Employment is a key determinant of social outcomes
This century, the compounding of disruptive events has generated animated debates about reconfiguring the welfare state – among them, the pros and cons of a basic income.
The first major disruption to the social policy status quo was the financial collapse of 2008 and ensuing recession. Prior to 2008, an important social policy, pursued most aggressively in the United States and United Kingdom, was aid to low-income families wanting to buy a house. As long as house prices continued to rise, as they did from the early 1990s to 2007, the policy more or less worked as intended. When prices stopped rising, the fragile portfolios of many large banks and many working-class families led to cascading bankruptcies. The political fallout was collapse of confidence in centre-left and centre-right governments. While some of the ensuing populist upheaval occurred on the left (e.g. Jeremy Corbyn’s takeover of the UK Labour Party), most was on the right (e.g. “tea party” Republicans, Trump’s election, Brexit referendum).
The second disruption has been the massive shift of basic manufacturing from high- to middle-income countries, China in particular. With the post-1989 demise of traditional Communist conventions of five-year central planning as a viable development strategy, pragmatic elites in east and southeast Asia enabled private and state-owned firms to operate free of many previously entrenched corrupt practices – practices still prevalent in much of South Asia and sub-Saharan Africa. They also assured decent primary and secondary education for all. A reasonably well-educated population is a prerequisite for creating a large labour force able to “go to town” and become productive workers in export-oriented manufacturing. Consumers in Europe and North America have enjoyed the low prices at Walmart; the working class has not enjoyed the loss of well-paying manufacturing and resource-sector jobs, replaced by low-paying service jobs. In the West, income polarization has worsened.
The third disruption is the COVID pandemic, which has led governments in high-income countries to protect lives over jobs. Instead of a job, millions of laid-off workers have received income via ad hoc transfers.
Not surprisingly, many on the left and on the right now argue to cut the Gordian knot implicit in our complex set of conditional social programs and convert the new ad hoc transfers into an unconditional basic income for all adults. Conservative advocates of a basic income – Milton Friedman is the iconic example – envision a basic income that substitutes for many conditional social programs and leads to a net reduction in government transfers. Progressive advocates envision a basic income as a more solid foundation to reduce poverty.
Elaine Power and Jamie Swift present a well-argued version of the left-wing case. In brutal summary, they make three arguments:
- The ethical component: Poverty is a miserable state of affairs, and a basic income could more or less eliminate it.
- Minimal adverse consequences: Incorporation of a basic income in the social contract would not generate reduced employment or family dysfunction.
- Manageable financial implications: Financing a basic income does not require major, politically unacceptable changes to Canadian taxation conventions.
I am not persuaded. Let’s take each argument in turn.
The ethical argument
Our communal identities begin with the family. Over millennia, the scope of human identities has extended to our village, our tribe and, in the last two centuries, our respective nation-states. Identification as citizens of a nation, with accompanying benefits and obligations, came to prominence in the 19th century. In most high-income democratic countries, national identity is sufficiently meaningful that citizens elect governments intending to impose taxes equivalent to 40 per cent or more of GDP, a third of which is redistributed via provision of core services (basic education and health care) and cash transfers.1 At present, cash transfers are provided to the old, the poor and the disabled. In Canada, since the 1990s, a new category of conditional transfers is large-scale transfers to low-income families with children. This was a quid pro quo for simultaneous tightening of access to social assistance.
At the current stage of human evolution, meaningful identity with the old, the poor and the disabled beyond the nation-state exists, but it is a marginal concern. Some high-income countries adhere to the UN admonition to spend 0.7 per cent of GDP on international development, but most countries, including Canada, spend less than half of 0.7 per cent on development.
The major disruptions that predated public support for the present welfare state were the Great Depression of the 1930s and the horror of World War II. For the UK and Canada, the “Magna Carta” of the welfare state is the Beveridge Report, tabled in the UK Parliament in 1942. Born in India, William Beveridge was an economist who devoted his career to social policy reform in the UK. Leonard Marsh, who participated in research under Beveridge, subsequently emigrated to Canada and authored a Canadian equivalent, submitted to Ottawa’s Parliament in 1943.2
Both reports called on governments, following World War II, to create a new social contract, with a dramatic expansion of expenditures on social insurance programs, education and pensions for the old. In 1945, the uncharismatic Labour leader Clement Attlee defeated Winston Churchill, the war hero. The postwar Labour government’s most important innovation was universal health insurance (the National Health Service). By the late 1960s, Canada achieved a similar set of expanded social programs.
