Elise Aerts - The Impact of Universal Basic Income on Labour Supply: Measuring Financial Work Incentives at the Intensive and the Extensive Margin

  • Presenting author: Elise Aerts (Centre for Social Policy, University of Antwerp)

  • Authors: Elise Aerts, Ive Marx and Gerlinde Verbist

  • Session: B02C - Basic Income - Tuesday 11:00-12:30 - Senate Hall

A universal basic income (UBI) is often the topic of heated academic and public debates. One of the most contested issues relates to work incentives and labour market supply, especially given the inconclusive empirical and theoretical evidence. According to standard economic theory, a basic income would result in a reduction of labour supply as (1) the reservation wage would increase and (2) the taxes necessary to fund a basic income would have an efficiency cost in terms of worsening of work incentives. However, reality is often much more complex than standard theory and the combination of a UBI with other tax-benefit policies may lead to unexpected effects. Differential effects can also be expected for various population groups (e.g. primary or secondary earner, men versus women; with and without children). In this study, we explore the impact of the introduction of a UBI on work incentives in Belgium and the Netherlands – close neighbours but also miles apart in the labour market. And to get a comprehensive picture of the possible effects on the labour supply, we measure not only the incentive to work on the extensive (i.e. to work or not to work) margin, but also on the intensive margin (i.e. how many hours work). We use the tax-benefit microsimulation model EUROMOD, as it is a flexible instrument to answer ‘what if’ questions, such as ‘what if a UBI is introduced…’. We do not rely on hypothetical families, but calculate the participation tax rate and marginal effective tax rate for a representative sample of the population (EU-SILC for the year 2019) using EUROMOD. By comparing the baseline situation with different UBI scenarios, we identify under which conditions and for which groups in the population work incentives would worsen or improve.