Minimum Income

Update: check here for a crucial numerial correction.

One of the things Scandinavian countries get right is a guaranteed minimum income. The US has a welfare system whose primary goal is to humiliate the poor by enforcing puritan restrictions on their lives – for example, single mothers are required to name a father before receiving TANF benefits; Sweden has a welfare system whose primary goal is to alleviate poverty.

The basic idea of guaranteed minimum income is that you pass some means test, which is usually having less than X income, and then get your income supplemented to X. Sweden doesn’t even have a statutory minimum wage, but the guaranteed minimum income is something like $14,000 per year (link to data; warning: there’s no inflation adjustment), which means that anyone who doesn’t pay significantly more than that won’t get any employees.

A German-style welfare system, where recipients have to prove they’re looking for employment, could work, but only if the requirements are lax enough to avoid government-side abuses. However chic it is in certain circles to make fun of welfare queens, any half-decent system has few enough infractions that stopping them won’t make a dent in government spending; on the other hand, abusive governmental restrictions on who can receive welfare make the lives of millions miserable.

The American poverty rate is $9,800 for one person plus $3,400 per additional person. A decent level of guaranteed minimum income needs to be at least that. In practice, it’s possible to tweak it to be a little more sensitive to such things as daycare costs (which should be fully state-funded anyway) or the fact that the first child has the highest marginal cost. Without tweaking, the easiest thing to do is to have a guaranteed minimum income at the poverty line for the size of household.

In Sweden, the guaranteed minimum income is given to individuals, so a couple gets twice as much as a single person; this is not a good idea, because it screws single people. A non-puritan alternative to handing out welfare based on marital status is considering actual household size, i.e. the practice rather than the legalese. For example, a woman who leaves an abusive husband to live on her own should immediately be considered single as she lives without her husband.

This also takes care of one of the standard criticisms of minimum wage increases. Since many minimum wage workers are young, the argument goes, increasing the minimum wage will increase at least youth unemployment, even if it won’t make much difference in the general unemployment rate. Supplementing a family of four’s annual income to $20,000 ensures that unless both parents can find a job simultaneously, which usually doesn’t happen, they’ll have no incetive to take jobs that don’t pay significantly more than $10/hour. Meanwhile, young people, who tend to be single with no dependents, will get only $10,000 and so are likely to take a job that pays, say, $7.50/hour.

Assuming that household income is independent of household size, the average payout will be about $15,500, unless people continue working jobs that pay less than that. If the entire bottom quintile takes advantage of that, the cost will be just under 8% of GDP.

To cut costs, there are two possible tweaks. One is to dole out money based on weeks or days rather than years. If the actual payout to a single parent is not $13,200 per year but $255 per week, it’s likely the parent will take a temporary low-wage job instead, as long as it pays significantly more than $255/week; increasing the minimum wage to even $7.50 is likely to produce such jobs.

The other tweak is to phase out the payment continuously as a household gets richer. For example, instead of supplementing the income of everyone to the poverty level, the government can supplement the income of everyone who makes less than 150% of poverty to 100% of poverty plus a third of the level of income. Although the payout will not decrease for any individual, it’ll encourage staying employed somewhat, which will only reduce the total payout.

If both tweaks together gets rid of the problem of voluntary unemployment, then under the same assumptions, the total payout will be about 4.5% of GDP. They won’t, but the weekly dole will probably eliminate it for people who make a decent amount of money per hour but can’t find a full-time year-round job, and the continuous phaseout will at least make a serious dent in it.

One of the problems in some European countries, including Sweden and Germany, is that free tuition plus welfare cause people to stay in school for many years just for the money. The quickest way to ensure it won’t happen in the US is to limit free tuition to four or five years.

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13 Responses to Minimum Income

  1. davidbdale says:

    To your knowledge, has any country experimented with a “matching grant” approach to un- or under-employment? Unemployment compensation would be of very limited duration, followed by a period of supplemental support for workers who manage to find some sort of employment that still does not raise their incomes above the poverty level? It would be messy, of course, but maybe it would do more to encourage a quicker return to the workforce?

  2. Alon Levy says:

    I’m pretty sure that’s the standard way of doing welfare. Israel does something pretty similar to that: it pays unemployed professionals a significant fraction of their last salary for six months, and in addition has low-paying long-term welfare schemes similar to TANF. The main problem with that people don’t need to prove they’re looking for work to get unemployment benefits; a professional who loses his job can comfortably live on layoff compensation and unemployment insurance and only start looking for work after the six months are over.

