Universal Basic Income: A Dynamic Assessment

By Diego Daruich and Raquel Fernández

http://d.repec.org/n?u=RePEc:cpr:ceprdp:14869&r=dge

The idea of universal basic income (UBI)—a set income that is given to all without any conditions—is making an important comeback but there is no real evidence regarding its long-term consequences. This paper provides a very inexpensive evaluation of such a policy by studying its dynamic consequences in a general equilibrium model with imperfect capital markets and labor market shocks, in which households make decisions about education, savings, labor supply, and with intergenerational linkages via skill formation. The steady state of the model is estimated to match US household data. We find that a UBI policy that gives all households a yearly income equivalent to the poverty line level has very different welfare implications for those alive when the policy is introduced relative to future generations. While a majority of adults (primarily older non-college workers) would vote in favor of introducing UBI, all future generations (operating behind the veil of ignorance) would prefer to live in an economy without UBI. The expense of the latter leads to lower skill formation and education, requiring even higher tax rates over time. Modeling automation as an increased probability of being hit by an “out-of-work” shock, the model is also used to provide insights on how the benefits of UBI change as the environment becomes riskier. The results suggest that UBI may be a useful transitional policy to help current individuals whose skills are more likely to become obsolete and are unprepared for the increased risk, while, simultaneously, education policies may be implemented to increase the likelihood that future cohorts remain productive and employed.

My own experience has been that it is extremely difficult to justify UBI, its financing is simply too distorting for its limited, untargeted benefits. This paper adds endogenous education to the mix actually finds some people that would like to enjoy UBI, but they make it worse for future generations (who of course do not have a vote). The paper also shows that UBI is not a cure-all that can replace all other policies. Targeted policies are still needed.

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