Preliminary Observations on Implementing a JIG

I have suggested in recent posts that both freedom and equality would be promoted by ensuring that all individuals: (i) are guaranteed a job if they want one; and (ii) can opt out of paid employment if they wish. The first ideal would be met by a job guarantee and the second by an unconditional basic income scheme. Accordingly, I am in favor of a combined job or income guarantee in which all adult citizens are guaranteed a job and/or basic income as a matter of right. This raises questions about the implementation of such a policy.

Among the questions relating to implementation of the policy are: Would it be disruptive? Would it cause an exit from the labor force that is too rapid given current productivity? Would it decimate the value of the currency? What is the correct level of the basic income payment relative to the job-guarantee wage? Should some individuals receive a higher basic income than others because of differences in capabilities?

We could also ask how high the job-guarantee wage should be in comparison to wages in the broader economy, but in this post I will mainly confine attention to issues surrounding the basic income component of a job or income guarantee. All I will do is make a few preliminary observations. They will not provide satisfactory answers to the preceding questions.

Potential Danger to the Currency

Notwithstanding the neo-chartalist perspective on value of the currency, it seems clear to me that there must be some positive level of the basic income that would be sustainable given current productivity. Perhaps this level is only very small, perhaps it is much larger. This is an empirical question. But it seems clear that there must be some amount that is sustainable given that in some countries welfare payments have been provided without being conditioned on a labor-time commitment.

In most countries, unemployment insurance requires paid contributions during periods of employment. But this approach has not always been the one followed. In Australia, for example, means-tested unemployment benefits until quite recently required no work activity other than a willingness to accept employment and were not based on a work history, although currently they do involve part-time ‘work for the dole’ for the long-term unemployed. In other countries, such as the UK, there are means-tested benefits provided along with other policies. The payments in both countries last for as long as the worker remains unemployed. Neither case has resulted in a decimation of the value of the currency.

Of course, the total amount provided to recipients in each of these schemes is small. In terms of the neo-chartalist perspective on state money, the schemes will have had some effect on the average labor time required to obtain a unit of the currency, but the zero work requirement “at the margin” has not resulted in a destructive flight to unemployment benefits or a collapse of the (domestic) value of the currency. Not surprisingly, most people have preferred to remain in employment rather than flock to the unemployment benefits. For most, it seems, there is more money, satisfaction, status and self-esteem to be had in employment than unemployment.

It can also be noted that many wealthy individuals also receive income without providing labor services. Interest payments on government liabilities are transfers, just as unemployment benefits are transfers. In modern money systems, the rates of interest paid are a matter of policy, similar to unemployment benefits, and not ultimately subject to market influence.

In all developed economies there is also a level of services provided in kind by the public sector. These, too, represent transfers that “at the margin” involve no labor-time commitment in return.

In other words, some minimal level of an unconditional basic income must clearly be sustainable, but the actual level that would be sustainable is hard to determine other than empirically.

At the same time, it is clear that there must be some level of basic income payment above which the value of the currency would be decimated. This would occur if the level of the basic income caused exit from the labor force to be too rapid, given current levels of productivity.

Universally Received or Universally Available?

The difficulty in determining the maximum feasible basic income level through theory alone suggests that a gradual implementation of the policy might be required. One consideration is whether the scheme should be truly universal from the outset or, instead, only universally available as an option. With true universality, one version of the policy might involve paying all adult citizens the basic income irrespective of whether they opt in or out of the labor force. This would not result in a net increase in the personal income of high income earners, as taxes would be increased to more than offset their basic income payment. Universal availability, in contrast, would be met provided individuals could opt in or out of the basic income program at any time. By opting for employment that paid more than some specified amount, they would at the same time be opting out of the basic income.

The universal scheme is clearly superior to the more limited scheme in the long run. The reason for this is its administrative simplicity. There would be no costs associated with policing who was and who was not entitled to the basic income payment. All adult citizens would receive the payment, no questions asked.

The difficulty is that the introduction of a universal payment would cause a much larger one-off increase in the general price level and/or tax levels for any given level of the basic income payment. If this one-off change could be managed politically, and without major disruption (that is, without causing excessively rapid exit from the labor force), it would be the best solution. We know that in a modern money system there is no need for the policy change to be budget neutral, especially with mass underemployment in most countries at present. Nevertheless, the budget deficit would still need to be kept consistent with productive capacity and the non-government net saving desire, and this would entail a significant increase in tax levels.

The universal approach, combined with a job guarantee, might actually be thought of as a ‘job and income guarantee’ since an individual would be entitled to draw on both a wage and the basic income at the same time. The alternative of ensuring universal availability (but not universality) when combined with a job guarantee might be regarded as a ‘job or income guarantee’ in that individuals could only draw on one or the other at any one time (beyond a threshold for part-time workers).

