Universal Basic Income: A Dynamic Assessment

What do we know about UBIs? What set of issues would an UBI solve and what new set of problems may it create or aggravate? These are important questions which cannot easily be answered as we lack the evidence provided by real experiences in advanced economies with a UBI policy. This is especially true of the longer-term intergenerational consequences of these programs and of their implications at an economy-wide level, i.e., in general equilibrium. Our paper provides a very inexpensive evaluation of such a program by studying its consequences in a computational model that incorporates many of the most important channels affecting the costs and benefits associated with a UBI policy.

The model features an economy with imperfect capital markets and overlapping generations in which agents are subject to productivity shocks. Individual’s make not only the standard labor supply and consumption decisions, but also decide upon whether to attend college and, when they become parents, how much to invest in the skill formation of their children when these are young, using both time and money. We then estimate the stationary equilibrium of the economy using simulated methods of moments to match key features of household data and a tax function that replicates the main features of US.

We find that a UBI policy that unconditionally gives all households a yearly income equivalent to the poverty line level ($11,000 per household per year as measured in year 2000 dollars) has different implications for older generations that are alive when the policy is introduced relative to future generations. The policy is generally welcomed by older and poorer households — those with low skills or without a college education. It is, however, a very expensive policy to implement. The higher taxes required to finance this policy reduces parental investment in children’s skills, lowers the share of agents with college education, and decreases saving, requiring 1 even higher taxes over time. This leads to younger agents and all future generations, operating behind the veil of ignorance, preferring to live in a world without UBI – and willing to sacrifice up to 9% of consumption to do so in the new steady state. A large part of the negative consequences of UBI, both in the transition and in the new steady state stem from these intergenerational linkages, highlighting the importance of taking them into account in policy analysis.