Basic income policies: theory and empirical evidence

LISER, Luxembourg 11 October 2017 10.30 – 12.30

Basic income policies: theory and empirical evidence Ugo Colombino EST (Torino), CHILD (Torino), IZA and LISER (Luxembourg)

1

Outline 10.30 – 11.30 • Focus on Unconditional Basic Income • Theory: • Equity and Efficiency • Problems: costs, incentives etc • Evidence: • Quasi-experiments • Experiments • Simulations 11.45 – 12.30 • Some results from Islam & Colombino (work-in-progress)

2

Focus on UBI • UBI = Unconditional Basic Income

• Other names: Citizen’s Income, Social Dividend etc. • What is it?

3

What is it? • Compare UBI with:

• Conditional (or Means Tested) Basic Income (CBI) • Negative Income Tax (NIT) • In-Work Benefits (IWB) or Wage subsidies or Tax Credits etc.

4

CBI Net

Welfare- (or poverty-) Trap: there is no incentive to work for a gross income lower than G Cheating: if your gross income is larger than G, you might have an incentive to hide (part of) it in order to get the subsidy and work less Admistration costs: monitoring gross income levels, filling forms, cheating, errors, litigation etc.

G

Gross G

Stigma: stigmatization, low take-up rate

5

NIT Net

Same problems as with CBI but to a lesser extent

Gross G

6

UBI Net

No welfare-trap problem No cheating problem Low administration costs No stigma

G

Gross

7

UBI vs CBI and the poverty (welfare) trap Net

UBI

CBI G

The individual will work under UBI but not under CBI

Gross

8

IWB Net

Close to EITC, Tax Credits, Inwork benefits etc

Problems as with CBI but good incentives to work

Distortion: gives incentive to lowproductivity sectors

G

Gross

9

Why is UBI interesting? • End of 2° WW to mid-70s: some sort of CBI in most Western Countries • Problems with CBI: bad incentives, high administration costs • Friedman 1962 proposed NIT as an alternative • Rather than Friedman’s NIT, many countries progressively introduced some form of IWB (80s – 90s) or more strict conditioning • New millenium: Globalization, Automation, Big Crisis. • Re-allocation of jobs, destruction of skills, precarization, polarization etc. • Need for a redesign of welfare 10

Why is UBI interesting? • Cuts on transfers and/or more sophisticated CBI and IWB • New «traps» • Complex and costly systems…

11

New «traps», Complex and costly systems… (Santens 2016)

12

How to apply for assistance if you are poor... (Santens 2016)

13

Misallocations of transfers (OECD 2017)…

14

Why is UBI interesting? • New interest in UBI (and NIT) …

• Simple, trasparent, easy to administer, possibly good incentives etc. • Old idea: Moore, Paine (1797), George, Hayek (1944), Lange, Simon, Meade (1989) , Van Parijs (1995), Atkinson (1995, 2015), Vernon Smith etc.

15

Theory: Efficiency • No traps, no stigma, no cheating, low administration costs • Incentives to new entrepreneurship and more efficient occupation and education choices through: • reduction of risk-aversion (Standing 2008) • enlargement of the opportunity set (Blattman et al. 2014, Haushofer and Shapiro 2016)

16

Equity: Thomas Paine • T. Paine (Agrarian Justice, 1797). A modern reformulation: o Common resources (land, air, water, spectrum etc.) belong to everyone in principle (Chart of the Forest 1217). o Free access to common resources is inefficient. o Private property or centralized management more efficient («enclosure», XVIII – early XIX centuries) o The original owners (everyone) should be compensated with the equivalent of the surplus obtainable under free access  UBI o

A modern implementation: Alaska Permanent Fund Dividend (about $2000)

17

«Common»: Equitable but Inefficient ω = disutility of work (reservation wage H = total population [AP(H) – ω]H = total surplus AP(H) ω AP

MP H

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«Enclosure»: Efficient but not Equitable ω = disutility of work (reservation wage H* = insiders [AP(H*) – ω]H* = total surplus (max)

AP(H*)

Insiders get some fraction of total surplus.