A downside of the less universal approach is that it would introduce all the usual complications concerning the determination of a person’s eligibility for payment. Nevertheless, an attractive feature is that the initial one-off effect of the policy would be much smaller than the truly universal policy for any given level of basic income payment. At the lower end of possibilities, it is conceivable that the basic income would involve total payments that were not far beyond what are paid under existing unemployment benefit schemes, or at least would not be of the same order of magnitude as would apply under a universal policy.

Even so, it is certainly the case that for the same level of individual payment as is currently paid in the form of unemployment benefits, a basic income scheme would involve a larger total transfer, because adult members of households not currently participating in the labor force would opt in to the basic income program. Some of this additional transfer could be absorbed through a non-inflationary increase in the budget deficit, but some might require an increase in tax levels and/or a one-off increase in the general price level.

Back-of-the-Envelope Calculations

For illustrative purposes, here are some very rough-and-ready back-of-the-envelope calculations for Australia, one of the countries in which benefit eligibility is not contingent on contributions being made during periods of employment. Currently, the unemployment benefit in that country amounts to a touch over $12,500 per annum. There are also additional forms of support for many recipients, such as modest rental assistance, health care and public transport concessions, but to keep things simple I’ll just go with the figure for the unemployment benefit payments. It seems that the total unemployment benefits paid at the moment amount to about 0.6 per cent of GDP. This does not include those receiving assistance while employed.

By way of comparison, assume that a universally available basic income payment of the same amount was introduced and that: all adults currently not participating in the labor force opted in; the unemployed all exited the labor force and opted in to the basic income (which is an overestimate, especially if a job guarantee was in place); and no one quit employment (an obvious underestimate). In that case, the total transfer would be about 3.5 per cent of GDP. This is presumably a lower bound, since it ignores that some workers will quit their job and opt in to the basic income.

If, instead, a universal basic income was introduced paying the same amount to every adult citizen, the total transfer would amount to about 14 per cent of GDP.

If the basic income payment was set higher, say, at $20,000 per annum, the total transfer would amount to about 5.4 per cent (universally available) or about 22.5 per cent of GDP (truly universal).

These figures are very rough but may give a ballpark idea of lower and upper limits for the total transfer associated with a basic income policy and the type of tax increases that would be necessary to neutralize most of the impact on aggregate demand.

It is only a guess, but I doubt the figures at the lower end of the range would seriously jeopardize the value of the currency through cataclysmic labor-force exit. The figures at the upper end, on the other hand, might be problematic. It’s difficult to tell without knowing more about people’s intentions in the event that a universal basic income was introduced alongside substantial increases in taxes. But it might well be the case that the more limited ‘job or income guarantee’ would be the better first move from our current starting point.

Pace of Social Change

Although the rationale for a ‘job and/or income guarantee’ is to maximize individual freedom to opt in or out of formal employment, it might nonetheless be the case that, at any point in time, the government had in mind a desirable level of exit from the labor force. Over a long time horizon, as productivity continues to rise, the capacity of society as a whole to opt for more free time – to be spent either productively or in leisure – increases, but whether this occurs is open to social determination. A society might elect to maintain current levels of formal employment and limit access to free time much as is done today. It is a political question that can be answered in very different ways.

The higher the preferred level of formal employment, the higher the job-guarantee wage would need to be set relative to the basic income. If, in implementing the basic income scheme, exit from the labor force exceeded the rate desired, there would need to be an increase in the gap between the job-guarantee wage and the basic income payment. If, in contrast, exit from the labor force was deemed slower than desirable, the reverse might be appropriate.

Unequal Capabilities

In setting the level of the basic income, it can be argued that some individuals require a higher income than others due to differences in capabilities. Amartya Sen has been the pioneer in this area. Unequal capabilities can take many forms, such as some individuals having less capacity to benefit from education, a greater need for health care, less talent resulting in narrower employment options, and so on.

My own view is that it is much easier, as a practical matter, just to have a single level for the monetary component of the basic income. That way, the administration can be kept as simple as possible and the potential for fraud minimized. Unequal capabilities can then be addressed through other means. For example, free and universal health care ensures that individuals can make use of the services as and when they are needed. Healthier individuals will consume these services less than others and so receive less real income. Likewise, free education can include remedial services for those in need of extra attention.

Inequalities caused by differences in talent and natural ability can be addressed, in accordance with the political will, at the source (e.g. through centralized wage determination processes), through additional redistributive tax-transfer measures, or through some combination of measures. Needless to say, some inequalities due to differences in talent may need to remain, at least until societal attitudes evolve further in an egalitarian direction.

An attractive feature of a ‘job and/or income guarantee’ is that it would be consistent with a wide range of social choices on most other matters. It would leave open how much of a role we want for the public sector relative to the private, how much emphasis we wish to place on the profit motive rather than other criteria for determining productive activity, how much we would like to equalize the distribution of income, and so on.