In most countries, welfare systems are designed to support the disadvantaged. Aid is conditional on means-testing, as fairness seems to require and efficiency seems to recommend. However, conditionality introduces noteworthy difficulties in practice. Administrative costs for screening and monitoring often exceed 10% of relief funds. A sizable portion of disbursements, sometimes over 25%, either overcompensate beneficiaries or reach ineligible recipients. Most concerning, however, is the low take-up of conditional programs, resulting in many eligible individuals remaining unsupported. A universal basic income (UBI) circumvents these difficulties, while creating some of its own.
In a recent paper, Luís Guimarães (MACGROW), with Diogo Lourenço (THEOMET), evaluates the economic and welfare impacts of replacing existing conditional programs in the US with a UBI that would cost the same. Their model, accounting for the imperfections of conditional welfare programs, suggests that a UBI would enhance economic output and reduce wealth inequality, albeit at the potential cost of lower aggregate welfare due to decreased protection for economically vulnerable groups.
This said, a UBI would reach the poor and nonemployed that do not benefit from conditional programs. As Luís remarks, “while a UBI falls short compared to an ideal welfare system—a consensus in current literature—our findings underscore that imperfections, particularly low take-up, have significant macroeconomic and welfare implications that modify this conclusion.”
The study also examines the outcomes of substituting a more generous conditional welfare system with a, suitably upscaled, expenditure-neutral UBI. According to Luís, “our findings indicate that such a replacement would yield welfare gains, especially for less educated individuals, as a UBI would alleviate larger distortions and more effectively reach those in the dead-angle of conditional programs.”
In his current research, Luís continues to explore how the design of the welfare system affects macroeconomic aggregates and welfare. He is also keen on understanding how alternative designs interact and cope with the threat of automation and with shocks prompting business cycle fluctuations.
