From Basic Income to Poor Law and Back Again – Part 4: Designing a Viable Basic Income

This is the final in my four part series on basic income. In Part 3, I highlighted potential impacts of  different basic income options on the labour market and social security system.  This demonstrated that basic income schemes can have adverse unintended consequences, especially for low paid workers.  In this final Part 4, I examine three possible responses to these dilemmas:

(1) a means-tested Basic Living Income;

(2) a less strictly means-tested ‘life cycle’ Living Income; and

(3) a set of smaller Supplements to meet particular costs.

These could be combined to form a two-tier Basic Income scheme with a base rate of payment to meet general living costs and a supplementary tier to meet additional costs. Continue reading

From Basic Income to Poor Law and Back Again – Part 3: Renewing the Social Minimum

In part 1 of this series on Basic Income, we travelled back in time to England on the eve of the industrial revolution in search of the first Basic Income scheme. When capitalism supplanted the traditional master-and-servant system of pre-industrial England, the Speenhamland system of local benefits for rural workers was replaced by the brutalities of the New Poor Law that denied benefits to ‘able-bodied’ unemployed people so that the factories had a ready supply of labour.

In the 20th century, the labour movement and social reformers learned from the past that under capitalism, the labour market, politics and social welfare are intertwined. They built a ‘welfare state’ on a foundation of universal suffrage, full employment, labour regulation, universal social services, and social security for people lacking enough income to live decently.

In part 2, we identified challenges to the modern welfare state including precarious employment, attempts to wind back social spending, and the increasingly harsh treatment of people relying on working-age social security payments which recalls the Poor Law distinction between ‘deserving and undeserving’ poor. This has led to new questions about whether, and how, a Basic Income scheme might be part of the solution.

This piece (Part 3) examines the structure of the ‘social minimum’ (minimum incomes) in Australia, and explores the implications of replacing parts of this system with different kinds of Basic Income.

The three pillars of the social minimum

Income support is only one element of the ‘social minimum’ – the set of social guarantees that underpin income security in wealthy capitalist societies. The three pillars of a decent minimum income are the family, labour market regulation, and the welfare system, broadly defined.

Figure 1 shows trends in key components of the social minimum income in Australia.

Figure 1: Wages, benefits and pensions for a single adult ($ per week, adjusted for inflation)

social minimum graph

Sources: ACOSS (2017)OECD StatExtractsDepartment of Social Services
Note: Minimum wage for a fulltime worker, excluding overtime. Average weekly ordinary-time earnings in main job for men and women. Family payments for two children (one of primary school-age, the other of preschool age), including maximum Rent Assistance.

Over the last two decades, the social minimum has lagged behind growth in average full-time wages. This has contributed to growth in poverty and income inequality. Figure 1 shows:

  1. Newstart Allowance (unemployment benefit) is very low (currently $38 a day) and has not increased above inflation for over 20 years. The last ‘real’ increase was a $2 a week rise from the Keating government in 1994.

2.Minimum wages have barely increased in real terms for two decades, and there is a reasonably consistent relationship between them and Newstart Allowance rates.

  1. Consistent with Poor Law principles, allowances for those deemed ‘able to work’ are much lower  than pensions for those deemed ‘unable to work’.
  2. Apart from pensions (which are indexed to wages), the social minimum is falling behind wider community living standards, proxied here by the average full-time wage. That is, the benefits of rising productivity and living standards have largely been denied to unemployed people and minimum wage-earners for two decades. Their living standards were effectively frozen in an era when the internet was in its infancy.
  3. Family payments for those with low incomes rose in real terms during the 2000s but have since declined. This is due to the removal of their indexation to wages in 2009 and subsequent decisions to freeze maximum rates of payment.

Back to a Basic Income?

A Basic Income scheme alone cannot guarantee that everyone in or out of paid work has a decent income. Critics of universal basic income are right to warn that replacing employment, wage and welfare protections and services with a minimum income guarantee is risky. It risks a repeat of the Speenhamland experience that powerful interests pull the new system down, arguing that it’s too costly and work incentives and the ‘dignity of work’ would be diminished. Another risk is that income protections in the other pillars of the social minimum – especially wages and human services – would be adjusted downwards.

A better question to ask is whether a Basic Income, together with reforms to strengthen the other pillars of the social minimum, could ensure income security for all.

