In Brief: New Study Exposes the Problem With Unconditional Aid
A true UBI, available to all families, would be prohibitively expensive and significantly reduce employment.
American Enterprise Institute Senior Fellow Kevin Corinth observes the results of a recent study from the National Bureau of Economic Research. The study chose 3,000 low-income families and gave them $12,000 annually. What the study finds is not at all surprising if one understands basic human nature.
The new study is the latest in a line of recent research finding significant employment loss from giving people cash. Earlier this year, a study published in the Quarterly Journal of Economics found that lottery winners in the United States reduced their earnings by $0.50 for every dollar of lottery winnings. A different working paper exploits the fact that in 2021, families with young children received more money from the Child Tax Credit than families with older children, and found that higher payments reduced employment among the younger families who received higher payments.
Corinth argues that the negative of giving away cash is actually bigger than the studies show.
The employment declines in these studies are important, despite the fact that they are based on short-term cash infusions that likely understate the effect of a permanent, nationwide policy. They suggest that a true Universal Basic Income (UBI), layered on top of existing benefits to low-income families, would reduce work effort. But they are only the tip of the iceberg when it comes to employment concerns.
But why does giving money while phasing out benefit programs negatively affect employment?
An extensive academic literature shows that phasing out benefits does a lot more to reduce work than simply transferring the same amount of cash to everyone. The reason is that phasing out benefits imposes a penalty on working. Every dollar you earn causes you to lose some of the benefits you were previously receiving. So whatever employment loss the latest studies find from a pure cash transfer, the ultimate employment effect would be much larger for a realistic policy that phases out benefits for higher income families.
Focusing on a benefit like the child tax credit, Corinth observes:
For instance, recent efforts to adopt a child allowance would increase benefits for most families and, as a result, modestly reduce employment. But the much larger employment loss would result from the policy’s imposition of a larger penalty on working, due to no longer allowing the current Child Tax Credit to offset the phase-out of other benefits targeted to low-income families.
The growing political popularity surrounding the concept of some kind of universal basic income is why these ideas can’t simply be shrugged off as ridiculous.