Beveridge perceived the welfare state as a set of mutual obligations among citizens in a democratic society. His report is filled with passages on the “citizen’s obligation,”of which this one, on the obligations implicit in provision of unemployment insurance, is typical:
The correlative of the State’s undertaking to ensure adequate benefit for unavoidable interruption of earnings, however long, is enforcement of the citizen’s obligation to seek and accept all reasonable opportunities of work, to co-operate in measures designed to save him from habituation to idleness, and to take all proper measures to be well. The higher the benefits provided out of a common fund for unmerited misfortune, the higher must be the citizen’s sense of obligation not to draw upon that fund unnecessarily.3
Assar Lindbeck, one of the most important Scandinavian economists to have analyzed the welfare state, reached the same conclusion as Beveridge.4 For Lindbeck, the welfare state is a “triumph of western civilization … (However,) the day the ‘Lutheran ethic’ subsides in the population, and ‘Prussian discipline’ ceases to be exercised by the controlling administrators, the welfare state is in trouble.”5
A recent contribution to analysis of the postpandemic welfare state is the 500-page report issued by British Columbia’s Expert Panel on Basic Income in December 2020.6 The panel outlines many incremental reforms to improve and enlarge transfers to the poor; however, the authors reject a basic income on several grounds, the first being that it ignores Beveridge’s “citizen’s obligation” or Lindbeck’s “Lutheran ethic”:
The basic income philosophy is conceptually consistent with our stated goal of moving to a more just society … However, there are two major differences between the (principles espoused by basic income advocates) and our broader social justice–based framework … (We emphasize) two elements of public trust that are sometimes overlooked by basic income advocates: policy stability and reciprocity. Specifically, (policy stability) relates to the cost of a program, how it would be financed, how those costs would be distributed, and the overall economic effects. Reciprocity refers to mutual respect between those who are beneficiaries and those who are mainly paying to fund the supports … By emphasizing (individual freedom from poverty) and downplaying the collective interest, important considerations related to public trust – cost, economic implications, and reciprocity – are downplayed in the basic income principles.7
Opinion surveys are snapshots of opinion at a point in time. They are not the final word, but if we are concerned with mutual respect between those paying for social services and those receiving them, surveys should not be ignored. In mid-2020, the Angus Reid Institute released a national survey on support for a basic income (see table 1). The headline of the release (“Majorities Support Idea of Basic Income”) sins by omission. The majority (59 per cent) support the idea of a basic income, but only a third (36 per cent) are prepared to pay more in taxes to finance it. This statistic is similar to the willingness to pay (34 per cent) in a 2016 Angus Reid survey posing the same question. Admittedly, there are important differences in willingness to pay based on region, age, income, education and preferred political party.
Advocates of a basic income point to several large-scale pilot projects that indicate no dire employment consequences over the length of the pilot. The B.C. report agrees that, over the length of typical pilots (three years or under), changes in employment are minor.8 However, the authors of the B.C. panel report do not find this evidence convincing:
We do not believe that basic income pilots provide information that accurately reveals the effects that a permanent, ongoing, fully implemented basic income would have on people’s behaviour … people will not respond in the same way as they would to a permanent basic income available to all eligible persons, rather than a sample.9
The implication is that adverse long-term consequences emerge slowly and randomized control pilot studies (assessing “treatment” samples versus “control” samples) are not able to answer misgivings about long-term consequences. For basic income advocates to be convincing, they need to discuss some long-term “success stories” – examples of communities, formerly poor, faring better thanks to some unconditional intergenerational income transfer available to all members of the community at low or poverty-level incomes. To my knowledge, no such cases exist.