Much depends what kind of Basic Income scheme is introduced. Some options are:

  1. A ‘living income’ (which people can live on in accordance with general community expectations – that is, above poverty levels) to replace the present social security system. This has two variants – an income-tested payment and a universalone.
  2. An ‘income supplement’ which is not enough to live on, but supplements wages or social security payments to give people more flexibility to negotiate a more uncertain labour market, help with extra costs (such as a disability or retraining) or to combine employment with other roles such as care. This is usually advocated as a universal payment, or one that at least extends to the majority of income-earners.

At the heart of the contest between different Basic Income models are tensions between adequacy and universalism, and between the obligations and entitlements of citizens.

Either a living income or an income supplement could be conditional (for example, on labour market participation) or unconditional (for example, an entitlement of citizenship). This distinction was drawn by Tony Atkinson, who advocated a ‘Participation Income’.

Tensions between adequacy and universalism arise due to the high cost of a universal scheme providing sufficient income for people to live on. As Martinelli (2017) puts it: ‘an affordable UBI would be inadequate, and an adequate UBI would be unaffordable’.

Whiteford estimates that a universal, unconditional Basic Income set at the pension rate ($21,000 a year for a single adult), with allowances for partners and children, would cost $360 billion a year, compared with the $150 billion cost of existing social security payments. A large increase in tax rates (not only for high income-earners) would be needed if this were funded through the income tax system, even if the Univeral Basic Income replaced the tax-free threshold (Scutella 2004).

On the other hand, a Universal Basic Income costing the same as the current social security and welfare programs would yield a payment of around $6,000 a year, less than half the already inadequate Newstart Allowance ($13,500).

Basic Income options for Australia

Most debate in Australia has focused pragmatically on two options (the shaded segments of Table 1):

  1. A ‘Basic Living Income’ that replaces existing income support and is means-tested. An example is the ‘common working-age payment’ advocated by a government welfare reviewin 2001.
  2. modest ‘Universal Basic Income’that supplements income support and minimum wages and is not means-tested. An example was the ‘Guaranteed Minimum Income’ advocated by the Henderson Poverty Report in 1976.

Table 1: Types of Basic Incometypes of basic income

Impact of options on the labour market and welfare system

What is the likely impact of these basic income options on the labour market and welfare system?

Much of the debate over the labour market impact of a Basic Income scheme concentrates on ‘work incentives’ for paid work. As Martinelli (2017) and Bowman et al (2017) point out, this argument has been over-stated. Experimental unconditional Basic Income schemes in the United States and elsewhere have only marginally reduced labour force participation. The myth of the ‘dole bludger’ who would rather do nothing at home than work is just that. The main impacts on paid workforce participation were among people who gave priority to other activities, especially caring and studying.

The more interesting, and more important, labour market impact of a basic income is its effect on wages. This could go either way. If workers have an alternative to working for wages they may drive a harder bargain, in which case wages would rise. Alternately, if workers have access to a wage supplement, employers may drive a harder bargain to capture this subsidy, or the Fair Work Commission may discount minimum wages, in which case wages would fall.

According to Martinelli (2017) and Gray (2017), who can drive the harder bargain depends on which Basic Income option is chosen.

Option 1 (Basic Living Income) is likely to improve pay and conditions for low-skilled work. It might (modestly) reduce workforce participation among unemployed people, especially if unconditional. Low-skilled workers, who are less likely to have substantial family resources or personal savings to fall back on, would have a viable alternative to working in a job they don’t want.

If the Basic Living Income were income tested to moderate its cost, then it is of no immediate benefit to middle and higher income-earners, but would still play a vitalinsurance role for those households. We all face risks such as redundancy, ill health or marital separation.

Option 2 (modest Universal Basic Income) is likely to strengthen pay and conditions for higher-skilled work and may reduce their paid workforce participation slightly (mainly among parents and other carers). This is because even a modest Basic Income would enhance choices for those with significant family support or savings.

However, it would probably reduce wages for low-skilled workers who lack family support or savings. A modest Universal Basic Income would do little to improve their bargaining power. Unless it is built on a solid foundation of robust minimum wages and secure working hours, the subsidy is likely to captured by employers, especially if Fair Work Commission takes account of a major increase in public support when setting minimum wages.

Climbing or sinking?

ladder

(Source: Koi Bito Forum)

The end result could be an increase in wage inequality. By supplementing low-paid, insecure work, there is a risk that a Basic Income that is too low to live on could entrench it for people lacking bargaining power.

