Why Finland’s basic income plans are going to fail

cash-1358874_640The Finnish Ministry of Health and Social Affairs has published all information concerning the basic income experiment which should be implemented in Finland from the 1/1/2017, and it does not look very useful. More generally, the future of the basic income does not look bright.

A very limited experiment

 The experiment, according to the Ministry, will be carried by the Social Insurance Institution of Finland (Kela), and its primary goal is to find out whether basic income promotes employment.  Persons receiving unemployment-related benefits, under certain limitations, would be included in the experiment. From the target group, a test group of 2 000 persons would be selected by means of random sampling. It would be mandatory to participate in the experiment, which would ensure that the results will not be biased.

According to the proposal, the level of basic income would be EUR 560 per month. Since the experiment would be mandatory, the level of the lowest basic income to be tested should correspond to the level of labor market subsidy and basic daily allowance. Basic income would be tax free for the receivers.  When assessing the effects of basic income, the test group would be compared with a control group comprised of such persons from the target group who do not receive basic income.

The target group of the experiment would not include persons receiving old-age pension or students, for example, because improving their employment situation is not the objective of the basic income experiment. Students’ primary goal is to complete their degree.

Finally, it will only allow to see if people receiving the basic income will be still interested in looking for a job, or if they will take different kind of jobs. There will be no assessment for example of the impact on poverty, or on growth in the country, which would be very important. In addition, even the experiment will not tell a lot about people’s attitude towards employment, because when you say to somebody: “during 1 or 2 years, you will receive 560 euros a month (replacing your basic unemployment benefits) that you will keep even if you take a job, but it will stop at the end of the experiment”, it is quite different from “here are 560 euros a month for all the time until you will be retired”.

Employers’ association: “we find it very problematic”

On the employers’ side, the idea of a universal basic income is not very popular, as a representative from EK (Confederation of Finnish Industries) indicate: “We find it very problematic. So far, we are not convinced that its benefits are bigger than the unwanted consequences. We are especially concerned with the expenditures and incentives it causes, as it looks quite difficult at the present stage to combine affordable costs, acceptable levels of social protection and efficient supply of labor”. They also consider that, if it is relatively high, the implementation will have an impact on the present bargaining system in Finland, in particular on the level of wages.

EK’s representative  is also considering that the experiment is not a real one: “The experiment does not deal with basic income as it is usually defined. It is more as an additional form of income benefit than a universal income. Another problems is the small number of people receiving the benefit. Due to these facts, we will not be able to determine if the basic income works or does not work. It is a pity, since we had hoped that government would have the courage to set up a proper experiment, which could give scientific proof of the impact of the basic income”.

Trade Unions: skeptical with the basic income, and with the experiment

A representative of the main trade unions’ confederation, SAK, has declared that they are rather neutral on this topic, but he added: “The basic income experiment would be academically interesting. On the other hand, the experimented model would be impossible to implement to whole population, so the scope of the experiment is very limited. In general we are a bit skeptical with basic income: it does not seem to be a realistic solution in solving the problems of the current social insurance systems

The idea that the experiment will be academically interesting is justified, as it can provide interesting results on how financial incentives affect behavior, and it will be easy to obtain reliable estimates on labor supply elasticity. But it is not an extensive experiment on basic income itself, and  the limited size and scope of the target group limits the conclusions available from the study.

Why is the basic income not a realistic solution in solving the problems of the current social insurance systems?

The analysis provided by the representative of SAK is that extensive social insurance systems, such as in Finland and other developed countries, have the following major drawbacks: they cost a lot of money,  the need for high taxation and high taxes tend to be “distortive”, and their benefits tend to produce harmful incentive effects e.g. on labour supply.

Traditionally, the following solutions are used to mitigate these problems:in order to limit the costs, by targeting the social support, in particular through means testing, so that only those who need benefits receive them; and posing conditions with criteria for eligibility (e.g. an unemployed must seek jobs actively), so that some harmful incentive effects are mitigated.

The problem is that posing conditions and means testing require complex monitoring and bureaucracy and create other incentive problems (e.g. when benefits are phased out when earning work income, effective marginal tax rates become higher).  These are fundamental problems in all modern social insurance system, which could be solved by the basic income, but:

A full basic income paid to whole population and replacing all other benefits would be outrageously expensive, would require very high taxation and the incentive issues would not be solved

  • More realistic basic income models are thus partial, which means that there would remain a need for additional benefits for those in need, so that bureaucracy and incentive problems of the additional benefits remain
  • Rather low basic income that replaces all other benefits would be possible, but it would leave the benefit receivers worse-off.

So the basic income is not  the best model for a modern social security, and the search for the Holy Grail is going to continue in Finland between the social partners and the government in the next years.



Categories: Economy, Social

Tags: , , ,

1 reply

  1. “A full basic income paid to whole population and replacing all other benefits would be outrageously expensive, would require very high taxation and the incentive issues would not be solved” – according to whom? The models suggested (with tax rates included) are cost neutral. The incentive issues for the ever growing group of social insurance receivers would indeed be solved. This piece of writing seems to discard the full proposal without citing evidence or otherwise backing up the claims.

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