On the other hand, there are many potential counterexamples: low-income urban neighbourhoods in which intergenerational reliance on social assistance is the norm; rust-belt American cities that have suffered significant loss of stable manufacturing jobs and are reliant on social assistance; remote indigenous communities in high-income countries, from First Nations in Canada to the Sami in Scandinavia and Aborigines in rural Australia; native-born citizens of petromonarchies in the Gulf.10
In each of these counterexamples, basic income advocates can argue that factors other than reliance on transfer income are to blame for adverse social conditions. Admittedly, racism features in any analysis of urban poverty in U.S. ghettos; low education levels are associated with dysfunction in the American rust belt; disruption by European settlers of tribal societies is a lingering problem; dependence of industrial societies on Middle East oil extensively distorted political and economic incentives in the Gulf. All these qualifications matter, but nonetheless a common feature among these cases is serious social dysfunction arising from unemployed men.
Advocates of a “traditional” welfare state – I include here Beveridge, Marsh, Lindbeck and the B.C. Expert Panel – want high-quality universal social programs, in education and health in particular. They support generous in-work benefits to those with low earnings and generous transfers to the elderly, disabled and dependent children in lower-income households – categories that most citizens do not expect to be employed. However, they also want employment earnings to remain the major source of income for most households with adult members able to work. Not surprisingly, the B.C. Expert Panel’s report contains recommendations to supplement low earnings as well as to improve labour standards and pay for lower-skill jobs.
There is a long tradition in social policy that emphasizes the role of employment – young adult male employment in particular – as a key determinant of social outcomes in a community. There are several motivations behind this emphasis:
In general, two-parent families realize better outcomes for children and for themselves than do one-parent alternatives. In any community, women, when choosing marriage partners, use employment as a proxy for men’s suitability as fathers. In marginalized communities, where many young men experience a low employment rate, young women often seek second-best alternatives (such as grandmothers as prime caregivers) for raising children.11
Adverse employment conditions are particularly damaging for men with low education levels relative to the norm. Over the last quarter century in the United States and most other high-income countries, men with high school or less have disproportionately experienced employment and income declines and above-average prevalence of many pathologies.12
Adults typically form unions and begin families while in their 20s. Those in their 20s who are not in education, employment or training – NEET, as they are called – are less likely to form stable unions than the non-NEET. The NEET group is less likely to participate actively in raising children that arise from a union and is prone to depression and abuse of alcohol and drugs.13
As summarized in the above bullets, the emphasis on employment may appear excessive. There is, nonetheless, extensive evidence that unstable and poorly paid employment is central to any understanding of intergenerational poverty in high-income countries. William Julius Wilson, a prominent American sociologist, developed his ideas on the role of employment in family formation primarily in the context of American inner-city ghettos. Writing in 1996, he summarized:
The disappearance of work and the consequences of that disappearance for both social and cultural life are the central problems in the inner-city ghetto. To acknowledge that the ghetto still includes working people and that nearly all ghetto residents, whether employed or not, support the norms of the work ethic … should not lead one to overlook the fact that a majority of adults in many inner-city neighborhoods are jobless at any given point in time.14
In several studies, American economists David Autor, David Dorn and Gordon Hanson have analyzed the impact of the decline in stable manufacturing employment over the last quarter century. In a recent study, in 2018, they analyzed change in manufacturing employment and social outcomes using detailed U.S. census data at the local level between 1990 and 2014. They concluded,
On average, trade shocks differentially reduce employment and earnings of young adult males, compared to young women, and shocks to male relative earnings reduce marriage and fertility. Consistent with prominent sociological accounts, these shocks heighten male idleness and premature mortality, and raise the share of mothers who are unwed and the share of children living in below-poverty single-headed households.15
Over the last decade, Princeton economists Anne Case and Angus Deaton have analyzed cohorts of Americans born since 1940 in detail. They focused on the prevalence trends of numerous morbidities and sources of distress – suicide, chronic joint pain, difficulty in socializing, heavy drinking, mental distress, sciatic pain, drug/alcohol mortality – and paid special attention to those who were not married or had never married and those who were not in the labour force. Adjusted for age, these symptoms of community distress were more prevalent among those born more recently. Not only has prevalence risen among younger cohorts, but the increase in prevalence rates has also accelerated among cohorts born since 1980.
Case and Deaton make no claim to have the definitive explanation for these trends. However, they introduce evidence on the importance of declines in wages and in labour force participation among White working-class Americans with education levels below a college degree. Among younger cohorts of men with low education levels, the accelerating prevalence of these pathologies is more pronounced among White than among African and Hispanic Americans.
