GAI – Proceed With Caution

Conservative Senator Hugh Segal is actively promoting the very old new idea of a Guaranteed Annual Income (GAI) and Senate Committe hearings may soon follow. I’m all for providing more money to low income families and would willingly scrap social assistance as we know it for something that is more generous and less punitive – and will concede that Segal has some progressive instincts – but I have three key concerns re GAI.

Will it, like the Macdonald Commission version of the GAI, be funded by folding in income security programs, notably EI, which have important family and individual income stabilization objectives above and beyond a simple anti poverty objective? I fear so, in which case GAI risks robbing ordinary working people and the the near poor to give to the very poor – not what most of us have in mind in terms of progressive income redistribution. Also, GAI would be family income tested while EI benefits flow to individuals and are not family income tested, which is hugely important for gender equity and the economic independence of women and young people.

Second, will GAI supplement or substitue for higher minimum wages? Friedmanites have long supported a GAI as a “work friendly” alternative to welfare and decent wages, the basic idea being that a near starvation GAI would provide incentives to work and still make the job market more “flexible.” But even the OECD now concedes that income supplements must go hand in hand with a wage floor if we are to avoid subsidizing low wage employers. (See 2006 Employment Outlook.)
Third, how will the GAI interact with the tax/transfer system? If the GAI is “generous” in the sense of lifting people out of poverty- as it has to be to address the key anti poverty objective – it will have to be funded by a very quick phase out of the GAI as earned income rises. This means punitive marginal tax rates on the near poor (unless, of course, we contemplate funding it through truly progressive tax reform, which is probably not on the good Senator’s mind.)

In short, we have to be cautious re GAI proposals. IF we have decent minimum wages and IF we reform EI to increase access and benefits, then there is a role for a GAI in the sense of a Guaranteed Basic Income for those who can’t work (in place of welfare as we know it) , and in the sense of wage supplements for the working poor who fall though the cracks of precarious work and EI. But it should be a residual program, rather than a building block for a new welfare state.

20 comments

  • Why should a GAI be contingent on a higher minimum wage? Raising the minimum wage has only a marginal effect on poverty: the vast majority of those in poverty are weakly attached to the job market, and the majority of those earning minimum wage are not in poverty. I’m unaware of any study that suggests that increasing the minimum wage will have a measurable effect on poverty. It’s true that the sort of minimum wage proposals on the table won’t have much effect of an effect on employment, but that’s not the same thing as showing that it will be effective in reducing poverty or inequality.

    I can see reasons for not wanting to do away with EI entirely, and for being careful about the family vs individual distinction when amounts are being calculated. But I don’t see why a GAI should be contingent on an increase in the minimum wage.

  • Stephen, if you read the 2006 OECD Employment Outlook which summarizes the research behind Phase II of the OECD Jobs Study you will find that the consensus view is (1) that minimum wage floors do have some impacts on inequality and poverty and (2) that wage supplements should go hand in hand with wage floors

  • Are you sure? I just skimmed the version available online (ISBN 9264023844), and I didn’t get that impression.

    Of course, it’s a 281-page pdf, and I only scanned it quickly for occurrences of the phrase ‘minimum wage’. Or I may have the wrong document.

    Could you point me to a more precise reference?

  • Whatever the merits of raising the minimum wage under current conditions, I think Andrew’s point stands that doing so would help limit the extent to which a GAI could function as a subsidy to lower-wage employers.

  • But that’s exactly what we’d expect to see: an increased supply of labour leads to a lower wage and higher employment. If a GAI weren’t in place, the tradeoff between lower wages and higher employment would be problematic. But since a GAI weakens the link between wages and income, those workers would be unambiguously better off.

    (In any case, what’s wrong with subsidising low-wage employers? They’re the ones most likely to hire marginalised workers. That’s an activity to be encouraged.)

    And again, that’s not an argument that increasing the minimum wage will do much at all to reduce poverty or inequality. And it’s certainly not a reason to make a GAI conditional on an increase in the minimum wage.

