Minimum Income scheme payments: economic instrument or merely a political tool?


In recent years, scholars and institutions have emphasized, with increasing frequency, the necessity of Minimum Income (MI) schemes. This system of social welfare provision guarantees to all citizens or families an income sufficient to live on, as long as they meet certain criteria. Eligibility is determined by citizenship, a means test, and willingness to perform community services or availability for the labour market. Considered a key instrument to fight poverty, the European Parliament clearly encouraged, in 2010, each Member State to create conditions, using coherent welfare policies, in order to guarantee an adequate standard of living for its citizens. Therefore, the implementation of this kind of income support has, for a long time, been at the heart of different debates. In particular, what scholars and politicians have tried to address were the implications of a possible introduction of a MI, where the debate encompasses several relevant issues. In fact, from psychology and sociology to law, from politics to the more specific aspects of economic theory, looking at the Minimum Income issue is always considered worthwhile. MI might, for instance, be motivated as a remedy against the so called “threat of starvation”, which has led people to accept any type of work since, loosely speaking, they did not have any alternatives. So, a MI would have given back the right of choice to people who were slaves of a system that did not guarantee anything but starvation in case one refused a not appreciated job proposal. Therefore, MI was necessary in order to make people do whatever they wanted, that is, they could have also rejected a job proposal waiting for a better one and, in the meantime, they were still able to survive as recipients of such a transfer. Surely the beauty of this policy is unquestionable. However, it could work if and only if people perceive this reform as a fair one: if not, that is, if workers looked at the introduction of a MI as a shocking reform, the net effect on conflict and rigidity of labour market - that MI is supposed to take care of - would be negative. In addition, policymakers should appropriately evaluate the costs related to such a reform: is it enough to argue that it could be financed by rearranging the set of the existing transfers and, in addition, that the costs of the MI ‘s implementation could be partially offset by a drastic reduction of administrative costs? Of course, this cost-benefit analysis should be done appropriately looking at the region-specific characteristics.

Evidence

Different studies have been done recently about minimum income schemes in the EU, on whether it was feasible or not, on how it could be implemented and, if both previous questions were answered appropriately, which would be the predicted implications on labour markets. One of said studies was conducted by Figari[1] who, driven by the EU resolution, directed a study in order to understand the effectiveness of a minimum income scheme, estimating two crucial indicators in 14 Member States[2]: coverage and adequacy. The former was to understand, given a threshold of poverty line, how many people were entitled to receive these transfers, whereas, the latter, refers to how many people of those entitled are lifted above the threshold or remain below it, albeit recipients of MI benefits. It turned out that, regarding the coverage issue, in several countries there were a lot of people excluded from receiving the subsides, even though they were entitled to have it. On top of that, some relevant results also arose for the adequacy issue: a large fraction of those who obtained MI still remained below the threshold of poverty. So, the authors pointed out that MI schemes could play a “counter-cyclical” crucial role against crisis and poverty, as long as both coverage is extended and adequacy is improved when policymakers decide to implement such a welfare policy. This, in turn, would require higher costs for the implementation of such reforms. Of course, this is just an example whose conclusion has to be considered more as suggestive rather than definitve.

Counterarguments

The main idea behind this article is not to claim whether or not it is worthwhile to implement a Minimum Income since, clearly, we cannot ignore the heterogeneity among different countries. But, despite this, we can analyse 4 different issues that could undermine the beauty of such a policy, namely:

  • Before starting to implement a specific policy, it would be better to perfectly understand what the impact on the institutional equilibrium could be and, hence, to think carefully about all the possible implications that could arise, changing permanently the status quo of the country. Therefore, when policymakers consider the implementation of a reform, they should not just look at previous experiences, but always contextualise with respect to their specific situation, in terms of institutions and organizations and in light of all possible theories that could make their life easier. Moreover, when implementing policies, the government should take into account not only the short-term effects but also the long-term effects (due to a possible removal of these policies) on the economy.

  • Promoting a policy like that would also imply the creation of incentives for the freedom to idle, that is, the introduction of MI could have negative effects on agents’ incentives to work. In addition, it could happen that MI is perceived as exploitative, in the sense that some workers would act as “parasites” of others.

  • MI can surely be considered as playing a crucial role to fight poverty, but this is true as long as some essential and precise systems of sanctions are implemented in order to keep people from lying about their earned income. In fact, one possible way is to act against the payoffs “offered” in the shadow economy, that is, to avoid situations in which those entitled to receive such a transfer actually have the opportunity to earn from other sources as well.

  • People could feel stigmatized when receiving this transfer: agents might react more on reputational rather than on economic incentives. In fact, if a person believes she is not able to produce income just because she is recipient of MI, she may not make any serious effort to search for a job.

In conclusion, all the remedies should point in the direction of guaranteeing a minimal condition of life, as the EU resolution suggests, but at the same time they should not promote, as Milton Friedman said, “a system that increasingly taxes work and subsidizes nonwork”.

[1] See Figari F, Matsaganis M, Sutherland H. (2013).

[2] European countries operating MI schemes.

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