Coming soon to a welfare state near you? A universal basic income

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A universal basic income is being touted as a possible key component of the future welfare state, but the economy still hasn’t reached a stage where automated production and productivity growth can support this.

Automated production, productivity stagnation, flexible labour markets and an ageing population are just some of the many factors which may signal a future where fewer households have guaranteed, regular work. If this becomes a reality, then many could see themselves without the adequate income they need to survive.

The universal basic income (UBI) is one solution which may reduce fears of a world without work. Its premise is that a guaranteed income is to be paid by the state to every citizen. While this idea is gaining prominence and has many radical merits which could genuinely help stimulate demand and allow for people to free themselves from the necessity of work, it is important not to get carried away.

The affordability of such a scheme still remains in doubt, and it is unlikely to gain political support from groups that would lose out as a result of a mass overhaul of the welfare system. While it is important to discuss new ideas in the current economic climate, which is in desperate need of fresh and innovative thinking, for UBI to be considered in practical terms, we must consider the following questions:

  • Has capital replaced a large proportion of the labour force?
  • Have flexible labour markets ended secure employment opportunities?
  • Is productivity continuing to rise?

If the answer to these three questions is yes, then UBI will no longer be a theoretical proposition but a sincere policy option. It is important to understand how and why this idea came about, and how the above questions relate to the viability of UBI.

What is UBI?

UBI is a guaranteed payment by the state or some other public institution to every citizen. This is a re-distributive policy funded through tax revenue. What form the tax takes is a matter for the government. It doesn’t matter how wealthy or how old you are or whether or not you choose to supplement this income through working, you will still be guaranteed an income.

It is rare for an idea to gain supporters on both the radical left and the free market right, but UBI has achieved this lofty aim. From Bertrand Russell[1] to Milton Friedman[2] UBI can boast support from the towering intellectuals of socialist and capitalist movements.

Switzerland has recently held a referendum on the matter, Finland is pursuing UBI as an experiment and now the UK Labour Party is openly discussing it as a potential policy. With this in mind, it would help to understand what it actually is and why might some consider it a solution to the current economic malaise.

Why would anyone advocate this?

Those on the left may argue that this frees people from the poverty trap and provides them with the basic means to live. With no pressure to work, workers may also find themselves in a stronger bargaining position, as they no longer have to take up a job solely to survive.

On the right, UBI is considered a much simpler way to re-distribute wealth, helping to eliminate poverty without the need for complex and distortive bureaucracies. They also might argue that with a guaranteed income there will be less incentive for workers to demand higher wages or protection from unemployment, leading to a much more flexible labour market[3].

So what are its opponents saying?

Again this depends on your view point. Many on the left might consider this would be a wage subsidy. Employers could pay less, and the tax-payer would pay the rest. It also means that an incredibly wealthy individual would receive the same benefit as someone at the other end of the income spectrum which could be seen us unfair or even regressive.

Those on the right argue that if a state income is guaranteed for doing nothing, then the incentive to work is reduced. UBI would also mean high taxes, which are also considered to be a disincentive to working, and could reduce efficiency in the economy[4].

Why is UBI gaining so much attention?

The “gig economy” and automation. The gig economy is characterised by extremely flexible labour markets. Companies like Uber and the rise of zero hour contracts are usually held up as examples of the gig economy taking off. While the gig economy can offer the sort of flexibility which encourages a more efficient labour market, it also implies that full time jobs and regular income are no longer guaranteed. UBI would offer some security and allow people to choose how much more they want to work to supplement their income.

Automation is the process of capital taking over from labour. As more sophisticated technology is created, demand for labour falls. If technology is developed further, we may end up in a world where demand for labour is permanently reduced due to technology, then mass unemployment could follow. UBI would ensure that those unemployed still had an income they could live on, while also allowing them to pursue other activities in the informal economy which are still likely to have a value to society.

In a world where employment and income is no longer guaranteed, UBI would be the type of security necessary for society to continue functioning.

Has labour demand really fallen?

While it is tempting to imagine a world where machines perform all the work, the evidence suggests we aren’t at this stage quite yet. According to the data, the proportion of employees in the economy (at least in the UK) has fallen by less than a percentage point between 1996 and 2016, suggesting machines aren’t taking over quite yet. The proportion of permanent employees has actually risen in the same time period. The proportion of self-employed has risen slightly and the number of full time employees has fallen slightly, but on the whole, the makeup of the UK labour market remains pretty similar today than it was 20 years ago.

1

Zero-hour contracts have risen more dramatically, with over 2.5 times the number of people on them in 2016 than in 2000. However, this represents less than 3% of the total population in employment. The sharp rise between 2012 and 2016 in zero hour contracts may suggest that this is indicative of the rise of a gig economy, but it could also simply reflect policy changes or other external factors. More study into this is definitely needed, but so far, there is very little evidence at present to find that this economic structure has “increased the share of insecure employment”[5]

2

Could we afford a UBI?

The other big political and economic obstacle is the affordability of UBI. UBI may come at the expense of other benefits, which would create opponents. If UBI were lower than the State Pension (which may have to be cut to finance UBI) it might prompt anger from an older voting bloc. Even then, to consistently finance a guaranteed income while there is an increasingly older and dependent population, UBI would not only need a more automated economy, to compensate for the declining labour force, but also for productivity growth to rise.

Yet, productivity growth has stagnated since 2008. If productivity continues to stagnate, it is unlikely that an economy would grow at a fast enough pace in order to continuously generate the required income. The data shows that both output per hour and per worker remains significantly below the pre-crisis trends.

3

Perhaps an automated economy could improve our productive capacity, but at this point in time, productivity growth is far off the required pace.

Will UBI get introduced any time soon?

While it is important to discuss this radical idea, it is unlikely that the UK or indeed many other advanced economies are ready for this yet. The UK economy is still built on a bedrock of full time labour. A dramatic transformation is unlikely any time soon, and may struggle to gain political support given the current approach to welfare is geared towards ensuring benefits act as an incentive to work. Looking back at our initial checklist, it is hard to see how the UK meets these standards:

  • Employment rates among the general population are high. Machines have not replaced labourers en masse.
  • The labour market has become more flexible, as shown by the rise in zero hour contracts, but the proportion of permanent, full time jobs remains dominant.
  • Productivity growth has stagnated since 2008, remaining well below the projected trend.

Until these trends shift, it is unlikely that UBI will become the new welfare model any time soon.

Dean Hochlaf
Assistant Economist

DeanHochlaf@ilcuk.org.uk

Footnotes

[1]Russell. B, (1918) “Roads to Freedom. Socialism, Anarchism and Syndicalism”, London: Unwin Books

[2]Friedman. M, (1962) “Capitalism and Freedom”, University of Chicago Press

[3]Clark. C, and Kavanagh, C. (1996) “UBI, inequality and unemployment: Rethinking the linkage between work and welfare” Journal of Economic Issues, 30.2

[4]Ibid

[5] Brinkley. I (2016) “In search of the Gig Economy” The Work Foundation

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