AP(H)

Outsiders get no surplus

ω AP

MP H*

H

19

«Enclosure» with compensation (UBI?): Efficient and Equitable ω = disutility of work (reservation wage H* = insiders [AP(H*) – ω]H* = total surplus (max)

AP(H*)

Both insiders and outsiders get some fraction of total surplus. The minimum compensation (UBI?) is the surplus under the Common

AP(H) ω

AP

MP H*

H

20

«Thomas Paine» today • Globalization and Automation are more efficient ways of production and exchange, just as enclosures led to a more efficient use of common resources • However, automation and globalization destroy established skills and rents (Sacks & Kotlikoff 2012)

• Part of the benefits from globalization and automation should be used to compensate the destruction of previous skills and rents • UBI helps the compensation and the re-allocations required by automation and globalization (Sacks & Kotlikoff 2012, Standing 2012)

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Globalization and Automation • Cowen, T. Average is over, 2013 • Hughes, J. J. “A strategic opening for a basic income guarantee in the global crisis created by AI, robots, desktop manufacturing and biomedicine.” Journal of Evolution and Technology 24:1 (2014): 45–61. • Krugman, P. “Sympathy for the Luddites.” The New York Times, June 13, 2013. • Marchant, G. E., Y. A. Stevens, and J. M. Hennessy. “Technology, unemployment & policy options: Navigating the transition to a better world.” Journal of Evolution and Technology 24:1 (2014): 26–44. • Brynjolfsson, E. and A. McAfee (2014) The Second Machine Age. Work, Progress and Prosperity in a Time of Brilliant Technologies, W. W. Norton & Company. • Sachs, J. D., and L. J. Kotlikoff. Smart Machines and Long Term Misery. NBER Working Paper No. • 18629, 2012. • Spence, M. “Globalization and unemployment: The downside of integrating markets.” Foreign Affairs, July/August 2011. • Standing, G. (2011) Precariat. The dangerous class, Bloomsbury Academic Press. • Standing, G. “Responding to the crisis: Economic stabilization grants.” Policy & Politics 39:1 (2012): 9–25. • Acemoglou and Restrepo, The race between machine and man, 2016, http://www.nber.org/papers/w22252

22

Sacks & Kotlikoff 2012

• XVII – XVIII centuries, industrial revolution • Luddites (early XIX century): «machines substitute workers and lead them and society to misery» • Retort to Luddites: machines make workers more productive and drive up their wages

23


• Machines substitute unskilled labour • Machines designed and run by skilled labour • College wage premium (US): 40% (2000)  80% (2012) • Top decile income distribution (US): 35% (1970)  50% (2012)

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• Skills require time • Older employess are more skilled • Older employees (and retired) own a large fractionb of capital • Median income of male employees (45-54 vs 25-34) • 1950: +4% • 1970: +11% • 2011: +41%

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• OLG model • Young workers start as unskilled • They can save to get skills and invest in capital • Machines are complementary to skilled labour but sustitute unskilled labour • Young workes become poorer. They save less and invest less in human and physical capital • The equilibrium path may lead the whole economy to misery • The way out call for intergenerational redistribution (UBI?)

26

Sacks & Kotlikoff 2012 Q = Q(N, S) = output, CES with elasticity εSN N = N(eM, L) = intermediate product, CES with elasticity εLM S = skilled labour L = unskilled labour e = machines efficiency

Wi = Qi (competitive economy), i = L, S

27


d ln(QL )  SN   L LM   unskilled labour may loose from tech progress d ln(e)  LM d ln(QS ) 1   L  1   S    0  skilled labour gains from tech progress d ln(e)  SN

 L = share of unskilled labour product  S = share of skilled labour product 28

Theory: Equity and Efficiency • The «share» version of UBI o o

J. Meade, Agathotopia: The Economics of Partnership, 1989 D. Ray, The Universal Basic Share (2016 post on Ray’s blog Chhota Pegs)

