ac.uk/research/cwpe-abstracts?cwpe=2208
