Universal Basic Income: Does the Carrot Work Better than the Stick?

Jan 25, 2017 | Economy, Governance, Society | 6 comments

Automation and robots will destroy jobs but create work. How will we secure employment in the future?

Since 1970s, social policies on both sides of the Atlantic have been dominated by workfare policies where the payment of benefits is made conditional on participation in job promoting activities such as training, rehabilitation and work experience, or on unpaid or low-paid work. Those who fail to fulfill these conditions lose their benefits.

The sticks have not worked very well. Traditional activation policies have proven inadequate in employing long-term unemployed people, and in preventing them from social exclusion.

A New Experiment in Finland

Beginning this year, the Finnish government is experimenting with an alternative approach. A guaranteed sum of €560 ($600) per month will be paid to a randomly selected 2,000 unemployed Finns. The basic experiment will continue until 2018, followed by an assessment of its results in 2019. The experiment is designed to reform the Finnish social security system to better correspond to changes in modern working life, to make social security more participatory and diminish work-disincentives, and to reduce bureaucracy and simplify the overly complex benefit system.

The basic income experiment is one of the key projects formulated in the program of Prime Minister Juha Sipilä’s Government (nominated May 28th, 2015). Traditionally, the Left Alliance and the Greens have advocated basic income, but surprisingly the 2017 experiment was implemented by a center-right bourgeois government.

The experiment could be expanded in 2018.

Experimental setting

The idea is to test if the carrot works better than the stick in encouraging the unemployed to accept new jobs offers and to seek income from entrepreneur activities.

The basic income cash sum will replace the existing flat rate unemployment benefits and will continue to be paid even if they take up jobs. An additional advantage is that recipients of this basic income do not need to report their incomes to the unemployment office, which reduces bureaucracy and the insecurity caused by fluctuating benefit levels.

The rest of the unemployed in Finland will form the control group. Since the treatment group getting the ‘treatment’, i.e. the €560 a month net, is similar to the control group in all relevant back ground characteristics, the experiment mimics experiments in natural sciences and in medicine.

If there will be differences after the experiment between the treatment group and the control group, we can establish a causal loop.

Positive view of individuals

The concept of basic income gathered interest from legislators and governments in the US and Canada in the 1970 resulting in local experiments, but the experiment in Finland is the first nation-wide randomized field experiment on the idea.

The question of how to find meaningful employment for those in the margins of labor market has urgent relevance throughout the Western world. As globalization and technology eliminate jobs or jobs continue to become less secure, an increasing number of people will be unable to make ends meet with earnings from employment.

Simultaneously, digitalization creates new job opportunities without the protection of traditional employment contracts.

In contrast to workfare policies, where claimants may face sanctions terminating all benefits, basic income is based on a positive view of individuals. It is a symbol that we believe in even poor people’s capacity and we think that they are able to do things which are beneficial to them and their community.

Earlier evidence

The belief is not completely without precedent. Results from a universal basic income experiment in Dauphin, Manitoba showed that life in this Canadian city improved markedly, in terms of health and education, during the experiment — especially among disadvantaged families. The same goes for four negative income tax experiments in five US states between 1968 and 1980.

Some of the experiments showed that employment fell slightly, though. In the absence of universal access to child care and elderly care, these results may be linked to a preference for unpaid care work over paid work. The Finnish context, with a social security system consisting of comprehensive income transfers and public care services, is very different.

Controversial ideal

There is a strong opposition, both from left and right, against basic income, even in Finland. There are vehement opponents among the conservatives as well as among social democrats and the trade union. The critics have dubbed the scheme a state handout, arguing it would hamper people’s motivation to seek jobs and participate in employment promoting activities.

There are strong arguments both in favor and against basic income, but rather little evidence as to how people actually reach and behave when they get unconditional guaranteed income. The 2017 experiment tries to shed some light on these outstanding questions.

Possible expansion in 2018

There are plans to introduce a new experiment in 2018 with a wider treatment group consisting of self-employed, free-lancers, small-scale entrepreneurs and other small-income receivers. An experiment with negative income tax might also be launched in 2019.

Planning for the 2017 experiment showed that the final study design will inevitably be the result of various politico-institutional compromises. The end result is affected by such factors as the amount of time available for the planning, whether it is possible to develop new payment and taxation systems, and the quality of the cooperation between different government agencies.

