Wednesday, January 25, 2006

Productivity and a Basic Income Guarantee

To prove that the Fluffy Economist is a listening blog, I've decided to write the following in response to (justified) criticisms that this blog 'does not contain any economics at all'. The Accidental Economist has published a thorough analysis of the UK's productivity problem which I have hamfistedly diverted to a discussion of a Basic Income Guarantee, or Citizen's Basic Income, of which Devel's Kitchen is rather fond.

I was wondering if the government's 'welfare to work' policy - of forcing jobseekers to retrain or have their benefits withdrawn, then shoving them into unwanted jobs - could also be pulling down productivity. Disgruntled workers seem unlikely to perform at their best. Perhaps a more flexible approach such as the US's earned income tax credit or (more radically) a basic income guarantee might assuage this.

Studies of the Negative Income Tax experiments (sort of similar to BIG) suggest that while labour supply decreased, this was mainly due to people taking more time between jobs to find the right one, rather than an outright withdrawal (Widerquist 2004), therefore helping match up problems. Moreover, by vastly reducing poverty, better fed and sheltered workers in low paid jobs would be better able to perform them.

Of course, by guaranteeing people a basic income people lose their reliance on their wages to survive, and so may work less hard to keep their jobs. Mitigating this somewhat, however, is evidence from Pressman (2005) that efforts to reduce poverty bear no correlation to declines in productivity for low skilled workers (in fact the correlation may be even be positive) although this evidence can be only tentatively used in support of BIG as none of the countries surveyed has implemented anything quite as radical. Furthermore, the linking of correlation to causality is always tricky, the most we can say is that conditional income guarantee programs do not seem to have hindered productivity in the past (thereby questioning Okun's famous 'equity-efficiency' trade off).

There is also a good argument that a BIG would increase human capital in the economy and so increase productivity. The NIT experiments showed higher attendance rates in higher education and better test scores in schools. Much of the decrease in labour supply in these experiments (which was substantial) was accounted for by women, both single parents and spouses, presumably to better care for their children - but I'm not sure whether feminists would find this a good or a bad thing. Unfortunately this side of the experiments remains underexamined. The reasoning behind human capital arguments seem sound, but because many of these effects are felt in the long run, and are not directly measurable, empirical evidence is hard to come by.

In sum, productivity performance of the lowest earners in society may have a lot to do with the structure of the benefits system. It seems a BIG could help.


Anonymous said...

Thought provoking

The Coincidental Economist said...


I guess that your posting is intended more as a review of the empirical evidence linking productivity with BIG than as a clear cut case for implementing a BIG in Brit. Still, I don’t see BIG’s advantages over more targeted measures. If your aim is to enhance low-skilled workers’ productivity by supporting their income, I see no major screening problem preventing a targeted program.


The Coincidental Economist

Accidental Economist (Glenn Athey) said...

Typically the economists response would be that wages are a reflection of individual productivity in the first instance and not necessarily a stimulant of it.

The idea is that the market values labour at its marginal cost.

Research into skills and labour markets would suggest that he low wagees in low skill jobs is a reflection of the quite low human capital deployed or developed in them.

Some arguments that the UK has half its jobs/economy in a low wage/low skills equilibrium trap.

There is little incentive for employers to invest in human capital development where there will be little productivity gain, gain in revenue or turnover. This is especially prevalent in for example.

I think that at the welfare to work level, we are often talking about the end of the labour market that is very different to the rest above it.

I don't think BIG would improve productivity. I think the correct steps would be stimulating or incentivising employers to increase productivity overall, or to give more basic skills to the lowest skilled workers, so they have more flexibility and mobility in the market.

I think its a big myth that all low or no skill jobs will disappear. We will still require many of them. What is happening though, is the continued prevalence of low wage low skill employment. But - thus it ever was.

Important to remember that labour markets are highly segmented and there are many other characteristics.

Neil Craig said...

If it were even close to economicly neitral it would probably be a good idea merely if it makes life eaasier for a lot of people.

You mentioned that it encourages women to stop work & look after families. A secondary effect of this could be to encourage the care of & production of children, particularly among those women who keep putting off child bearing until it is economicly convenient - a major personal & social problem in most western countries. Since this is a secondary effect thatwould take years to show it would seem difficult to prove, even compared to other effects here.

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