In Part 4, I will examine three possible responses to the dilemmas identified above: (1) a means-tested Basic Living Income; (2) a less strictly means-tested ‘life cycle’ Living Income and (3) A set of smaller Supplements to meet particular costs. These could be combined to form a two-tier Basic Income scheme with a base rate of payment to meet general living costs and a supplementary tier to meet additional costs.

This four part series is written based on the presentation, ‘From basic income to poor law and back again: can a UBI break the Gordian Knot between social security and waged labour?’, by Peter Davidson at the Australian Social Policy Conference at UNSW on 27 September 2017.

 

From Basic Income to Poor Law and Back Again – Part 2: Whither the Welfare State?

In the first part of this series, we followed the introduction and abolition of the first ‘Basic Income’ scheme, the Speenhamland system in the United Kingdom in the 19th century. When Britain industrialised, cash benefits were replaced by the ‘New Poor Law’ and the Dickensian workhouse. The conclusion drawn by social reformers was that to end poverty and financial insecurity, they would have to work on a broad front: from industrial regulation to universal suffrage and the construction of a welfare state (social security, education and community services). This strategy was very successful, but now there are concerns that it no longer works and can’t be sustained.

Continue reading

From Basic Income to Poor Law and back

This four-part series explores the genesis of the idea of a ‘basic income’, how this evolved into a more broadly-based strategy for social improvement, the risks to job security and the welfare state, and the role of a basic income in overcoming them.

It featured recently in the Australian Tax Transfer Institute’s policy blog

Part 1 examines the surprising origins of basic income. Continue reading

Activation policies in the 1990s and 2000s: Denmark and the United Kingdom compared.

Dear readers,

I haven’t blogged for a while. My excuse is that I’m writing up my PhD thesis comparing the emergence of activation policies in four countries: Australia, United Kingdom, Denmark, and the Netherlands. As you can imagine, this is taking a while!

In case this is a topic that interests you, here’s a sample of my work: a paper I presented at the FISS conference in Sigtuna Sweden in 2014 comparing activation in the UK and Denmark:

https://www.researchgate.net/publication/272482524_Comparing_activation_policies_in_Denmark_and_the_United_Kingdom_testing_the_convergence_thesis

The conclusion? These two pioneers of activation policy took the same ideas – structural unemployment, activation, and New Public Management, and implemented  them differently. They put the activation policy jigsaw together in different ways. Path dependency was at work here: the two countries had very different sets of labour market and social security institutions, and still do.

mousewheel

 

 

The ‘Qualification Program’: Norway’s answer to entrenched long term unemployment?

With an unemployment rate of 4.1%, Norway must be getting a few things right. In 2007 they did what few countries do: seriously invest in an employment program to reduce entrenched, long term unemployment.  The two-year ‘Qualification Program’ aims to overcome social barriers to work as well as low skills. Participants must undertake full time activities and caseloads are 1:18. In a new twist on work incentives, they receive higher income support than similar unemployed people. It’s not cheap, but 4 years after starting the program, long term unemployed people are 18% more likely to be employed.

Continue reading

Who’s the most efficient of them all: income tax or GST?

 

The emerging narrative on tax reform in Australia goes like this:

  • Yes, the GST is regressive (as clearly shown by a recent ACOSS analysis)
  • But we rely more than most of our ‘competitors’ on income taxes
  • And this is harmful to incentives to work, save and invest
  • So, we should ‘change the tax mix’ by raising the GST in order to reduce personal income or company tax rates.

This blog answers the question: which are more economically efficient – personal income taxes or consumption taxes?

Continue reading

The UK minimum wage and Universal Credit: more austerity or new foundations for economic security?

The following are my comments in response to a (good) debate on recent social policy changes in the UK on the website of their Social Policy Association. Social policy experts there are grappling with how to respond to the British Government’s budget which raised minimum wages and cut tax credits for low paid workers while continuing the roll-out of the new income support payment called Universal Credit. What are we to make of this ambitious re-shaping of income protection of low paid and jobless workers in the UK? There are lessons here for us in Australia and (as I argue) some lessons from Australian policy experience for the UK.
Here are the links for websites of the Australian Social Policy Association and British Social Policy Association. People with an interest in social policy ideas and debate should think about joining!