  • Stephen, did you really intend to defend the idea that an increased supply of labour aka more involuntary unemployment leads to lower wages, and then, suddenly, higher employment?
    Falling demand creates unemployment, lower wages do not fix the problem, they make it worse. More wage increases (regular, social or minimum) raise demand (aka the paradox of thrift) and reduce unemployment.
    The idea that microeconomic tools of analysis such as competitive market clearing explain macreconomic problems such as unemployment was a persistent error, perpetuated by right wing economics. It has no scientific basis so far as I can see.

  • I think it is very important to bear in mind that wages are paid to individuals, while poverty is defined at the family level. Higher minimum wages would boost the incomes of many young adults and women who are indeed not in poverty by virtue of family circumstances, but for whom low wages are still a major problem in terms of well-being and economic independence. OECD work on minimum wages and wage floors set by collective bargaining does show that these wage setting institutions have a significant impact upon wage inequality and the incidence of low wage work.

    I think we indeed want to squeeze marginal employers out of business provided we have high employment – precisely what the Rehn/Meidner wage solidarity/active labour market policy was all about.

    There are some references to economic studies linking GAI schemes to perverse subsidies to low wage employers at
    http://canadianlabour.ca/index.php/Jobs__Economy/864

  • Duncan: I don’t know where you got ‘more involuntary unemployment’ from anything I said. If workers have access to an unconditional GAI, then they can enter the labour market without losing those benefits. Whatever they earn from their market income they can keep.

    Andrew: I am very, very, very unconvinced. The thing that matters most is income. I don’t see the point in insisting that the income come in the form of wages, especially when there are easier and more efficient ways of providing extra income to those who are in poverty. And I certainly do not see the progressive case for opposing policy initiatives that will provide that extra income.

  • I have been reading with great interest the debate over the effects of GAI programs, and I would like to support what Andrew Jackson has argued. Following the Macdonald Report some twenty years ago, I became interested in exploring the possible macroeconomic and structural effects of the implementation of GAI proposals, especially since it seemed at the time that both anti-poverty activists and pro-business organizations had reached an unusual consensus on the benefits of income supplementation schemes in fighting poverty in Canada.

    In a paper which was finally published in 1989, Mario Iacobacci (now at the Conference Board) and I had argued that the support voiced by anti-poverty activists was unfounded because: (1) while the effect of a GAI program would be to pull people out of poverty at the extreme low end of the income ladder, the structural effect would be a proliferation of low wage employment; the reason for this had to do with the compensation effect of the income supplementation scheme which would have the effect similar to a wage subsidy for low wage firms; (2) on the usual assumption that the program would be expenditure neutral for the government (i.e., the net expenditures of the state would not be affected by the implementation of a GAI program), our simulation using the Conference Board econometric model at the time, suggested that the macroeconomic effect of the wage deflation would have negative consequences on overall output and employment for strictly Keynesian reasons. Hence, our conclusion was that an income supplementation scheme of the GAI variety ought not to be implemented in the absence of (i) a full employment policy and (ii) a strong minimum wage policy. This is because in an economy in which high unemployment is the norm, forces in favour of wage deflation would be strong and destabilizing at the macroeconomic level. If people are interested in the details of our analysis, please see our original paper:

    M. Iacobacci and M. Seccareccia, “Full Employment versus Income Maintenance: Some Reflections on the Macroeconomic and Structural Implications of a Guaranteed Income Program for Canada”, Studies in Political Economy, No. 28 (Spring 1989), pp. 137-73.

    Also one may wish to consult a more recent paper unfortunately in a well-established (but not well known) Mexican journal based in UNAM:

    M. Seccareccia, “What Type of Full Employment? A Critical Evaluation of ‘Government as the Employer of Last Resort’ Policy Proposal”, Investigacion Economica, Vol. 63, no. 247 (January-March, 2004), pp. 15-43.

