Thursday, 30 August 2018

Ontario follows Finland's lead in dropping its universal basic income pilot

Back in May, I wrote a post about Finland cancelling its universal basic income experiment. However, I totally missed the news earlier this month that Ontario was also cancelling its basic income pilot (a point that was raised in one of the presentations in the basic income session at the European Regional Science Association congress, where I am this week). As reported in Business Insider:
Anger and outrage, shock and betrayal: Those were some of the raw emotions after one of the world's largest basic-income experiments was suddenly canceled.
Earlier this week, Doug Ford, the conservative new premier of Ontario, Canada, pulled the rug out from under the experiment, which provided 4,000 people living at or near the poverty line with a stipend.
Ford's government hasn't publicly said much about its reasoning for canceling the program, other than claiming it disincentivizes recipients from finding work...
It lasted only one year, despite Ford's campaign promise to keep the pilot project funded...
"When you're encouraging people to accept money without strings attached, it really doesn't send the message that I think our ministry and our government wants to send," Lisa Macleod, Ontario's minister of children, community, and social services, told reporters this week. "We want to get people back on track and be productive members of society where that's possible." 
This is very similar to the argument behind the cancelling of Finland's basic income experiment, as I noted back in May. Why does a basic income create a disincentive for low-income work? Consider the model of the worker's decision in the diagram below. The worker has limited time (E) that they can allocate to work (and earn income, for consumption, measured on the y-axis) and leisure (measured on the x-axis). The straight line constraint represents the trade-off between consumption and leisure, and has a slope equal to the wage (actually, -w, because it is downward sloping). The highest possible indifference curve the worker can get to is I0, and the optimal bundle of consumption and leisure is E0 (which includes C0 consumption, and L0 leisure (and E-L0 work)).

What happens when you introduce a universal basic income? Since the worker doesn't need to spend time working in order to claim the universal basic income, this simply shifts the constraint upwards by the amount of the basic income (U). The worker can now reach a higher indifference curve (I1), and their optimal bundle of consumption and leisure is now E1, which includes both more consumption (C1) and more leisure (L1). More leisure means less time spent working (because (E-L1) is smaller than (E-L0)). The introduction of the universal basic income decreases work incentives. This might manifest at the extensive margin (some people who were previously working for a low wage decide to stop working entirely), or at the intensive margin (some people choose to work a little bit less).

Would a basic income increase work incentives? It seems unlikely, unless leisure has suddenly become an inferior good (a good that people prefer to consume less of when their income increases).

Could a basic income remove barriers to work? Perhaps if there are credit constraints to obtaining work, as the Business Insider article notes:
"It is kind of hard to find a job when you are struggling for food and you don't have money to keep your phone active and it goes down out of service," she said. "You can't afford to buy job clothing. You can't even do laundry to wash job-interview clothing."
On a basic income, Baltzer could eat healthier, buy clothes, go to the gym, do laundry, and afford phone and internet service to communicate with potential employers, she said.
However, credit constraints are unlikely to be binding for all non-workers, and it is entirely consistent for a basic income to both remove barriers to work for some people and reduce work incentives for other people. The proponents and critics of basic income are simply talking past each other.

A universal basic income remains a promising idea that is very difficult to implement politically. Ultimately, it is only realistic if taxpayers (and politicians) can make peace with the work disincentives that it will generate.

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