• The «insurance» version of UBI o

R. Shiller, livelihood insurance (New Financial Order: Risk in the 21st Century, 2003)

• The «intergenerational transfers» version of UBI o


29

Theory: Equity and Efficiency • The «too poor to be efficient» argument (P. Hill, Population, prosperity and poverty, 1977) • Some degree of universal and unconditional redistribution saves on wasteful rent-seeking (Milgrom & Roberts, 1990)

30

Problems • Bad incentives for labour supply? o o

Income effect on low income people Substitution effect on high income people

• Gives money to the rich «surfers»? o false problem: o

with a flat tax rate = t, the transfer is «exhausted» at gross income UBI/t

• «The poor can’t handle the money» argument o «… After all, if they knew how to manage money, how could they be poor in the first place?...» (Ronald Reagan, I think)

31

Quasi-experiments • Imbens et al. (1999) o Study on lottery winners in the US. No effect on labour supply for amounts around $15000 per year. Minor effects for larger amounts (around $80000)

• Marx et al. (2008) o Study on winners of Win for Life lottery (Belgium). Minor or insignificant effects on labour supply

• Akee et al. (2010) o Longitudinal study in North Carolina (recipients of a Govenment transfer). Big effects on human capital investments

32

Experiments • Widerquist (2005) – survey of US experiments in the 70s • Blattman et al. (2014) - Uganda • Pasma (2014) – survey • Haushofer & Shapiro (2016) – Kenia (GiveDirectly) • Standing (2017) - survey • Most of the (recent) experiments confirms some of the positive efficiency effects: • more efficient choices • increased propensity to entrepreneurship

33

Uganda 2008 • Blattman, Fiala and Martinez, Generating Skilled SelfEmployment in Developing Countries: Experimental Evidence from Uganda, QJE, 2014 • Government + World Bank experiment • 15-35 years old, peasants: earnings = approx. $1 per day • 6000 treatment, 6000 control • Lump sum transfer $365.

34

Blattman et al. 2014 • Focus on new entrepreneurship • Two periods, no credit market • U = u(c1) + δu(c2) = intertemporal utility • s = savings • y = worker earnings • F = fixed cost of entrepreneurship • K = capital • A = ability • f(A,K) = entrepreneurs earnings 35

Blattman et al. 2014 Worker Max U s.t. c1 + s = y + w c2 = y + s New entrepreneur Max U s.t. c1 + s + F + K = y + w c2 = f(A,K) + s 36

Blattman et al. 2014

With endowment wL and earnings y, the worker will choose E: no savings, consume wL + y. Given the cash transfer, the worker will save for K, pay the fixed cost F and turn to entrepreneurship in period 2

37

Uganda 2008, four years after • Most of the $365 used to get a new skill (tailor, carpenter, auto mechanic, hairdresser ecc.). • Treatment group income is 40% larger than control group’s • 41% of the treatment group left agricolture. 29% in the control group

38

Planned experiments • Netherlands, local pilot in Utrecht and other ciites • Canada (Ontario), announced by Government • Silicon Valley (Oakland), pilot (100 households) to be run by YCombinator • Kenya (GiveDirectly), pilot completed, large experiment to come (director A. Krueger, former Chairman of the Council of Economic Advisers) • New Zeland? • Scotland?

39

Finland (KELA) • 2017-18 • Assess whether UBI can be used as an alternative to current social assistance • Focus on incentives • 2000 unemployed • EUR 560 per month, tax free

40

Simulations • Non-behavioural simulation: o OECD (2017), non-behavioural simulation for European countries, focun on fiscal sustainability, winners and losers.

