Finland to Introduce a Basic Income

Finland has plans to scrap its welfare state in favour of a universal basic income of 800 Euros.

While it may sound counterintuitive, the basic income is intended to encourage more people back to work in Finland, where unemployment is at record levels. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

Detractors caution that a basic income would remove people’s incentive to work and lead to higher unemployment.

The article doesn’t say who those detractors are, but they are wrong. When economists claim that welfare removes people’s incentive to work, it’s not because receiving cheques from the government automatically makes one lazy. It’s because they take those benefits away when you earn more.

Take Finland before this reform. As the article states, “At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.” That means that they faced an implicit marginal tax rate of over 100%! With a basic income, the implicit marginal tax rate for everyone below the lowest tax bracket is zero. If your tax rate dropped from >100% to 0%, would that motivate you to work more? It sure would for me.

This is a good policy move. It will reduce marginal tax rates on the very poor while simultaneously reducing bureaucracy. Good job, Finland!

5 thoughts on “Finland to Introduce a Basic Income”

  1. > Take Finland before this reform. As the article states, “At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.” That means that they faced an implicit marginal tax rate of over 100%! With a basic income, the implicit marginal tax rate for everyone below the lowest tax bracket is zero. If your tax rate dropped from >100% to 0%, would that motivate you to work more? It sure would for me.

    Couldn’t you achieve the same effect with just having welfare payments degrade more gradually? So there is no situation when earning more pays less? It seems to me that GBI is mostly a patchwork for poorly designed welfare brackets. (And why are there brackets at all and not a curve?)

    On a related note, what is your opinion on things like technological unemployment (or underemployment) and the like? I am interested.

    1. Yes, a more gradual phaseout for benefits would also solve the 100%-marginal-tax-rate problem.

      The biggest issue with technological unemployment—as opposed to other random calamities that could cause a bunch of people to suddenly find themselves with worse employment prospects—is that it can cause a populist backlash against the technology. Uber, for example, is experiencing this.

      My worry is that a lot of developed economies have become more bureaucratic and less flexible, so that people who are unemployed by technology (or international trade, for that matter) can’t really get back on their feet. The extremely inelastic housing supply in many cities is probably the worst culprit, but a Byzantine and inefficient social safety net doesn’t help either.

        1. The opinion I think all economists share is that technological unemployment is temporary. How temporary is another issue. The classic example is when tractors replaced ~90% of the workforce without even causing a recession. It used to be the case that a huge portion of the population had to be out tilling the fields just to feed everyone, the tractor replaced all of those people, and they went to the cities to make Model T cars. If someone in the 19th century looked at the first tractors and predicted that the people of 2016 would have no work to do because tractors took all the jobs, we’d rightly laugh at them.

          The issue today is that the period of unemployment may be longer than it was in 1900. When an industry shuts down because a new technology replaces it, the very specialized workers in that industry might choose to collect unemployment insurance, apply for disability, or take early retirement rather than starting new careers. The next generation of workers is almost certainly better off because of new technology, but particular unemployed workers might be considerably worse off.

          1. Thank you for your time. What you wrote makes sense. But there are some more aspects to consider. For one, it is not *quite* true that no one was ever made unemployable by a machine. Think down syndrome. In the middle ages there was no diagnosis for it, and people afflicted were treated no worse than anyone else (we know that because they were buried the same). That’s because virtually all the work was hard manual labor, and those people were just as good at it as anyone else.

            Today of course down syndrome usually makes you unemployable, probably forever. Do you think it is possible for this “waterline” to rise further and expand to, say, bottom 10% by intelligence? I am not really certain that we can retrain *everyone*.

            (Another reason to implement UBI, I suppose.)

            Second issue is growth. Nothing can grow forever, and with some disasters (e.g. global warming) I can see it stalling. Which would also prevent invention of new jobs along with who knows what else.

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