    In this second paper I compare a GAI proposal with the Minskian full employment policy proposal of “Government as Employer of Last Resort” (ELR) and argue that while there are problems with the latter, an ELR policy would be much preferred to a GAI program. It is also very interesting to note that when GAI was first proposed officially in Canada in the famous 1971 Report of the Special Senate Committee on Poverty, often referred to as the Croll Report (named after the committee chair, the late Liberal Senator David Croll), the report stated very clearly that it favoured GAI but conditional on that (1) the government pursue a full-employment policy (via Keynesian expansionary fiscal and monetary policies) and (2) a strong minimum wage policy should be in place that would tie minimum wages to 50% of the average industrial wage. The reason for the latter qualifications, of course, is quite obvious. That is to say, the adoption of GAI without minimum wage and full-employment policies would not have the safeguards to prevent a wage deflation, especially at the lower end of labour-market earnings distribution.

    In any case, anti-poverty activists should ask themselves: why is it that right-leaning economists such as Milton Friedman and other conservative economists have always favoured GAI and not a full employment policy? The answer: a GAI policy on its own is seen as a pro-market measure that would be least disruptive to wage and overall labour market flexibility, while a full-employment policy would strengthen labour’s position by pressuring in the upward direction worker’s wages. While both measures could reduce poverty somewhat, it is clear that the latter would do so at the expense of profit earners, while the former would not.

  • Further to Mario’s comment, a recent UK study (Azmat, Ghazala Yasmeen. The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK. Centre for Economic Performance. May 2006. http://cep.lse.ac.uk/pubs/abstract.asp?index=2337) challenges the assumption that tax credits to alleviate in-work poverty mainly benefit workers. This paper investigates the incidence of the Working Families Tax Credit in the UK introduced in 1999, which unlike similar tax credit policies, was paid through the wage packet, increasing the connection between the employer and worker with regard to the tax credit. It found compelling evidence to suggest that employers discriminated by cutting the wage of claimant workers relative to similarly skilled non-claimant workers, and found that there was a spillover effect onto the wages of both claimants and non-claimants, for both men and women.

  • I still don’t see why it matters if the increased income comes in the form of higher wages or a GAI. Why does it matter if wages go down if income is going up?

    No-one is giving points for style here.

  • Mario Seccareccia

    The fact that market wages of the working poor (receiving GAI) are falling does matter a great deal!

    It is true of course that, depending on the tax-back rate, the GAI program would improve somewhat the overall income of the working poor, despite their lower employment earnings. However the effect of lower market wages of GAI workers would be to bring wages slightly above the low income (GAI) wages down as well because of competitive labour market pressure among employers. This type of downward spillover effect should be expected in an environment in which unemployment is the norm. Indeed, as long as there is a sufficiently high rate of unemployment, firms would be under competitive pressure to get labour costs down by hiring workers who would now be compensated by the income supplementation scheme, thereby leading to a proliferation of low wage firms. One would certainly not expect overall labour income in the economy to rise, despite the higher income of the very poor under GAI. In an economy in which unemployment is significant, the opposite would undoubtedly be the case, with the share of profit rising.

    Moreover, in my previous comment, it was made very clear that we are assuming that the net spending of government would not rise as a result of the adoption of a GAI program. This seems to be a reasonable assumption to make, especially in this era of deficit paranoia. If this is so, then with downward wage adjustment (not only of GAI workers’ wages but also wages above them), and with a rising share of profit, and furthermore with no greater net spending from the government, it follows simply that the aggregate demand effect through the consumption side would necessarily be negative, unless prevented via some kind of full employment policy (in which case this wage deflation effect would not materialize in the first place).

    It would be advisable that readers look carefully at our 1989 article cited in my previous message for more detailed analysis; otherwise this exchange would be less fruitful. But I would like to make it very clear; I do not oppose GAI programs. Under ideal conditions of very high employment in the economy, they would be very useful in providing a basic income for many, especially those who do not presently receive any labour market earnings, such as homemakers, starving artists in the cultural sector, seasonal workers hurt by EI cutbacks, etc. However, in a world plagued by significant unemployment and one in which governments are allergic to budget deficits, a GAI program would only be introduced at the expense of other social programs and would probably have a marked deflationary effect on wages in the economy.

  • While Hugh Segal’s motion for a feasibility study on guaranteed income is at least a sign of life on the movement towards a guaranteed livable income, we have all made the mistake of approaching guaranteed income from the point of view of having to prove its ‘feasibility’ (or viability).