There have been no studies in Canada as rigorous as those studying social problems in low-employment U.S. communities, but there is abundant cross-section evidence – fragmentary and some of it dated – to the effect that First Nation communities with low employment rates experience high social dysfunction. Statistics Canada publishes descriptive studies on homicide statistics in Canada, disaggregated in terms of Indigenous/non-Indigenous identity, gender and province. Averaging results over three years, 2016 to 2018, the Indigenous homicide victim rate outside the Prairies was four times the national non-Indigenous rate. In the Prairie provinces, the Indigenous homicide victim rate was 12 times the national non-Indigenous rate. Three quarters of Indigenous victims of homicide are men. A disproportionately large share of Indigenous homicides (two thirds of both Indigenous victims and Indigenous perpetrators) take place in the Prairie provinces, where the Indigenous employment rate is lowest. A similar tragic story can be told about Indigenous suicide rates.16
Financing a basic income
In 2017, the Liberal government of Ontario launched a basic income pilot, which was cancelled by the incoming Conservative government the next year.17 The basic income was set at $17,000 for a single individual and $24,000 for a couple. These amounts were 75 per cent of the relevant Low Income Measure, one of the poverty thresholds calculated by Statistics Canada. The federal Parliamentary Budget Office (PBO) has estimated the annual gross cost of a national basic income, based on parameters of the Ontario pilot. Canada-wide, the lowest gross cost of the basic income was estimated at $92 billion and the highest at $196 billion,18 depending on variation in the rate at which the basic income is reduced as earned income rises (benefit recovery rate or BRR, illustrated in box 1). To give some perspective, total estimated federal tax revenue for the 2019–20 fiscal year (prepandemic) was $286 billion. Depending on the BRR, the basic income would cost between one third and two thirds of total federal tax revenue.
The PBO offset gross costs by eliminating numerous federal and provincial tax credits and other programs targeting low-income households. Including these offsets, the net annual cost ranges from $46 billion to $150 billion. Note that some of these offsets imply sizable tax increases for all Canadian taxpayers. The “basic pesonal amount” is a nonrefundable tax credit that implies no federal income tax is payable on the first $13,200 of taxable income in the 2020 tax year. The provinces offer a similar tax credit, which varies by province; in B.C., it implies no provincial income tax on the first $11,000 of taxable income. These tax credits are available to all taxpayers, but are of greatest relative benefit to those with low taxable incomes. Elimination of these credits would raise the annual income tax liability of each B.C. tax filer by $2,500.19
Simulating the impact of a basic income
The B.C. Expert Panel undertook many simulations of the impact on poverty to be expected from a basic income, varying two key parameters: the value of the basic income transfer to those with no earnings and the rate at which the basic income is reduced as earned income rises (benefit recovery rate or BRR). In one case, which is discussed in detail, the estimated decline in poverty rate is from 8.6 to 2.7 per cent (in terms of the Market Basket Measure, a poverty threshold calculated by Statistics Canada):
- the basic income for an individual is $18,000 annually;
- the BRR is set at 50 per cent;
- the break-even earnings level beyond which no basic income transfer is disbursed is $36,000.*
We need to introduce one more concept, the marginal effective tax rate (METR). The METR is simply the sum of the relevant BRR and relevant tax rates (personal income tax, Employment Insurance and Canada/Quebec Pension Plan) based on earned income.
In figure 1, the blue line illustrates the METR at different earnings levels arising from the federal plus provincial personal income tax, with no benefits provided. At earnings below approximately $13,200, the METR is zero or negative. Why zero? The “basic personal amount” is a nonrefundable tax credit that implies no federal income tax is payable on the first $13,200 of taxable income; a similar B.C. credit implies no provincial income tax is payable on the first $11,000 of taxable income. Why negative? Canadian social policy also includes an earnings supplement for those with earnings above a lower threshold and below an upper threshold. Increases in earnings within this range increase the size of the supplement. Above the upper threshold, the supplement remains in place. At a somewhat higher earnings level, the supplement is subject to a BRR. The effect of the earnings supplement BRR, added to personal income tax rates, is a METR between $15,000 and $20,000 of close to 40 per cent. Once the break-even earnings level for the earnings supplement has been reached, the METR declines until earnings place the taxpayer into a range with a higher marginal tax rate.