41

Simulations • Calibrated DSGE models: o Van der Linden (2004), calibrated DSGE: UBI optimal o

Fabre et al. (2014), calibrated DSGE: UBI good but traditional UI better

42

Simulations Behavioural microsimulation Islam and Colombino (2017): UBI good Bargain & Doorley (2016): no bad incentives from extending transfers Sommer (2016): Germany, positive effects of UBI on labour supply Colombino (2015): Italy, UBI good (depends on welfare criterion) Jensen et al. (2014): Germany, UBI good Clavet et al. (2013): Quebec, UBI too expensive Horstschräer et al. (2010): Germany, unconclusive Scutella et al. (2004): Australia, UBI promising Colombo et al. (2008): Germany, unconclusive

43

The case for NIT+FT in Europe An empirical optimal taxation exercise

N. Islam (LISER, Luxembourg) & U. Colombino (EST, Turin, Italy) Work-in-progress

44

Outline • CBI, UBI and IWB as special cases of NIT • Optimal policies

• Computational Approach: combining microeconometrics, microsimulation and numerical optimization • Results for six European countries • Identifying a general rule?

45

CBI, UBI and IWB: special cases of NIT CBI

NIT

Net

Net

G

G

Gross

Gross

G

46

CBI, UBI and IWB: special cases of NIT UBI

NIT

Net

Net

G

G

Gross

Gross

47

CBI, UBI and IWB: special cases of NIT IWB

NIT

Net

Net

G

Gross

Gross

48

Different profiles of NIT Concave

Convex

Net

Net

G

G Gross

Gross

49

Differences in interpretation/implementation Friedman noted the substantial equivalence of NIT and UBI

Friedman was right in a static scenario However, there might be differences in an intertemporal scenario with uncertainty This can be seen more clearly by distinguishing two different interpretations or implementations of NIT or UBI… 50

UBI: up-front payment implementation Net

Supporters of UBI usually think this implementation

At the beginning of the month you receive G Your own income is then taxed a a rate t G

Gross

51

UBI: ex-post conditional transfer im plementation Net

Supporters of some form of NIT usually think of UBI as a special case of NIT with this implementation

At the end of the month, you receive G –tY provided Gross < G/t

G

Gross

G/t

52

Optimal Policies • Searching for optimal (= Social Welfare maximizing) CBI, UBI, IWB and NIT in European countries • NIT is expected to be no worse – social welfare-wise – than its special cases • However, CBI, UBI or IBW might be preferable according to other criteria (poverty, labour supply etc.) • Work-in-progress, preliminary results

53

Optimal Policies We depart from the traditional approach of fiscal reform evaluation: we look instead for optimal reforms We also depart from the approach of computing optimal policies using theoretical formulas (e.g. Mirrlees 1971, Saez 2001) Instead we adopt a Computational Approach (CA) that combines microeconometrics, microsimulation and numerical optimization (e.g. Aaberge & Colombino 2006, 2012, 2013, Blundell & Shephard 2012) 54

Model and Data • Microeconometric model of household labour supply • Separate estimation for each country, couples and single • Sampled alternatives, 7 for singles, 49 for couples • Sample include non working, wage employed, self-employed • Retired excluded • Age 18 - 65 • EUROMOD datasets based on EU-SILC 2010 • This presentation is limited to 6 countries • The project will cover most of the countries in Euromod 55

Microeconometric Model max (U(c, l) = V(c, l) + ε) s.t. c = wl +y – T(wl +y) lB U( ) = utility function V( ) = «systematic» utility ε = random variable (extreme value distribution) T( ) = tax-transfer rule c = net income l = labour supply w = wage rate y = exogenous income B = opportunity set

56

Parametric Policies We consider four types: UBI, CBI, IWB and NIT The members of each type are defined by a vector of parameters π.

πUBI = (GUBI, t1,UBI, t2,UBI ) with t1,UBI= t2,UBI πCBI = (GCBI, t1,CBI, t2,CBI) with =t1,CB = 1 πIWB = (GIWB, t1,IWB, t2,IWB ) with t1,IWB < 0

πNIT = (GNIT, t1,NIT, t2,NIT ) G is adjusted according to the household size (square root rule) Basic income is matched with a Flat Tax (e.g. Atkinson 1995) The policies replace the whole tax-transfer system

57

Microeconometric Model V(c, l) is a quadratic form in c and l, with coefficients function of socio-demographic characteristics + some alternative-specific dummies, e.g. for singles:

