In Portugal, the RSI (“Social Insertion Income”) is the equivalent of the US’ TANF program; it “(was) created to support people and families who are in a situation of serious economic distress and at risk of social exclusion”.
The RSI consists in a financial aid of €173 for the beneficiary, €89,07 for each “full age” individual and €53,44 for each minor (for these two the source is older). To calculate the value to receive, only 80% of the revenues (from dependent work) are considered.
Taking an individual aggregate in consideration (the reasoning is equivalent for different family structures), we can see that no one (the purpose of gaining experience may change this) will accept any job if it gives less than €173, since the implicit tax rate is 100%. Accepting a job that offers a salary amongst €173 and €216,25 (80% of it is €173) is a feasible option, since with an implicit tax rate of 80% there is some incentive to work; accepting a job that offers a salary larger than €216,25 is also an option, now with a zero (simplifying assumption) implicit tax rate. We can see that there’s an attempt to join both social justice and some incentives to work. We can now ask: are these values suitable, should they have other values? It’s a hard question and it depends on what our aims are.
In the last few years, the financial aid has been considerably reduced: the maximum aid for families, e.g., has been reduced from €569 in 2010 to €374 in 2013. This fall of almost 35% in the value is related with the austerity measures, but I risk saying that this high cut is also explained by the conviction that the value that was given was too big because it created bad incentives, that were higher valued than the “social improvements” they gave. While not denying that these bad incentives may occur, I think that two essential things are not being considered: the role of the RSI in order to guarantee the respect of the legal minimum wage and its role as a booster of wages. They are both correlated: people are less desperate to get a job at (almost) no matter which wage, what obliges employers to raise wages. It leads to an ideological discussion, amongst those who state that the labour market usually works properly (increasing wages will lead to unemployment) and those who think that there are asymmetries of power that justify, at least, some intervention. For the lasts, I think an approach as the “employer of last resort” (see the Argentine experience) adds efficiency to the solution, since the previously unutilized labour force is now creating value.
Economic analysis helps deciding which measures to take by trying to predict agent’s behaviour, as it is the case. But, in the end, the pros and cons should be measured in a normative way: at this point, it’s politics, no longer economics, we are talking about.
Samuel Cardoso, 624