    Given the crisis of the environment, of world finances, and of people’s mental and physical health–we should be demanding to see evidence of the viability or feasibility of the currently and almost universally stated goals of economic growth.

    After all, the promise of economic growth is NOT that everyone would eventually have a living wage job, but that everybody can earn as much money as they want if they were willing to work harder and harder (more and more production and consumption), and that economic growth is unlimited.

    “The gross national product is not a pizza that must be carefully divided because if I get too many slices, you have to eat the box. The economy is expandable and, in any practical sense, limitless.”
    P.J. O’Rourke

    This attempt to end poverty with economic growth IS – THE – MOST- unfeasible goal possible. This goal is virtually unquestioned, but at the same time, people wonder if a guaranteed income is feasible.

    It is only for moral reasons and not scientific reasons that we are not immediately implementing a guaranteed income as an emergency measure since it is the only way we can stop all unnecessary, harmful, and wasteful economic activities without throwing millions of people into desperation when they lose their jobs from an economic slowdown of any kind.

    “Humanity is sitting on a ticking time bomb. If the vast majority of the world’s scientists are right, we have just ten years to avert a major catastrophe that could send our entire planet into a tail-spin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced.”
    Al Gore, Inconvenient Truth

    Unlimited economic growth, versus, a ticking time bomb is an impossible discrepancy in goals.

    ”We are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right.”
    “Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.”
    Paul Krugman quoting George Orwell’s 1946 essay ”In Front of Your Nose.’
    source

    In addition, discussing guaranteed income means we must discuss how we define Money and Productive?

    ~~~~~~~~~~~~~~~~~
    Livable Income For Everyone ~ L I F E ~ is an organization started in 2003 to promote the implementation of universal Guaranteed Livable Income ( G L I ) in every country in the world.

    LIVABLE INCOME FOR EVERYONE website
    News, links, articles and evidence for a Guaranteed Livable Income

  • The fact that market wages of the working poor (receiving GAI) are falling does matter a great deal!

    It is true of course that, depending on the tax-back rate, the GAI program would improve somewhat the overall income of the working poor, despite their lower employment earnings.

    To me, those appear to be two contradictory sentences.

    Under ideal conditions of very high employment in the economy, they would be very useful in providing a basic income for many

    Employment rates have never been higher. If not now, when? And why should we wait?

  • Mario Seccareccia

    In 2007, the official unemployment rate was 6 percent, a rate that we hadn’t seen in about thirty years. Yet it was still almost double what the unemployment rate was in the mid-1960s in Canada (if I remember correctly, in 1966 the official unemployment rate was about 3.4 percent). In fact, when the now defunct Economic Council of Canada first started publishing its annual reports in the mid 1960s, it recognized at the time that those rates of unemployment were a problem and that we should strive for full employment (but without inflation)! This is also why the Senate Committee on Poverty, which began its deliberations in 1968, felt that the danger of unemployment was significant enough at the time that GAI should also be accompanied by full employment measures.

    Some forty years later, do you honestly believe that labour is sufficiently scarce in 2008 and that the competitive downward pressure to which I had referred in my two previous messages would not materialize if a GAI program were put in place? I do not believe so. Also remember that, when one adds the discouraged workers and the involuntary part-time employed, our official unemployment rate of 6 percent could easily move much closer to double-digit levels of “underemployment.”

    Hence under what conditions should a GAI program be implemented? Only if and when a full employment policy is in place — that is to say when competitive downward pressures in the labour market would be nil. Perhaps you may wish to ask the question at what rate of unemployment is full employment? While the term seems to have fallen off the radar screen of most conventional economists nowadays, I am old enough to remember when many economists in Canada would argue that a rate consistent with a FRICTIONAL unemployment rate of about 2 or 3 percent would be full employment. However, more generally, full employment is when anyone who wants to work can find work at the EXISTING LEVEL OF WAGES (please take note of my emphasis on the existing level of wages). If, instead, there is a significant number of people under a GAI labour market setting who would be prepared to accept a cut in wages just to compete for a job, we would know that it isn’t full employment. Clearly a 6 percent unemployment rate is still not sufficiently within the vicinity of full employment.

