Why the effects of a guaranteed income on income and employment in Texas and Illinois shouldn't surprise us

The idea of a universal basic income (sometimes called an income guarantee) has gathered a lot of interest over recent years, particularly as fears of job losses to artificial intelligence have risen. The underlying idea is simple. Government makes a regular payment to all citizens (so it's universal) large enough to cover their basic needs (so it's a basic income). However, other than a number of pilot projects, no country has yet fully implemented a universal basic income (UBI), and many have apparently changed their minds after a pilot (see here and here). There are a couple of reasons for that. First, obviously, is the cost. A basic income of just $100 per week for all New Zealanders would cost about $26 billion per year. That would increase the government budget by about 14 percent [*]. And $100 is not a basic income, because no one is going to be able to live on such a paltry amount. Second, there are worries about the incentive effects of a universal basic income. When workers can receive money from the government for doing nothing (because it's universal), will they work less, offsetting some (if not all) of the additional income from the UBI?

That brings me to this NBER working paper by Eva Vivalt (University of Toronto) and co-authors. The paper was originally published back in 2024, and received quite a bit of coverage then (for examples from the media, see here and here), but has been revised since (and I read the September 2025 revision). Vivalt et al. evaluate the impact of two large guaranteed income programmes in north central Texas (including Dallas) and northern Illinois (including Chicago), both of which were implemented by local non-profit organisations (with the programmes funded by OpenResearch, founded by OpenAI CEO Sam Altman). These are not quite UBIs of course, because they weren't available to everyone. Nevertheless, they do help us to understand the incentive effects that could apply to a UBI. Like many would hope a UBI would be (ignoring the immense fiscal cost), the programmes were quite generous (for those in the treatment group, at least) and:

...distributed $1,000 per month for three years to 1,000 low-income individuals randomized into the treatment group. 2,000 participants were randomly assigned to receive $50 per month as the control group.

Vivalt et al. look at the impacts on employment and other related outcomes. There is a huge amount of detail in the paper, so I'm just going to look at some of the highlights. In terms of the overall effect, they find that:

...total individual income excluding the transfers fell by about $1,800 per year relative to the control group, with these effects growing over the course of the study.

So, people receiving the UBI received less income (excluding the UBI - their income increased once you consider the UBI plus their other income). In terms of employment:

The program caused a 3.9 percentage point reduction in the extensive margin of labor supply and a 1-2 hours/week reduction in labor hours for participants. The estimates of the effects of cash on income and labor hours represent an approximately 5-6% decline relative to the control group mean.

People responded to receiving a UBI by working less, just as many of those who had concerns about the incentive effects of a UBI feared. However, the negative incentives also extended to others in the household:

Interestingly, partners and other adults in the household seem to change their labor supply by about as much as participants. For every one dollar received, total household income excluding the transfers fell by around 29 cents, and total individual income fell by around 16 cents.

So, although households received $1000 extra per month from the UBI, their income only increased by $710 on average, because the person receiving the UBI, and other adults in the household, worked less on average. What were they doing with their extra time? Vivalt et al. use American Time Use Survey data, and find that:

Treated participants primarily use the time gained through working less to increase leisure, also increasing time spent on driving or other transportation and finances, though the effects are modest in magnitude. We can reject even small changes in several other specific categories of time use that could be important for gauging the policy effects of an unearned cash transfer, such as time spent on childcare, exercising, searching for a job, or time spent on self improvement.

So, people spend more time on leisure. Do they upgrade to better jobs, which is what some people claim would happen (because the UBI would give people the freedom to spend more time searching for a better job match)? Or do they invest in more education, or start their own business? It appears not, as:

...we find no substantive changes in any dimension of quality of employment and can rule out even small improvements, rejecting improvements in the index of more than 0.022 standard deviations and increases in wages of more than 60 cents. We find that those in the treatment group have more interest in entrepreneurial activities and are willing to take more financial risks, but the coefficient on whether a participant started a business is close to 0 and not statistically significant. Using data from the National Student Clearinghouse on post-secondary education, we see no significant impacts overall but some suggestive evidence that younger individuals may pursue more education as a result of the transfers...

Some people have concluded that the results show that a guaranteed income or UBI is a bad policy. However, the guaranteed income did increase incomes (including transfers) overall and therefore makes people on average better off financially. Leisure time is an important component of our wellbeing, so we shouldn't necessarily consider more leisure time a bad outcome for a policy. In fact, Vivalt et al. also find that on average the guaranteed income increases subjective wellbeing on average (but only in the first year, after which subjective wellbeing returns to baseline). 

