Nova workboard

a blog from young economists at Nova SBE

Minimum Guaranteed Income – Theory put to practice

In the academic course of economics, the feeling of being trapped in the mathematical web of theoretical models is not uncommon. Even as the plot thickens, some may still crave to directly apply knowledge and tools so as to see how the world would naturally respond to our actions. Luckily, there exist rewarding subjects relying almost solely on real life decisions and policies and on the analysis of their consequences – namely Public Economics, the study of government policy and intervention. On this subject, one may want to shift their focus to the branch of Public Finance and analyze the public sector and the government role and its decisions and policies, with their real life results. This is, therefore, an area of study easily transposable to the real life framework and it is somewhat interesting to observe current events relating to this subject.

 

Such examples of social intervention are Minimum Guaranteed Income (MGI) plans. Common traits of an extensive list of countries, these social plans are one of many existing approaches to fight poverty, aiming for equity. Their strategy consists of drawing an income threshold (a poverty line, so to speak) below which an individual qualifies to receive the monetary difference between their current income and the established threshold.  The ongoing debate, however, sheds a very unflattering light on these programs, as they may provide perverse incentives for labor participation; when dealing with a MGI plan, both economic theory and empiric evidence suggest that the design of the strategy may drive the beneficiaries away from the labor market.

 Image

As depicted in the above graph, establishing a MGI policy leads families living below the threshold line to completely withdraw themselves from the labor market. It becomes then necessary to take action and reverse the incentives, by lowering the threshold, impose conditions upon which the candidates become eligible or establishing earnings disregard policies, which lower the implicit tax rate on earnings.

The Portuguese Rendimento Social de Inserção (RSI), akin to similar minimum guaranteed income policies, provides a real life example of such measures. As of February of 2013 the threshold below which individuals qualify to receive aid has been lowered, a situation that has been occurring for the past years. The underlying reasons for this refer to budget deficit control and reduction in public expenditure; nevertheless, it is important to note that these changes are prone to affect the number of beneficiaries, as well as the labor participation.

 

It is, of course, not enough to rely on economic theory alone, or expect empirical evidence to easily provide all the answers, but it is nonetheless interesting to observe the theory coming to life and the economic tools being put to practice. Even in simple cases.

 

Carla Ferreira #636

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.