    Also, remember that the question is not just one of whether or not we have reached full employment; we should also have policies in place that will keep us at full employment! This is what I meant when I said that a GAI program should be implemented under ideal conditions of very high employment. What I should have perhaps added was that such conditions should also be PERMANENTLY in place to prevent such downward labour market pressures to arise. The experience of the last forty years teaches us that governments do not have the strong will or commitment to maintain a high level of employment. In the name of fighting inflation and combating budget deficits and so on, governments have too quickly abandoned that commitment to full employment which was very much in the vocabulary of policy makers four decades ago.

    This is why I agreed with Andrew Jackson that a GAI program should be handled with care! Other safeguards should be put in place. Without those safeguards, a GAI program could lead merely to a downward spiraling of the labour market. I fail to understand why a GAI policy AND a full employment policy cannot be coupled. Many of those in the United States who support ELR policies of full employment tend also to be associated with the movement for a “living wage” and for other forms of “full income” (in terms of GAI). Why can those who believe that GAI is a good thing (as I do), cannot also accept the twin goal of full employment? What’s the problem? Is it because you subscribe to the view of the Bank of Canada that a unemployment rate below its NAIRU estimate will be too inflationary? If it is the latter, defenders of ELR in the U.S. have argued that, under ELR, it is possible to have full employment without inflation. Again, if that were possible, then why push for GAI without full employment?

  • The low unemployment rates of the 1960’s can almost entirely be explained by demographic factors: baby boomers had yet to enter the job market, and women were pretty much shut out of the labour market. Employment rates back then were much, much lower than they are now. If we had the participation rates we had back in the 1960’s, unemployment would be negative. We *are* at full employment, and real wages have been rising for the past few years in response to the the increase in employment demand.

    It may well be that workers who have been hitherto excluded from the labour market by the welfare wall may choose to enter the labour market, and it may well be that they will do so at low wages. But as long as they have access to a GAI, their welfare will be unambiguously improved

  • Mario Seccareccia

    This will probably be my last comment on this matter, since I realize that the argument has shifted to a point where there is little about which to debate, since your problem is now perhaps with Statistics Canada. Indeed, you seem to have agreed that GAI without full employment can be problematic but you have now shifted ground by arguing that WE ARE at full employment and therefore a GAI program would be appropriate! What can I say? You are opening up a semantic box that frankly I do not have much patience to sort out in this forum.

    However, I would like to make a couple of last comments on what you said. First, I would strongly question your position that the low unemployment rate of the 1960s was a supply side phenomenon relating to demographics. I happen to be one of those baby boomers and, if it wasn’t for the fact that I continued through university, I would have entered the labour market as many of my high school friends had done during that same period. The baby boomers were entering in large numbers throughout the period of the late 1960s but it certainly didn’t make a significant dent in the average rate of unemployment at the time. Most of the major jump in the unemployment rate took place beginning in the late 1970s and early 1980s and persisted throughout much of the 1990s. The reason was not primarily a supply-side phenomenon but a demand-side one pertaining to the tight monetary policy of the Bank of Canada in raising real interest rates to combat the double digit inflation ensuing from two important oil price shocks (in 1973-74 and in 1979). With real interest rates at such unprecedented historical levels, this pushed up the servicing cost of debt, and encouraged the fiscal authorities to cut program spending and raise taxes in a futile attempt to balance their books. Once monetary policy loosened as happened by the mid-to-late 1990s, the unemployment rate also began inching downward from its double digit level (and the public finances also moved from negative to positive balance under the Chrétien Liberals).

    Furthermore, I don’t swallow the argument that it has been the growing participation rate of women that pushed up the unemployment rate in the late seventies and subsequently. If you look at the unemployment rate of female workers since the mid 1970s you will discover that it not only tracks very closely that of males but, generally speaking, its rate is slightly LOWER to that of males! You will clearly have to look for some other reason to explain away past high unemployment rates and/or today’s 6 percent unemployment figure as you seem to be doing in your sweeping statement about the nature of unemployment today.

