Damon Jones on Whether a Modest Basic Income Might Lead People to Work Less

Chancellor: Hello and thanks for joining us for the Poverty Research and Policy Podcast from the Institute for Research on Poverty at the University of Wisconsin-Madison. I’m Dave Chancellor. This is our July 2019 podcast episode and we’re going to be hearing from Damon Jones, who is an economist at the University of Chicago Harris School of Public Policy. Professor Jones visited us at IRP this winter and he gave a talk about universal basic income. As he’ll explain more, a universal basic income is a regular cash payment that every person or essentially every person gets as a right of legal residency. The idea of a universal basic income has been gaining interest in recent years, but Jones says we don’t have much evidence about what a large-scale universal basic income policy would do. But he says that existing tax and transfer policies can give us some clues. As part of his research on Universal Basic Income, Jones and his colleague Ioana Marinescu have looked at a program in Alaska called the Alaska Permanent Fund that might give some ideas about what to expect. When we first started talking, I asked him to tell us more about what a Universal Basic Income is.

Jones: I think that universal basic income as a phrase and a policy has gained a lot of traction recently and so it’s been seen as its own type of policy reform or policy proposal, but if you take a step back it’s a part of general income and tax and transfer policy. So you can think basic income, one of the key features is that it puts a floor on how low your income that you have on disposal can go. That’s a feature of any tax and transfer schedule. There’s a part of it that limits or can decide how much you’ll have on your disposal or how low your income can go. Many tax schedules will let you go down to zero. And so a basic income will put a floor on how low your income can possibly go. Another type of tax policy called the negative income tax has a similar feature, that there’s a minimum amount of income that everyone will have. And so universal basic income is also that type of policy in the sense that it puts a floor on how low your income can go.

Chancellor: So that’s the basic part—and Jones says there are a number of ways to achieve that through the tax and transfer system that essentially put a floor on people’s income.

Jones: The universal part of this policy basically generates another thing, which is that, the way that it’s distributed is basically not conditional on your demographics or other behavior that you take. One way to think about that is that this part of the policy is paid out to everyone or paid out to most people. Basically, everyone qualifies for it, that there’s not a complicated set of rules that determines whether you are qualified for it. That’s where the universal component comes in. The way we speak about that though gets tricky because it’s a question about how do you pay for these transfers? They have to come from somewhere. When you add the financing part to it, it’s no longer possible for everyone to, on net, get an increase in their income. Even if you’re paying everyone with a check—so let’s say you send everyone a check every year or every month of a minimum amount. You have to pay for it from somewhere. So, how you decide to finance that will then ultimately affect who is going to be on net getting an increase. Somebody has to get a decrease in order for someone to get an increase. There are different ways to do that. People tend to be a lot less specific in their policy proposals about that part.

Chancellor: Jones says that a broad aim of a policy like this is to reduce inequality, but that there are a lot of things a policy like this can do, so I asked him what some of these other goals or things might be.

Jones: Putting a floor in people’s income basically kind of gives you an insurance—it limits how poor your outcomes can be or how much you have on hand to consume. And so, by putting a floor, you’re basically creating a safety net. And so some people see that the main purpose of this is to create a safety net, even for people who can’t work. That’s to be contrasted with something like the Earned Income Tax Credit, which boosts the income of the low income working families, but if you’re not working you don’t receive the earned income tax credit generally. So, creating a safety net is one goal. Other people have the goal of giving a transfer to people in the most efficient way possible. So we have food stamps, we have Medicaid, we have public housing—we have different ways to help out people with low incomes. And there’s a lot of research that argues cash transfers in some ways may be better for these families. There are differing views on this, but proponents argue that giving people direct cash will allow them to use the money for what they need it for. So, on one hand, food, for example—a family in Chicago can’t use their food stamps to buy diapers. But they would be able to use this cash transfer to buy diapers. So, there are some people who think, well, we should defer to these households, they know what they need the money for the most—just give them cash. There are others who think that we should be more paternalistic—if we give food stamps, then we know—evidence shows that they’re more likely to spend that money on food. So, some of the argument has to do with having the most bang for your buck literally is to give people cash.

Chancellor: And Jones says that another potential benefit to a universal basic income type program is that these programs are fairly simple to administer and to understand when it comes to eligibility.

Jones: There’s generally going to be a tradeoff between being able to target certain outcomes and target certain people, and with that you bring more complexity. Different people have views about how complex or simplified these things should be and the universal basic income might be simpler because everyone qualifies. It’s not conditional on what you do and it’s not restricted to be used on any given type of activity or purchase. So those are some of the arguments people have in favor of this. The other thing is that there’s this view that there are certain sets of people who at their stage in their life are sort of, the industry in which they work has shrunk and so they are now left with very limited employment opportunities. There are other people who are facing changes in their industry where there’s more automation so there’s a group of people that may have a very hard time finding employment given technological and global shifts and that for these people you might need to have this type of policy to give those workers or former workers means to live on. So those are some of the arguments in favor of a basic income.