The orange line applies to those receiving temporary assistance in British Columbia. It illustrates the “welfare wall,” a major disincentive for anyone “on welfare” to seek employment to get “off welfare.” Beyond a $400 per month exemption in B.C. (now raised to $500), the welfare BRR is 100 per cent. Once earnings exceed the break-even temporary assistance level, the METR falls to the blue line.
The purple line assumes a basic income of $18,000 for an individual, subject to the 50 per cent BRR associated with the basic income. Until the basic income break-even income, the purple line lies 50 percentage points above the blue line. Tax credits and the earnings supplement keep the METR below 50 per cent until approximately $11,000. Thereafter, the METR rises to 80 per cent until the $36,000 basic income break-even earnings level. The METR associated with this basic income model entails a “wall” lower than in the case of temporary assistance, but sufficiently high that the BRR over the $15,000–$36,000 earnings range is 80 per cent.
The choice of parameters for this illustration was based on minimizing the program cost while reducing the provincial poverty rate below 3 per cent. A lower BRR reduces the METR and hence the employment disincentive, but it increases program cost because the break-even earnings threshold at which recipients no longer receive any basic income rises. If, all else constant, the BRR was lowered to 30 per cent from 50 per cent, the METR “wall” would decline to 60 per cent over much of the range between $15,000 and the break-even earnings level of $60,000. The estimated cost of implementing this revised model in B.C. rises from $9 billion to $15 billion. To give perspective, the basic income cost with a 50 per cent BRR is nearly twice the province’s preK–12 education budget, and with a 30 per cent BRR nearly three times the preK–12 budget.
* British Columbia Expert Panel on Basic Income, Covering All the Basics: Reforms for a More Just Society, p. 363.
Instead of a basic income
If we ignore potential long-term unintended consequences, the basic income undeniably generates benefits to the poor in B.C. (the Expert Panel assessed a B.C. basic income, not a national program). For example, the panel estimated that the model discussed in the box will reduce the province’s poverty rate from over 8 per cent to below 3 per cent.
The Expert Panel’s final argument is that the opportunity cost of a basic income is too high. At an annual budgetary cost between $3 and $5 billion, the panel concluded that many poverty-related problems, more urgent than a basic income, could be addressed. Among many other changes, the report’s 65 recommendations included:
- reforming disability assistance programming, including an increase in the monetary benefit for those on disability assistance to the Market Basket Measure poverty threshold (at a cost of approximately $900 million);
- increasing temporary assistance benefits and reducing the associated BRR to 70 per cent (over $300 million);
- increasing the earnings supplement for adults without children ($400 million);
- extending targeted health benefits currently available only to social assistance beneficiaries, including dentistry, to low-income families not receiving social assistance (about $800 million);
- increasing services and financial support for young adults transitioning out of care (under $200 million);
- providing rent assistance (about $900 million).
My one major criticism of the Expert Panel is that it said little about the potential for high-quality preK–12 education to reduce intergenerational poverty. Admittedly, among the 65 recommendations are school bonds and funds for training social assistance recipients. One of the proximate goals for poverty reduction should be to reduce the incomplete secondary school rate among young adults aged 20 to 24. (Currently, this rate is about 9 per cent nationally.) Among those not achieving secondary certification by age 25, the most important group is the Indigenous population. On the basis of 2016 census data, among those on-reserve, fewer than half (48 per cent) have achieved secondary certification. The ability of those lacking such certification to find permanent employment at decent wages, whether living on- or off-reserve, is severely restricted. Among those who identify as First Nation but live off-reserve, secondary completion is higher (75 per cent). Among Métis, the share is 84 per cent, and among the non-Indigenous it is 92 per cent.20
Reducing incomplete secondary rates is feasible – but it is expensive. Among the most successful programs is Pathways to Education, a program of intense secondary-level mentoring and tutoring in low-income neighbourhoods. Its first pilot was in a public housing project in Toronto; Pathways has slowly expanded to inner-city neighbourhoods across Canada. The annual cost per student is about $5,000. The program has undergone several rigorous evaluations, which indicate its efficacy.21 Had I been on the Expert Panel, I would have argued for the array of services provided instead of a basic income to include several hundred million dollars spent on programs such as Pathways.
