Free money makes people less likely to work. If common sense doesn’t convince you of that, a new study should.
In July, a National Bureau of Economic Research paper looked at the effects of a guaranteed income program run by two nonprofits. The initiative gave $1,000 a month for three years to 1,000 low-income individuals. As a control group, 2,000 individuals received $50 a month. It was “the largest unconditional cash transfer program evaluated by a randomized controlled trial” in the United States, according to researchers
The stakes of this experiment are significant. Those behind these guaranteed income programs are often looking to pave the way for a universal basic income. As the name implies, that scheme would give every person — or every low-income person — “free” money from the government. The theoretical justification is that a guaranteed income source would eliminate or alleviate poverty.
Without pressing financial stress, this theory goes, people would be able to find better jobs or take risks, such as starting a business. It could, proponents argue, allow them to pursue their education, leading to better long-term career prospects.
Or handing out free money might cause more people to work less.
Unsurprisingly, option No. 2 carried the day.
“We find total individual income excluding the transfers fell by about $1,500 per year relative to the control group, with these effects growing over the course of the study,” the researchers found. Further, “the program caused a 2.0 percentage point reduction in the extensive margin of labor supply and a 1.3-1.4 hours/week reduction in labor hours for participants. The estimates of the effects of cash on income and labor hours represent an approximately 4-5 percent decline relative to the control group mean.”
It gets worse.
The handout also caused partners and other adults in the home “to change their labor supply comparably to participants.” As a result, “for every one dollar received, total household income excluding the transfers fell by at least 21 cents.”
But perhaps these individuals spent their extra time taking college classes or starting businesses. Nope. Recipients of the money used “the time gained through working less to increase leisure.” The researchers rejected “even small changes” in other categories such as child care, exercising, looking for work or self-improvement.
These findings are a disaster for proponents of these plans. They also have ramifications for welfare and other safety net programs that too often trap people in perpetual poverty. A guaranteed universal basic income, no matter how alluring, is an awful idea.