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a blog from young economists at Nova SBE

The Universal Basic Income

The Universal Basic Income (UBI) has been gaining ground on the political and economic debates. It consists of a welfare program that would provide, to every citizen (regardless of their working status or previous incomes) a fixed amount of money.
The supporters of the UBI argue that this program could be a solution to the automation of the job market, would decrease stress levels in society and poverty. On the other hand, the critics point out that this program would have a tremendous cost, which would require an increase in taxes, and, as a consequence, the poverty level would increase, as reported by the OECD. Critics also highlight that this program is incentivizing workers to drop their jobs.
This discussion is still very theoretical, but some studies have already been developed regarding the consequences of implementing this policy. One of these is the field experiment in Finland. This field experiment began in January of 2017 and consists of 2000 unemployed workers, randomly selected, being awarded €560 every month, for 2 years, even if they get a job in the meantime. These transfers replace their previous unemployment insurance. The earliest results have already come out, but we should be careful when analysing them since the short period of implementation of the program doesn’t guarantee that the results are reliable.
According to the results, the stress level of the agents and the unemployment rate decreased. The first result can be explained by the fact that the unemployed don’t need to worry with the bureaucracy that is associated with the unemployment insurance. The second is explained by the fact that the unemployed lose their insurance if they receive an additional form of payment. Since the UBI doesn’t depend on the working status, the agents are more likely to accept jobs (even if the wages are low) or create their own small business.
These results seem to indicate that the UBI would bring positive impact in the economy. In addition, a report by the Roosevelt Institute (USA) has predicted that a flat transfer of 1000$ to every citizen would increase the GDP by at least 12.56%. Yet, we must take into consideration that both studies don’t account the impact of a significant increase in taxes, in order to finance the UBI. In fact, the Roosevelt report even assumes that taxes don’t influence the consumer’s options, which is not a reasonable assumption. Therefore, the positive results of these studies don’t reflect exactly the true impact of the UBI.
Overall, we can predict that the UBI will be a hot topic in the near future. On one hand, this program might be the solution for an increasingly automated world. On the other hand, the costs of the program would probably have a negative impact, especially on poor households, since the increase in taxes would affect them more severely. It is crucial that policy-makers bear in mind all the facts in order to decide on the best course regarding this program.

Diogo Leitão, MSc in Economics

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Author: studentnovasbe

Master student in Nova Sbe

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