And for the rebuttal to the case against basic income, click to read Elaine Power and Jamie Swift Respond.
1 As defined by the OECD, general government revenue as a share of GDP among member countries in 2019 ranged from 22% in Mexico to 58% in Norway. The United States ranked low at 32%, while Canada, at 42%, was the median OECD member country. France and the Scandinavian countries ranked highest.
2 William Beveridge, Social Insurance and Allied Services, tabled in UK Parliament, 1942; Leonard Marsh, Report on Social Security for Canada, tabled in Canadian House of Commons, 1943 (reprint ed., with introduction by Leonard Marsh, Toronto: University of Toronto Press, 1974).
3 Beveridge, Social Insurance and Allied Services, p. 58.
4 Lindbeck died in 2020. Elsewhere in this issue, we publish a brief history of his contribution.
5 Assar Lindbeck, “Hazardous Welfare State Dynamics,” American Economic Review, Vol. 85, No. 2 (Papers and Proceedings, May 1995), p. 13.
6 British Columbia Expert Panel on Basic Income, Covering All the Basics: Reforms for a More Just Society, Final Report (2020).
7 Ibid., pp. 28–29.
8 Ibid., p.152
9 Ibid., p.372.
10 Mahmoud Habboush, Gulf States Struggle to Shift Jobs to Choosy Locals, Reuters, November 2, 2011.
11 William Julius Wilson, When Work Disappears: The World of the New Urban Poor (New York: Vintage, 1996); Charles Murray, Coming Apart: The State of White America, 1960–2010 (New York: Crown, 2012).
12 David Autor, David Dorn and Gordon Hanson, “When Work Disappears: Manufacturing Decline and the Falling Marriage Market Value of Young Men,” American Economic Review: Insights, Vol. 1, No. 2 (2019), pp. 161–78.
13 Sylvie Brunet, The Transition from School to Work: The NEET Indicator for 20- to 24-year olds in Canada, Cat. no. 81-599-X (Ottawa: Statistics Canada, S. 2019); Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism (Princeton, NJ: Princeton University Press, 2020); Robert Putnam, Our Kids: The American Dream in Crisis (New York: Simon and Schuster, 2015).
14 Wilson, When Work Disappears, p. xix.
15 Autor et al., “When Work Disappears.”
16 Sara Beattie, Jean-Denis and Joel Roy, Homicide in Canada, 2017, Cat. no. 85-002-X (Ottawa: Statistics Canada, 23018); John Richards, No Easy Answers: Insights into Community Well-being among First Nations, E-brief 304 (Toronto: C.D. Howe Institute, 2020); Mohan B. Kumar and Michael Tjepkema,Suicide Among First Nations People, Métis and Inuit (2011–2016): Findings from the 2011 Canadian Census Health and Environment Cohort (Ottawa: Statistics Canada, 2019).
17 For a review of the design of the Ontario basic income pilot see Michael Mendelson, Lessons from Ontario’s Basic Income Pilot (Toronto: Maytree, 2019).
18 Office of the Parliamentary Budget Officer, Costing a Guaranteed Basic Income During the COVID Pandemic (Ottawa: Author, 2020).
19 In terms of income tax avoided, the value of the basic personal amounts depends on the size of the nonrefundable credit multiplied by the lowest marginal income tax rate (15% federal, 5% B.C.). The federal total is approximately $2,000. The provincial totals vary by province; in B.C., the total is approximately $500.
20 For more detail on Indigenous education levels, see John Richards, Pursuing Reconciliation: The Case for an Urban Off-Reserve Agenda, Commentary 526 (Toronto: C.D. Howe Institute, 2018).
21 In Evaluating Student Performance in Pathways to Education, E-Brief 203 (Toronto: C.D Howe Institute, 2015), Philip Oreopoulos, Robert S. Brown and Adam Lavecchia undertook a difference-in-difference assessment of the efficacy of Toronto Pathways projects. Despite high per student cost, in a social cost-benefit analysis of Pathways, Employment and Social Development Canada concluded the present value (over 25 years) of benefits exceeded the present value of costs (Evaluation of Pathways to Education (Ottawa: Employment and Social Development Canada, 2019)).