A universal basic income is a regular payment from the state to every citizen. The idea dates back centuries and has been promoted by voices on the left and right. In its purest form, it would represent a radical simplification of both the social security and tax systems, and comes with significant advantages and disadvantages.
Interest in UBI has been growing recently and is linked to debate about the future world of work, especially greater job insecurity and the impact on technology on employment. This report examines the adequacy of UBI as a response to possible developments in the labour market.
There are five key risks from the changing world of work:
- More insecure work: there have been increases in self-employment, zero-hours contracts, agency work and in the number of people who want to work more hours than they do
- Stagnant pay: average real wages will not rise for the 15 years following the financial crisis, according to official forecasts. This period could stretch out even longer if productivity does not start to improve or if any such improvements are not passed on in wages.
- Skills and jobs dislocation: the UK has both skills shortages and excess capacity in less relevant skills. Faster industrial change could lead to more dislocation.
- Rising inequality: we are currently experiencing rising geographic inequality, the hollowing of the labour market and the rise of ‘one wage’ towns and workplaces.
- Insufficient work: labour supply per capita is likely to fall over the next few decades so the UK can cope with a modest decline in demand. However, some experts predict labour demand will fall rapidly as a result of technology change (many others disagree).
A UBI would help to address some of these risks, but not all, and it comes with disadvantages too:
- More insecure work: a UBI-based tax/benefit system responds automatically as people cycle in and out of work or change their hours. This is one of the main advantages of the policy. It also provides better rewards for working short hours, so it could increase the numbers in precarious work, at the same time as making their lives a little less precarious.
- Stagnant pay: a UBI is not a solution to pay stagnation caused by flat productivity, as it is principally a policy for redistribution not economic growth. A scheme funded by personal taxation is also likely to reduce the disposable income of median earners without children. If pay was to stagnate because it had decoupled from rising productivity (ie the labour share of GDP was declining over the long term), a UBI funded by taxes on profits or wealth might be a solution.
- Skills and jobs dislocation: a UBI would increase the financial incentives to find work but remove work-search conditions. Proponents say this would lead to better matching of workers to jobs and allow people to retrain. Sceptics question whether training instead of job search is helpful and fear that people could slip into long-term worklessness.
- Rising inequality: A well-funded UBI would redistribute more resources, but this money would be targeted at low to middle income households not the very poorest. Such a scheme would entail high tax rates so might be impossible to introduce or erode in value over time. Recent modelling of specific UBI proposals has projected increased poverty. The uncertain or even negative effects of UBI on poverty and inequality are a very significant limitation to the case for the policy.
- Insufficient work: the case for a UBI would only arise if productivity was rising and hours of work falling, leading to stagnant weekly earnings (this is a version of the problem of pay stagnation caused by the labour share of GDP declining). If hours of work in the economy were instead becoming more unevenly distributed a UBI would not offer a solution (such rising inequality in weekly earnings would not be effectively addressed by a revenue-neutral UBI reform).
Alternative policy solutions also have the capacity to respond to these risks:
Universal credit is much worse than UBI at incentivising work but it provides a better cushion when earnings fall. This means it is well designed to respond to the risks of pay stagnation, inequality and insufficient work. UC currently fails to offer a subsistence income for people without work, but nor would any conceivable UBI funded by personal taxes; and it would cost less to raise the value of UC in future. In addition, money raised from any future taxes on profits or wealth would be much more efficiently redistributed through UC than UBI. Like UBI, universal credit is designed as a response to insecure work with the value of net payments varying automatically as people’s employment circumstances change (assuming it is implemented successfully). Both systems create greater incentives for short hours, which UC seeks to mitigate by a controversial regime of ‘in-work conditionality.’ In the face of skills and jobs dislocation UC’s conditions and sanctions are intended to keep recipients close to the world of work, but this offers little to those who need to re-skill or change occupation.
Contributory benefits are only paid when people are out of work so cannot offer a solution to existing workers facing pay stagnation, earnings inequality or insufficient work. However, like UBI, they offer protection for people out of work who are not eligible for means-tested support and this could become more important with rising insecure work or skills and jobs dislocation. Working-age contributory benefits are today a small part of the social security so introducing extra support might be relatively cheap. Priorities include relaxing eligibility conditions to insure more people in insecure work, and improving the entitlements for people without work facing skills and jobs dislocation.
Alternative universal entitlements could be introduced, with some of the features of a UBI:
- A learning allowance could be paid on a non-means-tested basis to everyone out of work studying appropriate, high-quality FE and HE, as a response to skills and jobs dislocation.
- Child benefit could be paid at a much higher rate. This would replicate the main distributional effect of a UBI, with far less cost and controversy, and help families with respect to all five labour market risks.
- Tax-free allowances which pay the equivalent of a basic income to workers earning enough to benefit, could be gradually turned into a credit paid to everyone, in a way that left no one worse off in cash terms. Means-tested benefits would remain in place. This would be a response to insecure work, jobs and skills dislocation, inequality and insufficient work.
When thinking about the risks arising from the future world of work, a UBI has some advantages, but in many cases more practical reforms offer alternative solutions. In reality, even most proponents of UBI accept that the policy would need to sit alongside some continuing means-testing. So a pure UBI is not a silver bullet for the changing world of work. Supporters and opponents of UBI should therefore desist from polarising confrontation and seek to discover where they share common ground, especially on the role of universal entitlements within a multi-layered tax/benefit system designed for the changing labour market.