Analyzing a Universal Basic Income

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Is a universal basic income better than unemployment insurance?

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In light of the Great Recession’s lingering impact on unemployment, policy pundits have suggested replacing existing unemployment insurance with a guaranteed, universal system that ensures everyone has a basic level of income. A recently released academic paper, however, disputes these suggestions, finding that unemployment insurance works better as a social safety net than a universal income scheme.

Under a universal basic income scheme, all residents in a country, regardless of their financial situation, would receive a flat, monthly income from the government. Theoretically, such a scheme would provide a minimum standard of living for all residents. Pundits have proposed a universal basic income as an alternative or supplement to unemployment insurance.

In their recent paper, Alice Fabre, Stéphane Pallage, and Christian Zimmermann acknowledge that a universal basic income program would be easier to apply, but they argue that unemployment insurance works better because it can tailor benefits to those most in need, rather than to all citizens, thus minimizing distortions to the economy.

The authors also tested a combined system including both unemployment insurance and a universal basic income. Even in this system, however, the authors noted that the optimal structure consisted of only unemployment insurance. Its ability to target only the unemployed trumped any amount of reduction in administrative costs that a universal basic income program could provide.

Fabre and her colleagues note that if universal basic income levels are too large this could increase voluntary unemployment. According to their analysis, a payment of 2.25% of a worker’s income, or about $2,000, would best balance the tradeoff between increasing welfare and increasing voluntary unemployment. The authors note that the payment should never be too generous because the resulting voluntary unemployment would greatly cut into the tax revenue needed to sustain the program.

Existing unemployment insurance programs are not perfect, the authors recognize. The administrative costs of monitoring who gets unemployment insurance are substantial. In addition, unemployment insurance creates economic distortion through the taxation needed to fund it and in potentially creating a disincentive to seeking employment.

The authors explain that their paper does not claim to be definitive word on how well all universal basic income systems would work. For example, they note that their study is only one model of how universal basic income systems compare to unemployment insurance and that many variations exist for structuring a universal basic income. However, the authors state their skepticism that industrialized countries could beneficially transition to universal basic income systems.

Some countries have already considered a universal basic income as an alternative to unemployment insurance. Canada experimented in the 1970s with a universal basic income project, called Mincome. More recently, a proposed referendum in Switzerland would guarantee 30,000 Swiss francs (or about $34,000) for each citizen. India is currently testing a universal basic income program in some of its rural communities, which appears to some observers to be having good results.

In the United States, a few state governments have considered similar programs. While not called universal basic income, Alaska currently pays a yearly dividend from the Alaska Permanent Fund to all inhabitants who have lived there for more than one year, including children but excluding those convicted of a felony during the current year. This year’s payment is for $1,884 and is scheduled for December 18th.

The U.S. Department of Labor oversees current unemployment insurance in the United States, although the states administer these programs. States have capped how long individuals can collect unemployment insurance, although the federal government repeated extended the maximum number of weeks during the Great Recession.