Chancellor: But Jones says there are tradeoffs—or at least potential tradeoffs—with a universal basic income program and so as we mentioned before, he and his colleague Ioana Marinescu wanted to look at an existing program to better understand what some of these tradeoffs might be, but there aren’t a lot of programs that really fit the bill.

Jones: There are a couple of questions about basic income that we have limited evidence on because it’s generally just hard to see this type of policy in action. One of those questions has to do with what happens when you have a large scale program like this and everyone is receiving this transfer, so it’s a universal basic income. It’s a cash payment. By definition it’s going to a large majority of the population at the same time. That’s one thing that’s hard to find in practice. Another thing that’s hard to find is the type of policy like this that is sort of permanent. If you implement a policy like this that’s going to change people’s future expectations about what they will be able to do and what income they’ll kind of have on hand for a long time to come. So we looked at Alaska where they have something called the Permanent Fund Dividend. They have a fund, which is basically a store of wealth that they have that was initiated by oil discoveries and now is just a fund that is diversified and invested in a number of different assets. And the state owns this wealth and they distribute it to people every year, they distribute some of the returns from that wealth to people in the form of a cash payment called the Permanent Fund Dividend. This has some of the features that I just mentioned—everyone in Alaska who’s lived there for at least 12 months gets the payment and the policy has been in place for over 30 years, so it’s been something that people have basically expected to be there for the foreseeable future.

Chancellor: I asked Professor Jones what it was that they were actually trying to understand better by looking at the Alaska Permanent Fund Dividend.

Jones: We have evidence in the past that looks at what happens when you give one person a payment, what happens when one family wins the lottery, what happens when subset of people get maybe some sort of special cash transfer? This gave us a chance to look at what happens when everyone in a geographic area is getting this payment when they can expect it for a long period to come. The key issue that we were interested in is what happens to people’s likelihood of working if they begin to get these types of transfers? Theoretically, I give you an extra cash payment of some sort, you can maintain the same quality standard of living and afford to work less. This is called the income effect in economics and so you might predict that this type of transfer would make people less likely to work. And so what we wanted to do was look in Alaska and see what the evidence shows about this type of transfer on labor market outcomes.

Chancellor: So I asked him what they found when they actually looked at the evidence.

Jones: What we found in Alaska looking before and after the introduction of this policy that was in 1982, we compared Alaska to other states that didn’t have this policy, before and after. And in comparison, we found that Alaska’s—the probability of being employed in Alaska didn’t seem to change much compared to a comparable set of states that we compared it to. So we concluded that this policy didn’t have a huge effect on the likelihood of people working. We did also look at other things like whether or not you worked, but also how much you work. And we found that people were a little more likely to work part time. And that could be some people going from no work to part time. But it could also be some people going from full time to part time. We weren’t able to tease that apart but there does seem to be some movement towards part time work. Overall though, we didn’t see much movement in whether or not you’re working. We concluded that even though cash payments have been shown in the past to make people work less or have a lower likelihood of working, we didn’t find that when the payment was given to everyone at the same time in Alaska. Why was that the case? One possibility is that when you give everyone a payment as they do in Alaska, another thing they do is spend that money. That could feed back through the economy and offset the previous income effect that I mentioned, of people working less when you pay them another source of income. So that could be what was going on and we have some evidence that suggests that that might be the case. Another thing about the Alaska permanent fund dividend is it’s not a basic income. So it’s not enough to live off of, but it can start to get sizeable, especially if you have a family say, of four, you get four times the payment, there’s a payment for each person. So it can begin to be significant and we actually don’t need you to be able to live off of it to see an effect. One of the things it can do is, say you have two earners, sometimes the secondary earner is not that attached to the labor force. So even though it doesn’t have to take everyone out of the workforce it could take your secondary earner out of the labor force and they could stay home and do things for the household at home. So it’s not that it’s impossible for this payment to make an effect, even though it’s not a basic income. But what we found was we didn’t find a significant negative effect on the likelihood of people working, but we did find an increase in part time work.

Chancellor: I asked Jones if this increase in part time work, of people still working but maybe working a little bit less—if that’s a good or a bad thing.