Expanding the experiment will, however, require that the good practices identified during 2016 are followed. Besides adequate time and economic resources, the coordination between, and commitment from, government sectors are crucial to successful implementation.

Clearly, not even an expanded research design can provide an exhaustive analysis of such a comprehensive reform of social benefits and taxation as basic income. In order to produce more reliable and generally applicable information, a series of experiments are needed to study the preconditions for the reform from a variety of perspectives and at the level of various population groups.

Series of experiments

The possible follow-up experiment in 2019 should be succeeded by further trials, utilizing, for example, the national incomes registry, which is set to be introduced in Finland around 2020. Such a series of experiments would produce valuable information not only about basic income, but also about the way other benefits providing basic economic benefits work and the possible ways in which they could be reformed.

The Finnish basic income experiment is an ambitious and exceptional public policy project even in an international context. This is reflected in the amount of attention that the project has garnered internationally. The field studies offer an excellent tool to analyze the impact of societal reforms in a detailed fashion. Therefore, it is important that steps be taken to ensure that follow-up studies can be conducted in Finland.

We cannot know whether the Finnish example will inspire field studies to analyze the impact of policy measures, but there are examples suggesting that this may be the case.  While the jury is out in Finland, authorities in France, Italy, Switzerland, Scotland, and the Netherlands have all recently announced an interest in running basic income pilots in the coming years.

About the Authors:

Heikki Hiilamo (PhD) is Professor of Social Policy at Helsinki University and Kjell Nordstokke Professor at VID Specialized University in Oslo.

Olli Kangas (PhD) is Professor and Director of Governmental Relations at Social Insurance Institution of Finland. Kangas, with his team, was responsible for designing the basic income experiment in Finland.

Discussion

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6 Comments

  1. Finnish basic income experiment might be randomized but it is not completely randomized – the requirement to be able to provide causal conclusions.

    Also, the experiment design is so far away from a completely randomized design that it is questionable if it is going to be possible to mimic a randomized design.

    Published documentation (from the working group) about the experiment shows that basic criteria for designing experiment in the way to be able to mimic a completely randomized experiment have not been met. As a result, we cannot expect that collected data will be sufficient for providing casual conclusions.

    The whole approach seems a bit contradictive: Finland is promoting this experiment with a high level of enthusiasm, but not implementing it properly at all. The design of this experiment is so full of holes that it is clear already now that reliable causal conclusions will not be possible.

    Reply
  2. Dear Pipsa,

    It is not possible to respond to your criticism since you do not provide any details to support your sweeping general statements. If you think the experiment is flawed, you should specificy your argument.

    Reply
    • If Pipsa doesn’t feel like chatting, I’ll improvise the answer to your question;

      In the “Experimental Setting” section you paint scientific credibility into the experiment by suggesting we think of the recipients as the “treatment group” and the other unemployed as the “control”. You say that given the background similarities, any differences at the end of the trial period will identify a causal loop much like experiments in the natural sciences and medicine do.

      This analogy doesn’t work nearly as neatly as you want it because no mouse is aware of the fact that it participates in a scientific or medical experiment. More importantly for the objectivity of the experiment, the mouse is unaware that the experiment has an end point.

      Your human participants check the yes box on both counts. So, if I’m one of the recipients, just knowing that this extra €560/month will end in 24 months would fundamentally change my attitude towards both: how to spend that money and how to strategize for when the free income is over. Just these two points, seems to me, so obviously invalidate the objectivity of the end results that I can’t avoid wondering why you didn’t explicitly hedge your premise within these conclusion constraints.

      In short, you can’t sell this as a scientifically valid experiment because the participants’ knowledge of the terms and conditions fundamentally biases the “during” and “post” behavior. Not to mention that the self-reporting on the “effects” of the “treatment” is a whole other can of worms..

      Mind you, I have no strong position on the whole UBI topic so, I’m not grinding an axe here. It’s the seemingly purposeful misdirection when advocating the expected benefits vs limitations of the experiment that’s annoying and probably worse – justifies the opponents to dig their heels and use the same communication tactics.

      Reply
      • Well, Anon, how would you design the RCT on an income transfer without the experiment group not being aware of the fact that they are getting the benefit?

        Reply
  3. I’d like to follow up on the results of this kind of experiment. Would you recommend any specific newsletter I could subscribe? Thanks.

    Reply

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