Continue reading

Social policy for the ‘good society’

Social policy for the ‘good society’

[comments presented at the Australian Social Policy Conference, Sydney 30 September 2015]

The ‘golden triangle’ of a good welfare state consists of:

  1. A labour market that minimises inequality and maximises mobility;
  2.  A social security system that minimises poverty and maximises economic participation;
  3.  Community services that strengthen solidarity and target disadvantage.

To achieve the ‘good society’ we still need to strengthen each of these three foundations and integrate them in response to individual and community needs.

It helps to give an example: I’ve been researching ‘activation’ or employment participation policies for people of working age on income support.

Over the last 25 years, Governments have re-written the welfare contract:

In return for income support, people are now expected to take steps to secure paid work where they can, and Government in turn is expected to invest in supports that improve their capacity to do so.

This brings to the fore three factors that have always shaped well-being for people in a vulnerable position in labour market: adequate income support, access to jobs (keeping in mind that labour market participation was always a benefit requirement), and the services required by people disadvantaged in the labour market (which in the past were rarely offered).

Every country does activation differently: it’s a site for the inevitable political contests over work and welfare. Every country has its policy strengths and weak links.

In Australia, wage inequality is too high but labour mobility is relatively good. We have an unusual combination of high minimum wages, greater reliance on part time employment (so that employers can use low skilled labour more productively) and in-work benefits (people receive income support and family payments when in low paid part-time jobs). This set-up is far from perfect, but it works better than labour markets that underpay people or exclude them completely. For example, a full time worker in the United States receiving the minimum wage has to work five days to earn as much as a minimum wage earner in Australia receives in three.

The weak links in our labour market for low skilled workers are high levels of casual work, decline of union presence in workplaces, and lack of protection for the large number of temporary workers from overseas (backpackers and students), which undercuts minimum wages.

The weakest link in the social security system is the low level of Newstart Allowance for those out of paid work: at $37 a day, which is towards the bottom of unemployment benefits in OECD countries.

In employment services it’s the lack of investment in the 70% of recipients have been on Newstart for more than 12 months. The main public investment here is Work for the Dole (a traditional ‘workfare’ program), which is more about pushing people away from income support than drawing them towards secure employment.

The solution to these problems is not just a matter of more benefits and more investment – the system has to be restructured so that the benefit system, labour market, and employment services are mutually reinforcing.

At least three changes are needed:

  1. We assume unemployed people should come to the labour market, not the other way round.There is much talk of incentives for unemployed people when its employers who need to be incentivized. A tighter labour market, better regulation of pay for low skilled work, wage subsidies for economically excluded workers would do much more to reduce unemployment than adjustments to benefits to improve work incentives. Employment service providers should have better resources and incentives to work more intensively with employers.
  2. We divide social security for people of working age into pensions for those supposedly ‘unable to work’ and the much lower Newstart Allowance for those ‘able to work’. Newstart is over $260 a week less than the pension for a single adult. By implication, those able to work are less ‘deserving’ of income support, even where their financial needs are the same.‘Unable to work’ a very antiquated notion. We should move away from these old distinctions and base rates of payment on need rather than distance from employment.

    This idea owes much to the principles of ‘basic income’ (and Australia comes closer to that ideal that most countries), but I prefer Tony Atkinson’s version in which payments are still linked to workforce participation. If income support is not closely connected with the labour market, then economic exclusion may be entrenched.

    If we move away from outdated notion that some people are ‘unable to work’ participation requirements can be better adjusted to individual circumstances, especially caring roles. This does not imply that the social security system should regulate family care. Rather, caring roles should be taken into account when deciding economic participation requirements.

  3. Governments guarantee people basic income support but not the employment assistance they need.In the name of cost-efficiency and flexibility, employment services in Australia are purchased from non-government providers based on employment outcomes. This sounds like a good idea – given the poor historical performance of public employment services in assisting people with labour market disadvantage. But over time employment services have been reduced to the lowest common denominator: the minimum of job search assistance required to get those who are ‘easiest to place’ over the line, while the rest languish for years on unemployment benefits.

    The present employment services system is all about process rather than content. We’ve lost sight of what it is that employment services should provide: the regular work experience, training and other services that many people need to improve their job prospects. No one is taking clear responsibility to provide them.

    We need to ensure the Government does not repeat that mistake as it experiments with the ‘investment approach’ to social disadvantage which is now under consideration.

These three issues are all connected: we won’t have adequate income support without labour market participation, and participation won’t be effective without a substantial investment in employment supports, and a change in the way the labour market treats low-skilled workers.