    The thing is, unemployment insurance and minimum income are two different things. Minimum income is supposed to eliminate poverty. Unemployment insurance is supposed to let skilled professionals who lose their jobs take some time to find jobs in their fields rather than unskilled jobs. My next welfare post is going to be about unemployment benefits, and how to structure them in a way that doesn’t a) promote voluntary unemployment, b) egregiously subsidize the middle class, or c) deskill professionals who are laid off.

  3. SLC says:

    The just deceased Milton Friedman once advocated a “negative income tax,” which would augment the income of workers earning below the poverty line. This would have two advantages over welfare.

    1. It would give individuals an incentive to obtain employment.

    2. For those individuals who obtained employment but whose incomes fell below the poverty line, the Government would make up the difference.

  4. Alon Levy says:

    And it’ll have two serious disadvantages:

    1. It won’t do anything to help people who can’t find work. Given that it’s impossible to live on welfare in the US but there’s still widespread unemployment among the poor, it’s safe to say incentives alone won’t work.

    2. It won’t provide the poor with the opportunity to enroll in professional training so that they can find work.

    Canada, whose welfare system is based on this concept, does better than the US and Britain, but worse than Sweden, Norway, Denmark, and Finland.

  5. davidbdale says:

    I guess I was advocating something similar, but I, too see disadvantages, even beyond those you’ve identified, Alon. For instance, wouldn’t it enable employers to calculatedly offer exploitively low wages knowing the rest of us would make up the difference?

  6. Alon Levy says:

    It depends on where. You can’t get unemployment insurance after you’ve found a new job; the main avenue for that sort of abuse comes from an idea that was floated on Majikthise a while ago of extending insurance to people who have only found a job that pays significantly less than their old job.

    Minimum income is something else. The benefits the rest of society will pay to people who already make above minimum wage are fairly small. There exists the political capital and will to raise the minimum wage to $7.50. Under my gradual phaseout scheme, a single parent making $15,000 a year will get her salary supplemented to $18,200. You can think of it as raising the minimum wage to $9.00 an hour but then remitting some of the additional funds to employers to encourage them to hire more low-income workers; apparently, Britain does something like that explicitly, offering benefits to employers who hire people who have been unemployed for a long time. The actual payout to people making more than poverty is fairly small – only about $300 per American, or one sixth of the entire system’s cost – and is probably outweighed by the effect of encouraging employment. Above a level of pre-tax, pre-welfare $10.00/hour or so, there’s no more government assistance, so no employer will be able to significantly shift costs to the government.

  7. SLC says:

    Re Levy

    The bias against welfare in the US is historical in nature. It goes all the way back to the Jamestown, Virginia colony where the leader, John Smith, informed his followers that, “if you don’t work, you don’t eat.” That sentiment exists to this day.

  8. double-soup tuesday says:

    Take a look at this article from the NYT today.

    http://www.nytimes.com/2006/11/28/business/28tax.html

    Who needs welfare. All is well.

  9. I really like the minimum income idea.

    SLC–

    Actually, the bias against welfare only goes back to the 1960s, when public benefits raised the majority of African-Americans from poverty for the first time. The Great Society programs cut poverty by 2/3, but then John “Bubba” Smith of Whitebread, Virginia informed his neighbors that “I don’t think it’s right that a white man has to pay taxes so a black man can get out of work.”

    Smith is today known as the first “Reagan Democrat.”

  10. [...] bulk of the middle class won’t get anything approaching $80,000. Note that this assumes my doubly tweaked minimum income scheme, which already provides a base of $23,000 to the average [...]

  11. [...] know my posts on instituting a welfare state in the US? The ones about minimum income and unemployment insurance? There’s something wrong with them. The way I calculated the cost [...]

  12. [...] Alon Levy explains the concept of Minimum Income, and why we should have one. [...]

  13. rickc says:

    Hi:
    I am a supporter of a guaranteed minimum income. I plan in the near future to write an article about it on associatedcontent. Please check out some of my posts. I am new to online writing

    http://www.associatedcontent.com/article/1290882/downsizing_the_declaration_of_independance.html?cat=3

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