V  1c   2c   3 (T  l)   4 (T  l)   5 (T  l)c  2

2

[alternative-specific dummies]

58

Microeconometric Model Choice probability (Conditional Logit)

Pi ,k ( ) 

expVi (ci ,k ( ), li ,k )

 expV (c j

i

i,j

( ), li , j )

59

Microeconometric Model Expected maximum utility (McFadden 1978):

Vi *( )  ln

  expV (c j

i

i,j

( ), li , j )



60

Microeconometric Model Comparable money-metric utility μi (King 1983):

ln

  expV (c ( )   ( ),l )  V *( ) j

R

Rj

R

i

j

i

Decoster & Haan (2015) present a different implementation inspired by Fleurbeay (2011) An alternative (e.g. Aaberge & Colombino 2013) is to ri-evaluate V* with common preference parameters (Deaton & Muellbauer 1980) 61

Social Welfare (Kolm 1976) μi = comparable money-metric utility of household i

1 Efficiency =  i i   N expk(i   )  1  Inequality = ln   i  k  N  k  Inequality Aversion parameter 1  Social Welfare =   ln  k 

expk(i   )  i  N  62

Identifying Optimal Policies π = parameters of the policy

Ui(c(π), l) = utility of household i, given income c(π and, hours of work l Vi(π) = Emaxl,c Ui(c(π), l) = expected maximized utility given policy π μi(π) = comparable money-metric Emax utility W(μ1(π), …, μN(π)) = Social Welfare function π* = argmaxπ W(μ1(π), …, μN(π)) s.t. public budget constraint.

63

Identifying π* with Computational Approach

π* at convergence

Maxπ W(μi(π),…, μN(π))

π

s.t. P.B.C. This is solved by numerical optimization

μi(π)

Vi(π) = maxc,l Ui(c, l) s.t. household’s budget constraint given π This is solved by microsimulating a microeconometric model of household decisions V is turned into μ (King 1983)

64

An example: Italy

Italy Third Best: Optimal IWB, k = 0.05

Italy First Best: Optim al NIT, k = 0.05 Net

Net t2 = 0.47

t2 = 0.35

t 1 = 0.37

t1 = -0.04

G =144

Gross

Gross

65

An example: Italy Italy Second Best: Optimal UBI, k = 0.05

Italy Fourth Best: Optimal CBI, k = 0.05

Net

Net

t 2 = 0.31

G =337

t1 = 1

Gross Gross

66

Optimal CBI, NIT, UBI and IWB, k = 0.05 Belgium G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

804

1.00

0.44

1635

0.0

57

-1.07

NIT

522

0.28

0.72

1635

5.0

61

1.51

UBI

905

0.64

0.64

1645

7.9

57

1.29

IWB

441

-0.02

0.52

1672

9.0

65

0.37

Current

----

----

----

1645

15.0

----

---67

16870 NIT

16860

Belgium

16850 UBI 16840

Efficiency

IWB Current

16830 16820

Iso-social welfare lines

16810 16800

CBI 16790

-805

-800

-795

-790

-785

-780

-775

16780 -770

-Inequality

68

Optimal CBI, NIT, UBI and IWB, k = 0.05 France G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

374

1.00

0.17

1688

18.5

72

1.48

NIT

123

0.36

0.16

1690

18.4

74

1.70

UBI

322

0.26

0.26

1645

7.9

57

0.23

IWB

245

0.26

-0.026

1684

9.0

73

0.06

Current

----

----

----

1645

15

----

---69

10770 NIT 10760 CBI

France

10750

Efficiency

10740

10730 10720 10710 IWB UBI 10700 Current 10690

Iso-social welfare line -110

-109

-108

-107

-106

-105

-104

-103

10680 -102 -101

-Inequality

70

Optimal CBI, NIT, UBI and IWB, k = 0.05 Ireland G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

