Economy & Politics

Unconditional basic income: illusion rather than innovation

Basic income: 1200 euros unconditional for everyone?imago images / Jens Schicke

The unconditional basic income is becoming an evergreen without ever being a hit. For around 15 years this socio-political utopia has been discussed again and again in Germany. The basic idea has hardly changed: every citizen of a country should receive a monthly sum of money from the state with which he can at least finance his basic needs without ever having or having to provide anything in return. The need does not play a role in the payment either.

Jörn Quitzau is an economist at Berenberg Bank. He also runs the blog
Jörn Quitzau is an economist at Berenberg Bank. He also runs the blog Fußball-Ö

Proponents see the basic income as either an instrument freed from bureaucracy and state coercion to protect against poverty, a funding for artistic or otherwise valuable work or a contribution to a society characterized by mutual trust. People’s worries about losing their jobs due to digitization could also be alleviated by the prospect of a basic income. During the Corona crisis, the idea got a boost again because many self-employed and employees lost incomes through no fault of their own.

Even if the basic concept is clear, there are very different options: How high should the monthly basic income be? Should it replace the existing social benefits in whole or in part? How would it be flanked by tax policy? In particular, however, two fundamental questions need to be clarified, provided that the basic income is really to be paid unconditionally and in an amount that would cover the socio-cultural subsistence level without any additional income.

  • How does an unconditional basic income, which, depending on how it is structured, would severely disrupt work incentives, fit into a time when there is a shortage of skilled workers and the foreseeable decline in the workforce?
  • How should government spending, which has increased dramatically due to the basic income, be financed?

On the first question: Incentives play a central role in a market economy. If they are distorted or disrupted – for example through taxes, social security contributions, lavish social benefits or a basic income – there are undesirable developments in the labor market and in the economy as a whole. The unconditional basic income would upset the wage structure in the lower wage segment because the bargaining power of employees would be strengthened and significantly higher wages would probably be required for unpleasant, stressful or boring activities. Higher wages for low-wage earners are definitely desirable, with the minimum wage already preventing particularly blatant cases of wage dumping.

But the consequences would also be rising costs for companies and rising prices for consumers. Jobs could move abroad, where the old wage structure still prevails. Parts of the work would simply be left standing if no one was willing to pay the now higher wages. This would certainly also affect household services, which would often be unaffordable because of the higher wage demands. For the individual citizen it could mean again in many areas: Do it yourself! The economy based on the division of labor would be damaged.

Incentives should not be underestimated

An unconditional basic income is to be financed through higher taxes. That, in turn, would primarily disrupt the performance incentives of those who already pay high taxes. They could turn down jobs, work less and companies could move abroad. The higher tax burden would also strengthen the incentives to work more in the shadow economy. All of this would erode the tax base from which the basic income would have to be financed.

Proponents of unconditional basic income question the role of incentives. They argue that people would work even if they had already made a living. Any false incentives are classified as insignificant. The intrinsic motivation for the workforce certainly also plays a role and the workload is not controlled by financial incentives alone. With a strong work ethic, incentives can take a back seat, at least for a certain time, so that individual people work even if they do not benefit financially. Apart from such temporary exceptional cases, financial incentives play a central role in the decision to work time and free time.

It should also be taken into account that people’s work ethic is perhaps only so high because they were taught from the start that everyone is responsible for their own livelihood. But what if everyone grows up with the certainty that they can get through life reasonably comfortably without their own effort?

Observations from several pilot projects abroad have shown that recipients of a temporary basic income often continue to work anyway. The German Institute for Economic Research (DIW) has recently started an experimental study in cooperation with the association “Mein Grundeinkommen”, with which it will be determined from spring 2021 how paying an unconditional basic income changes the behavior and attitudes of the test subjects change. For this purpose, 120 people should receive 1200 euros per month for three years – unconditionally and with all additional earning opportunities.

Immense costs

The probability is high that the informative value of the results – as with the pilot projects in other countries – will only be low. The participants have a considerable incentive to continue working because the project is limited in time. After three years, you have to make a living from your own gainful employment. The participants should also be interested in maintaining their market value during the project phase. A three-year break on your résumé is not always good. If people continue to work in spite of the payment of a basic income, then that hardly serves as proof of the fact that they are not harmful to the incentive, but rather for the existence of deadweight effects. It would be more revealing than analyzing the temporary experiments to examine the changes in behavior of the lottery winners of a lifelong immediate pension. As far as I know, there is no scientific analysis on this yet.

Regarding the second question of financing: the proponents of an unconditional basic income either downplay the costs and use somewhat curious methods according to the motto “what does not fit is made to fit” nicely. Or the costs are not even taken into account.

But the costs would be immense in practice if the basic income covers at least the socio-cultural subsistence level. Nor could it simply replace all other current social benefits such as acquired pension entitlements, so social spending would increase significantly. And finally, one hears very little about the international migration movements that would be triggered by a German (or European) single-handed basic income. But that is a crucial point. If one country were to introduce such a basic income on its own, the international pull for immigrants would be so great that the national borders would have to be strictly secured. At the same time, the companies would relocate their production abroad, eroding the financing base. The system would collapse quickly if the basic income was not coordinated internationally and introduced in many countries at the same time – which is quite unrealistic.

The idea of ​​an unconditional basic income certainly springs from good intentions. But the road from a good intention to a good result is often long and rocky. Even scientifically supported, time-limited experiments are unlikely to help. Especially since Germany has already undergone a major sociopolitical experiment in which the incentive effects of generous social benefits were not taken seriously and high unemployment figures were the result – with a pronounced shadow economy at the same time. Only the social reforms of the Gerhard Schröder government corrected the false incentives and brought about a positive turnaround in the labor market – and reduced the share of the shadow economy from just under 17 percent in 2003 to a good 9 percent of official GDP. Even if everything is not perfect in the existing system and there is a need for improvement, especially in the area of ​​additional income, Germany is well positioned with this activating welfare state and does not need any daring socio-political experiments for the foreseeable future.

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