The results should have surprised anyone. They are consistent with a simple model of the labour-leisure tradeoff that I cover in my ECONS101 class. The model (of the worker's decision) is outlined in the diagram below. The worker's decision is constrained by the amount of discretionary time available to them. Let's call this their time endowment, E. If they spent every hour of discretionary time on leisure, they would have E hours of leisure, but zero income. That is one end point of the worker's budget constraint, on the x-axis. The x-axis measures leisure time from left to right, but that means that it also measures work time (from right to left, because each one hour less leisure means one hour more of work). The difference between E and the number of leisure hours is the number of work hours. Next, if the worker spent every hour working, they would have zero leisure, but would have an income equal to W0*E (the wage, W0, multiplied by the whole time endowment, E). That is the other end point of the worker's budget constraint, on the y-axis. The worker's budget constraint joins up those two points, and has a slope that is equal to the wage (more correctly, it is equal to -W0, and it is negative because the budget constraint is downward sloping). The slope of the budget constraint represents the opportunity cost of leisure. Every hour the worker spends on leisure, they give up the wage of W0. Now, we represent the worker's preferences over leisure and consumption by indifference curves. The worker is trying to maximise their utility, which means that they are trying to get to the highest possible indifference curve that they can, while remaining within their budget constraint. The highest indifference curve they can reach on our diagram is I0. The worker's optimum is the bundle of leisure and consumption where their highest indifference curve meets the budget constraint. This is the bundle A, which contains leisure of L0 (and work hours equal to [E-L0]), and consumption of C0.

Now, consider what happens when the worker receives a UBI. This is shown in the diagram below. At each level of leisure (and work), their income (and therefore consumption) is higher. That shifts the budget constraint up vertically by the amount of the UBI. If the worker spends no time at all working, they now have consumption of U, instead of zero, and if they spend all of their time working (and have no leisure) their consumption would be W0*E+U. The worker can now reach a higher indifference curve (I1). Their new optimal bundle of leisure and consumption is B, which contains leisure of L1 (and work hours equal to [E-L1]), and consumption of C1. Notice that the worker now consumes more leisure and more consumption as well. Because leisure has increased, that means that the number of work hours has decreased. The increase in leisure, decrease in work hours, and increase in income overall (when the UBI is included), are consistent with what Vivalt et al. found.

So, based on a simple model of the labour-leisure tradeoff, the results of this guaranteed income programme are not surprising. We should have expected a reduction in work, and a reduction in labour income, and that's what Vivalt et al. found. The question policymakers are left with is whether a large income transfer like this is worth it for government, if each $1000 transferred increases incomes by just $710 on average.

[HT: Marginal Revolution, back in 2024]

*****

[*] Of course, if other welfare payments were scrapped in favour of a universal basic income, then the net cost would be lower. Nevertheless, the point that the cost is very high still stands.

Loneliness, income, and unemployment in the time of COVID-19

When your public policy hammer of choice is a universal basic income, every social problem looks like a nail. At least, that's what I thought when I heard this story on Radio New Zealand this morning:

People on low incomes were more likely to suffer high levels of loneliness during lockdown.

The report 'Alone Together', published by the Helen Clark Foundation and consultancy firm WSP reveals the Covid-19 lockdown exacerbated the risks of loneliness, especially for those who had no work.

The report recommends everyone has access to a guaranteed minimum income, high speed internet and mental health support.

You could be forgiven for wondering, if loneliness is the problem, then a first order solution is not a guaranteed minimum income, but guaranteed minimum friends. Yes, the government should start an automatic match-making service to ensure that every person has many high-quality friends and therefore won't be lonely. There is no doubt a missed opportunity there.

On a more serious note, the report itself is available here, and indeed it does show that people on low incomes are lonelier. It finds this using data from the 2018 General Social Survey. However, it also says that:

It is striking how closely loneliness was linked to employment status and household income. The group most likely overall to report feeling lonely in 2018 were people who were unemployed.

If unemployment is a bigger issue than income (and it is: 7.2 percent of unemployed people report being lonely most or all of the time, compared with 6.1 percent of those in the lowest (under $30,000 per year) income bracket). So, based on that alone it would make more sense to advocate for a jobs guarantee, rather than a guaranteed minimum income. However, the report misses that obvious solution and doesn't mention it at all.

There are broader problems with the report though. Essentially the report assumes causal relationships, when all it is showing is correlation. People with low incomes may be lonelier, but that doesn't mean that raising their income will reduce loneliness. Maybe their income is low, and they are lonely, because they are unemployed. Even with a higher income, they would still be unemployed and lonely. Understanding the causal relationships is important in order to identify the appropriate policy (whether that be a guaranteed minimum income, a jobs guarantee, or something else).