981

1.00

0.27

1188

26.6

47

-2.81%

NIT

904

0.32

0.89

1191

12.8

61

3.99

UBI

1062

0.57

057

1161

0.0

57

1.48

IWB

494

-0.09

0.31

1274

15.8

48

-0.41

1249

19.6

Current

71

26750

NIT

26700

Ireland

26650

Efficiency

UBI 26600

Current IWB 26550

Iso-social welfare line

CBI

-2375

-2370

-2365

-Inequality

-2360

26500

-2355

26450 -2350

72

Optimal CBI, NIT, UBI and IWB, k = 0.05 Italy G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

337

1.00

0.31

1530

29.2

65

0.53

NIT

303

0.37

0.47

1510

21.3

72

0.93

UBI

196

0.35

0.35

1535

25.8

73

0.62

IWB

144

-0.04

0.35

1539

16.2

73

0.59

Current

----

----

----

1540

26.6

----

---73

4570 IWB 4565

UBI

Italy CBI

4560

Efficiency

4555

4550 NIT


4545

4540 Current

-1055

-1050

-1045

-1040

-1035

-1030

4535 -1025

-Inequality

74

Optimal CBI, NIT, UBI and IWB, k = 0.05 Luxembourg G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

626

1.00

0.19

1664

20.0

62

-1.01

NIT

605

0.19

0.49

1643

11.0

63

0.10

UBI

1297

0.48

0.48

1642

3.7

51

-0.16

IWB

542

-0.01

0.33

1660

7.5

65

-0.24

1648

10.7

Current

75

7860 Current 7840

NIT

Luxembourg

UBI

7820 IWB

Efficiency

7800


7780

7760

CBI 7740

-2880

-2870

-2860

-2850

-2840

-2830

7720 -2820

-Inequality

76

Optimal CBI, NIT, UBI and IWB, k = 0.05 United Kingdom G

t1

t2

Hours

Poverty (%)

Winners (%)

%Δ Social Welfare

CBI

641

1.00

0.25

1182

27.3

56

-0.46

NIT

774

0.63

0.64

1157

16.0

76

9.06

UBI

674

0.55

0.55

1175

30.3

74

6.91

IWB

174

-0.03

0.19

1262

23.3

46

-6.60

1196

30.3

Current

77

9050

NIT 9000

United Kingdom

UBI 8950

Efficiency

8900

8850 Current

CBI 8800

8750


8700 IWB

-1100

-1095

-1090

-1085

-1080

-Inequality

-1075

-1070

-1065

8650 -1060

78

Comments • NIT is best (welfare-wise) • UBI in most cases better than CBI

• CBI may lead to a significant reduction in labour supply and poverty-trap effects • IWB in most cases dominated by NIT and UBI • In Luxembourg the reforms hardly improve upon the current system

79

Comments • Optimal Taxation Theory suggests NIT close to optimal with convex profile • Computationa Approach confirms good performance of NIT • However, in most cases, with concave profile • UBI (= Unconditional Basic Income) could outperform NIT when taking administrative implementation details into account

80

NIT Concave

Convex

Net

Net

G

G Gross

Gross

81

Comments Optimal Taxation Theory

Computational Approach

Previous analyses based on Optimal Taxation suggest IWB might dominate NIT and UBI in many European countries (e.g. Saez 2002)

According to our exercise, IWB dominated by both NIT and UBI

82

Identifying a «general» rule • The correspondence between «primitives» and π*

• S «economies» • θ1, θ2, …, θS = «primitives» (elasticities, productivity etc.) • π1, π2, …, πS = optimal tax-benefit rules

83

Identifying the correspondence between π and θ

θ1 … … … θS

Regression analysis, Clusters, Correspondence analysis, etc.

π1 … … … πS

84

How NIT parameters π depend on «primitives» θ (OLS, very preliminary) G

t1

t2/t1

451.8

0.290

1.910

Inequality aver. (k)

11.8

0.008

-0.009

Productivity (wage)

8.7

-0.008

0.020

P.B.C.

-0.6

0.000

0.000

L.S. Elasticity

-11.8

-0.002

-0.030

Constant

85

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