Using Universal Basic Income and Unemployment Insurance to Help Citizens Cope with Unemployment

Unemployment's effect is usually considered negatively to any economy. However, many economists and academics state that there is a certain level of unemployment that cannot be erased. High unemployment rates translate into high costs on the individual, the society and the country. The costs of unemployment to the individual are easy to perceive: when a person loses his job, there is an immediate impact to that person's standard of living as his income is affected. When unemployment gets too persistently high rates during long periods of time, it becomes a pervasive problem, severe restrictions on immigration proposals are made and there are often increased calls for protectionism. In regards to the country, the unemployment leads to higher payments for such as benefits, food assistance, and Medicaid. In addition, those governments are collecting lower levels of income tax as before - forcing the government to borrow money.

In order to help citizens that endure unemployment, it can be of use two mechanisms Unemployment Insurance (UI) and Universal Basic Income (UBI). UI is one of the largest social insurance programs in the US, with more than $34 billion paid in benefits in previous years. "This figure is considerably smaller than for Social Security, Medicare or Medicaid, but it exceeds spending on such major programs as Workers’ Compensation, Temporary Assistance to Needy Families (TANF) or Food Stamps" (Stephane and Zimmermann, 2014). The main goals of a UI program usually include: (1) to help recipients to make efficient job choices during a period of financial stress, (2) to sustain consumption for workers and their families; (3) to minimize the adverse incentives that may accompany partial wage replacement, and (4) to help to stabilize the overall economy.

The idea of Universal Basic Income (UBI), on the other hand is simple. It gives everyone the means to live on a basic level with dignity by provisioning them with a minimum allowance without means-testing. In October 2013, Switzerland developed a constitutional initiative of a UBI policy

Two opposing views on the solutions

The goals of these unemployment programs can come into conflict. In the UI initiative case, replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job.

The UI suffers from a couple of flaws, such as tax distortion, the lower savings it generates, moral hazard, and disincentives to work. It is designed to offer support to people affected by involuntary unemployment. Because of the conflicts mentioned before, UI requires important monitoring of beneficiaries as it is difficult to assess if they actually look for employment with reasonable effort. Especially since the time spent searching for opportunities is on average a few minutes a day (Krueger & Mueller, 2010). Monitoring the UI program requires additional resources. For example, in the state of Oregon, "the cost of running the unemployment agency is about $500 per unemployed person per year" (Stephane and Zimmermann, 2014). This is the type of cost some want to avoid with this policy. Moreover, since monitoring is not perfect, a proportion of individuals who refuse employment offers would manage to go undetected.

Although the unemployment insurance program does a better job at protecting the unemployed, its overall usefulness could be in doubt since it suffers from moral hazard and substantial monitoring costs. Therefore, it can be complemented with the universal basic income (UBI), which is simpler to manage and immune to moral hazard.

In the UBI initiative, on the other hand, the conflict arises when it is given to people who do not need it, such as employed people. However, a UBI program is simpler to manage than a UI program, even if it still generates a tax distortion. Moral hazard is not an issue because workers and unemployed agents receive the same amount. It does not provide disincentive to look for work, unless it is set too high.

UBI is also motivated by ethical reasons in addition to its overall goal to reduce poverty. Beneath this premise is a sense of social justice and the social responsibility of a free state for its members. "For freedom to be meaningful, a free society must provide everyone with the proper means to exert that freedom" (Van Parijs, 1991). The state of Alaska provides one alternative of basic income through the Permanent Fund (Alaska Constitution, Article IX, Section 15) by sharing dividends from an Alaskan natural resource, oil. A basic income policy could be a good alternative to the reduction of social security contributions.

Economic theory behind the each alternative

The macroeconomic stabilization achieved through UI or UBI programs could occur through a build-up of trust fund accounts during strong economic times and the net payouts during weak economic ones.

The macroeconomic effects derived from both programs are considered positive. In a few words, an aggregate demand externality and an effect of low aggregate demand on the social cost of disincentives. The aggregate demand externality summarizes the impact of the redistribution effect when the economy is not performing well; both are governed by the difference in marginal propensities to consume between the unemployed individuals and employed ones. The UBI policy is challenged when unemployment level rises, with fewer agents employed, the tax rate required to sustain the policy must increase.

The UBI amount should not be set too high. It is demonstrated that the UBI policy thus raises the actual unemployment rate. Especially since the likelihood of quitting rises exponentially in response to increases in UBI benefits (Stephane and Zimmermann, 2014)

The interaction between UI and aggregate demand (AD) motivates higher generosity when the economy is slack. A redistribution effect on AD drives the impact of higher UI on output. This means that UI takes on a macroeconomic stabilization role arising from the AD externality caused by transfers to the unemployed. In addition, low AD changes the social cost of disincentivizing labor supply. Moreover, an increase in UI affects output and employment through a redistribution effect on AD.

The main argument against UBI has always been that it could significantly reduce the labor supply. Many UBI proponents stress out the insurance factor, and the lower administrative and monitoring cost than UI. However, UI is socially preferred because it does provide insurance and transfers are not “wasted” on people who do not need them (employed workers).

Conclusions and recommendations

Unemployment's effects in economy translate into (1) costs on the individual, (2) the society and (3) the country. An individual's standard of living is impacted when unemployed. On society, it translates into increased calls for protectionism. To the country, the unemployment leads to higher payments and less available funds because the lower level of income.

In order to stimulate economy and demand by unemployed people, it is recommended to evaluate two proposals: a Universal Basic Income policy (UBI) complemented with an Unemployment Insurance (UI) policy.

The main disadvantage of the UI program is related to monitoring costs. While an UI policy is better equipped to respond to employment shocks, it suffers from moral hazard and is costly to manage. Monitoring costs are significant and add to the social cost of administering the policy. Since no monitoring system is perfect a fraction of agents could abuse this program. A universal basic income policy, on the other hand has no such social costs and is very simpler to manage. The moral hazard present in a UI program would not be relevant in a UBI program as every agent in the economy is eligible for UBI benefits whether employed or unemployed.

To conclude, an optimal UBI is feasible. UBI may represent a more reasonable alternative even if the UI policy remains socially preferred. The superiority of UI is anchored in its ability to help those who are most in need.