Surprisingly, given that the report is subtitled "The risks of loneliness in Aotearoa New Zealand following Covid-19 and how public policy can help", the report mostly uses data from the 2018 General Social Survey. It does have a section where they report some survey data collected by Kate Prickett and others at Victoria University. In that section, they show that the survey data demonstrates higher levels of loneliness for the high-loneliness groups - for example:

...20 percent of those with household incomes under $30,000 reported feeling lonely most or all of the time, compared with 6.1 percent in 2018. Unemployment remained a risk factor, with 19.2 percent of those who lost their job as a result of Covid-19 reporting feeling lonely most or all of the time during the lockdown.

However, they don't report the equivalent changes in loneliness for other groups. So, we have no way of knowing whether the higher lockdown loneliness for the unemployed is greater than or less than that for the employed.

Finally, focusing additional resources on mental health was relegated to the sixth (and last) of the recommendations. I thought that was interesting. That would seem to me to be the most obvious solution, especially based on the data in this report.

Anyway, this report tells us which groups are lonely, but doesn't really help us to understand why. And without knowing why, it is difficult to identify the correct policies. At least with more resources devoted to mental health, you can feel like there will be improvements not just in loneliness, but in mental health and wellbeing more generally.

Considering a universal basic income

With the economic carnage caused by the lockdown response to the coronavirus crisis, and most governments responding with a much more generous social safety net, many people are wondering about whether it is time to seriously consider a universal basic income (for example, see here and here). However, before we get ahead of ourselves, we need to consider what adopting a universal basic income (UBI) would mean, and what we already know from the limited experiments that have been undertaken so far in developed countries.

In a 2019 article (open access) published in the journal Annual Review of Economics, Hilary Hoynes and Jesse Rothstein (both University of California, Berkeley) do an excellent job of reviewing the academic literature on UBI. The start with the obvious - what is a universal basic income? It seems like an obvious question, but it turns out that when people talk about UBI, they often mean different things. Hoynes and Rothstein note three features of a canonical UBI:

1. It provides a sufficiently generous cash benefit to live on, without other earnings.

2. It does not phase out or phases out only slowly as earnings rise.

3. It is available to a large proportion of the population, rather than being targeted to a particular subset (e.g., single mothers).

It turns out that a lot of UBI proposals depart from this ideal, especially in terms of the first feature (by keeping the payments small, in order to manage the total cost), or the third feature (by limiting who is eligible).

Hoynes and Rothstein then go on to outline the arguments in favour of a UBI, of which there are three main ones:

One motivation commonly offered for adopting a UBI is that the labor market is not delivering, or is not expected to deliver, adequate growth of wages and earnings for the lower portion of the income distribution. This is sometimes presented as the “robots are coming” argument...

A distinct argument for a UBI is that it could replace the current patchwork of transfer programs in the United States, thereby avoiding the high cumulative marginal tax rates implicit in many existing poverty programs, such as cash welfare... According to some, a UBI would radically simplify the transfer system, reducing perverse incentives while still ensuring a minimum level of income for those who are truly unable to work...

...a UBI represents a more comprehensive and politically defensible safety net [than the current patchwork system], one that reaches all of the needy and not just a demographically targeted subset... They argue that a more universalist approach would also reduce the stigma of program participation, simplify cumbersome application processes, and possibly move the conversation away from assessments of the deservingness of the poor...

In the current crisis, the first argument for a UBI becomes overwhelming, but not for the reasons originally proposed. If the labour market is unable to deliver wages at all due to a lockdown, then that makes the case for a UBI much stronger.

Hoynes and Rothstein then outline how a UBI compares with existing social security programmes in the U.S., and only some of that section applies to countries like New Zealand, where the existing social safety net is more comprehensive and generous. However, the takeaway message is important, since it would apply broadly to most social security systems:

In sum, a UBI would have quite substantial distributional and cost effects. A smaller proportion of UBI dollars would go to the bottom of the income distribution compared to the current system, though a generous UBI, with the needed revenue funded by a progressive tax, could increase the absolute size of transfers to the bottom and thus would represent a (potentially very large) downward redistribution of income. Similarly, a canonical UBI would give a larger share of transfers to the nonelderly and nondisabled than the existing programs, so any proposal to finance it through cuts in health and retirement programs — the largest sources of funds in the existing US transfer system — would need to address the large declines in living standards that the elderly and disabled would experience.

The article reviews the literature on the potential labour market effects of a UBI - a key consideration for some, who believe that the work disincentives would be large. Finally, they review the existing literature on the effects of UBI pilot programmes (such as those I have previously discussed here and here), but in general that literature might be summarised as unhelpful, because:

UBIs meeting the definition we laid out above — large enough to live on, and without phaseout or other eligibility restrictions — have never been implemented in a rich country on a large scale or even in a pilot experiment. What we know about the likely effects of a UBI comes from analyses of policies that are similar in some ways to UBIs, though different in others, and from the broader labor supply literature.