    But even if one were to agree with you (which I clearly do not) that unemployment has been “caused” by the higher participation rate, the fact still remains that these are bona fide unemployed (according to Statistics Canada) regardless of their age or gender and that these unemployed workers (who are without job and looking for work) would still be putting downward pressure on wages under a GAI program. Fundamentally, I believe that most of today’s unemployed are NOT frictionally (or voluntarily) unemployed and are in that state by virtue of the fact that they are quitting their jobs and are just being too choosy, etc. Most of the 6 percent of the labour force officially unemployed are INVOLUNTARILY unemployed who are searching for work, are available for work but cannot find jobs at the existing level of wages because such jobs are simply NOT there. Your concept of “full employment” is certainly not consistent with my definition which I defined in my previous message.

    Finally, even if one were to agree with you that we are now at “full employment” (which I strongly reject), there is still the problem of what will ensure that this “full employment” level of unemployment remains steady over time with a continued increase in labour demand to absorb the growing labour force. Unless there is a full employment policy in place to try to keep the economy on an even keel, the destabilizing effect of a GAI program will simply happen later during the next recession!

    I admire your tenacity in defending the positive welfare effects that could result from a GAI program, but I remain unconvinced by your argument, especially in trying to sweep away the unemployment problem and its effects under the rug, by simply redefining today’s unemployment as being consistent with “full employment”. Let me repeat once again, the implementation of a GAI program ought to be a accompanied by a true full employment policy. Without the latter, the welfare effects to which you refer would be largely ephemeral.

  • The NAIRU and the supply side thesis are two sides of the same ad hoc analytical coin. Beyond the ad hocery (sic) there is also and more significantly, the problem that the timing does not match either demographically or institutionally speaking.

    Female participation rates trended as the sole breadwinner wage deteriorated and economic growth slowed. Also, Youth participation rates trended up over this period of time. And wow so too did unemployment rates. Quite how you get to a rising NAIRU in the context of a massive supply semi-skilled and low skilled labour is beyond me. If anything it should have been falling as both female and youth workers added significant flexibility to labour markets.

    Moreover the crucial question is what would have unemployment rates looked like had the economy grown at the same pace from the mid-70s to mid 90s as it did from 45-75?

    The supply side argument mistakes consequence for cause. And even then it does not want to be consistent when it comes to thinking about that other shibboleth of contemporary liberal economic theory: NAIRU.

    That said, I think we do have fairly tight labour markets right now in several regions and sectors which could be characterized as close to full employment in which there is some frictional unemployment and a skills mismatch.

    At the same time there are regions and sectors where there is a high level of involuntary unemployment and labour slack because of the lack of demand.

    If we assume that this is the «normal» state of development then we need to ask what would be the uneven regional effects of a GAI without a higher minimum wage and or full employment.

    Arguing at the level of aggregate unemployment rates in between the two extremes of above 8% or below 3% is not very helpful.

  • RE: “Let me repeat once again, the implementation of a GAI program ought to be a accompanied by a true full employment policy. ”

    The problem as L.I.F.E pointed out is, with full employment we will not only have massive inflation, but also massive overconsumption that will leave us and the Earth overconsumed and most likely “dead in the water”.

    Not all of us, ‘love’ our jobs.

    Most of us would retire today (I would!!!), if we had a Guaranteed Livable Income http://www.livableincome.org

    $15,000 – $25,000 guaranteed and indexed to inflation.

    ’nuff said.

  • I couldn’t agree more!

    A truly progressive basic income would have to be a top-up program, not just on top of existing social benefits, but more importantly on top of out-of-the-box programs as well. Three out-of-the-box programs that come to mind are government-run job guarantee / Employer of Last Resort programs (gets rid of structural and cyclical unemployment), universal food “stamps” (helps not just with combatting hunger, but also with combatting obesity and promoting healthy eating), and educational training income (forget student campaigns for “tuition freezes” and even “zero tuitions” if you’re studying in a career-related post-secondary program).

    Otherwise, count me out on the risks of “basic income” putting downward pressure on wages.

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