Jones: This brings up an interesting point, which is that when people talk about these policies and they might lead to people working less, the interesting thing about economics is that there’s two reasons why people might work less. One of them tends to be worse for the economy than the other. One reason why you might work less is because we’re creating some barrier to working or doing something that skews the reward for working. So a tax on your wages lowers the reward to working. Sometimes other policies that prevent people from hiring certain types of workers that can reduce their reward to working. When the reward to working goes down that can cause people to not work who might otherwise have worked. And that might tend to have some adverse effects on the economy. Another type of reason why you might not work is because you just have more income in your bank account, say from a basic income payment. Or from an inheritance or something like that. That can make you work less as well. The thing there is that it’s not affecting your reward to work. You can still get the same wages for your hours worked even though you get this basic income. But you might work less now because you don’t have to—that’s called the income effect—it actually turns out that that decision is less of a problem from an economic standpoint for the economy. You’re deciding to work less because you want to, not because you’ve blunted the reward to working. So, why do people work less when they have more income? It could be for perfectly good reasons. Maybe you’re near retirement now and because you can live off this income, you don’t have to work as much and now you have more time out of work that is also valuable. And it’s valuable to people and therefore it’s valuable to the economy. You could be spending more time with your children now because you have less of a need to work. So, the reward to work is still there but the reward to being at home with your children could be higher. If that’s the case, it actually might be more valuable for society for you to be at home with your kids. So, just because someone works less doesn’t mean that it’s necessarily a bad thing. There are some things that people need to take time off for, and this cash can free up that time for them to do that. Some people can invest in themselves, make some investments, either by taking a risk, becoming an entrepreneur or getting more education. Those are other things that people work less to do that are valuable to society. So, just finding evidence that people work less is not necessarily bad for the economy. There are valuable things you can do that aren’t in the formal labor market.

Chancellor: But Jones says that from a policy perspective, there’s a little more disagreement on whether people working less in the formal labor market is desirable.

Jones: Politically, there are people who place different values on these different things. Even if an individual values their time at home with their child more than working, there are people who are not involved in this decision who have preferences over what should happen. And they may place more value on someone working, above and beyond what that person does themselves. So now you have a divergence in preferences over people’s time. And so, some of the policies we have are designed in ways that imply this higher value for working. The Earned Income Tax Credit is in some ways praised because it may encourage people to work or it gets money toward the working poor. That qualifier, “the working” poor sometimes it suggests a higher value in society for working people than non-working people. I think you know that there are people who are critical of this, this value that’s attached to work that is you know not necessarily rooted in fundamental economic factors but just rooted in people’s preferences for society, societal preferences. Are the working poor more deserving of a transfer than the nonworking poor? That’s not immediately obvious to me. And so another reason that some people advocate for a basic income is because it’s not based on some deserving quality of actually working.

Chancellor: Still, Jones suggests some caution with their findings—he says there are a lot of details you need to take into account with a study like this.

Jones: On the one hand, I did a study in Alaska, on the other hand, Alaska’s quite different than other places so we need to be careful to know what’s unique to Alaska and what might apply outside of Alaska. The oil played a big role in the economy in Alaska, especially during this time, the 70s. So on the one hand you might think that this is a very unique thing because Alaska basically struck oil, literally struck oil, and that’s why they were able to afford this policy. Another detail that we were able to discover that we became more familiar with is that the payments from this fund, however, are not currently based on oil discovery. So you might be worried that if oil prices go up today, the dividend payments go up today—and anything that we discover thereafter, is it because of oil shocks or is it because of the dividend payments? The way they devised that program is the money is invested in a diversified portfolio and so from year to year, even as oil prices fluctuate, the money in the fund is already separated from that, disentangled from that – decoupled from the volatility of oil discovery, oil production and oil prices. So, that helped our study but it’s also interesting to see how they insulated themselves from the volatility of this oil, this resource, and invested it in other ways to basically diversity themselves.

Chancellor: So I asked Professor Jones—despite some of the uniqueness of this particular policy, how it could help us understand how a universal basic income type of policy might work nationally or in another setting.

Jones: I think the main takeaway from this study is that even though we know that cash payments might affect how much people might work in isolation when they’re given to one person, in Alaska we found that that may not necessarily be true when it’s given broadly as a universal payment. And so that might generalize to the type of federal policy that would be of the same scale if it was going to sort of ramp up and be a more sizeable payment—then it’s not clear how the effects might scale up. We speculate some but we can’t be sure. So, at least it shows that it’s possible for when a policy like this is implemented that the macroeconomic effects—the effect of everyone having money and spending it. That can drive in the opposite direction of individual level income effects that cause people to work less. In our case, they seem to have neutralized each other. More would need to be known like – is this happening in other settings, but at least it gives us some insight into what might be possible. Of course at the national level, there’s a different question about financing this. It would be financed in a different way than in Alaska, so that would be something that you would need to think more about.

Chancellor: Many thanks to Damon Jones for taking the time to talk with us. You can read the working paper, which is part of the Human Capital and Economic Opportunity working papers series on the HCEO website. This podcast was supported as part of a grant from the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation but its contents don’t necessarily represent the opinions or policies of that Office, any other agency of the Federal government, or the Institute for Research on Poverty. To catch new episodes of the Poverty Research and Policy Podcast, you can subscribe on Apple Podcasts, Stitcher, or Google Play Podcasts. You can also find all of our past episodes on the Institute for Research on Poverty website. Thanks for listening.