Finally, it is impossible to adequately consider a UBI without considering its cost. As Hoynes and Rothstein note in their conclusion:

The source of the new funds is a first-order issue and will have substantial impacts on the distributional effects of the policy and its ability to target those most in need of assistance. In particular, replacing existing antipoverty programs with a UBI would be highly regressive, unless substantial additional funds were put in.

The idea that adopting a UBI could represent a regressive change in the social security system would come as a surprise to many people, I expect. Overall, will a UBI be a saviour for the economy - unless we are somehow able to solve the issue of how to fund it, we may never find out.

[HT: Marginal Revolution, last year]

Would a universal basic income be eaten up by higher housing costs?

Earlier this week, I reviewed David Graeber's book Bullshit Jobs. In the conclusion to the book, Graeber discusses a universal basic income as a solution to the problem of bullshit jobs. However, one point in particular struck me:

One could make the argument UBI wouldn't work with a rent-based economy because, say, if most homes were rented, landlords would just double rents to grab the additional income.

That got me thinking back to the points raised in Robert Frank's book Falling Behind: How Rising Inequality Harms the Middle Class (which I have previously discussed here and here). I think Graeber has underestimated the importance of his point (which is buried in a footnote), and that it doesn't rely on a rent-based economy, since it would also apply to an economy where home ownership is more prevalent.

Frank argues that housing is a 'positional good', and that people are concerned about their relative status in terms of positional goods. For instance, a house in a good neighbourhood comes with low crime and access to better schools. People prefer to live in houses in the good neighbourhood rather than the worse neighbourhood, and so the value of houses in the good neighbourhood is bid upwards.

If you give one family a boost in income, they will use some of that extra income to buy or rent a house in a better neighbourhood. They will invest in the positional good in order to raise their relative status. However, if you give all families a boost to their incomes, all families would want to buy or rent a house in the better neighbourhood. Since there is a limited supply of such houses, all that would happen is that the rents (or house prices) in good neighbourhoods would be bid up to a higher level. There would be no change in relative status for any families, and the additional income would be captured by landlords in the form of higher rents, or by home sellers or developers in the form of higher house prices. Families that tried to opt out of this process would miss out on a house in a good neighbourhood and would end up living in a worse neighbourhood (so there is an incentive not to opt out).

It seems to me, then, that a large proportion (if not all) of a universal basic income would be eaten up by higher housing costs, with no net benefit to families. Aside from the general unaffordability of a universal basic income at a level that people could actually live on, this seems to be a very important problem with UBI proposals that I don't think has been addressed. At the least, it would be interesting to see whether some of the high-profile UBI pilot programmes in recent years have looked at housing costs.

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.

Finland is ending its universal basic income experiment

I've been meaning to write about universal basic incomes for a while, particularly since it is something that we discuss in my ECONS102 class each year (and something I cover in regular courses for officials from the Vietnamese Social Security Administration). There are several current experiments in universal basic income (including GiveDirectly's experiment in Kenya, some pilot programmes in India, and several others). However, one of the headline experiments in Finland may be coming to a close, as the New York Times reported last month:

For more than a year, Finland has been testing the proposition that the best way to lift economic fortunes may be the simplest: Hand out money without rules or restrictions on how people use it.

The experiment with so-called universal basic income has captured global attention as a potentially promising way to restore economic security at a time of worry about inequality and automation.

Now, the experiment is ending. The Finnish government has opted not to continue financing it past this year, a reflection of public discomfort with the idea of dispensing government largess free of requirements that its recipients seek work.

The biggest argument that people make against a universal basic income (UBI) is cost. For instance, paying every adult in New Zealand a weekly income of $200 (note: that's not exactly a generous basic income at all!) would cost around $36 billion per year, which is about 7% of GDP and would more than double government transfers (currently total social security and welfare payments are about $30 billion).

However, an under-appreciated argument against a UBI is how taxpayers (who would foot the bill for the UBI) would feel about it. And it appears that disquiet among taxpayers (and importantly, voters) is at the heart of the reconsideration of the Finland experiment:

Many people in Finland — and in other lands — chafe at the idea of handing out cash without requiring that people work.

“There is a problem with young people lacking secondary education, and reports of those guys not seeking work,” said Heikki Hiilamo, a professor of social policy at the University of Helsinki. “There is a fear that with basic income they would just stay at home and play computer games.”

The Finnish data on the experiment is supposed to come out next year. It will be interesting to see what they find, even though the experiment itself is over. Importantly, are the work disincentive effects as large as people are worried about? Or do the recipients get jobs even though they're being given free money? It's especially important that these experiments are rigorously evaluated, given that many are arguing that a UBI might be a solution to the loss of our jobs to robots. We need to have a good idea of their effects in order to make an informed decision about whether a wider roll-out is appropriate.