Social Dividend and Employment

1. Social Dividend and Employment Cheng Furui Tsinghua University, China 2007-01-25

2. Outline • Basic income or social dividend • Social dividend and employment • The challenges • Basic income and related schemes

3. Basic income or social dividend • According to the definition of Mr. Parijs (2004), a basic income is an income paid by a political community to all its members on an individual basis, without means test or work requirement. We can also call it unconditional income.

4. In specific, it is an income paid on a regular basis, rather than a one-off endowment; • it is paid by a political community, the nation-state, beneath or beyond that; • it can be funded by taxation or other sources; • it is paid to all members of the community, including the children;

5. it is paid on an individual basis, every member will get the uniform amount; • this income has no means test, irrespective of current income; • it is without work requirement, irrespective of present work performance, or even of willingness to work.

6. Various forms of basic income proposal have been taken around the world and it is very popular in recent years as a strategy against poverty and unemployment. But seldom is pure basic income in the above definition. • As far as we know, Alaska’s dividend scheme is funded out of part of the return on a diversified investment fund that the state built up using the royalties on Alaska’s vast oil fields. It is a very successful and exciting practice.

7. In the same vein, James Meade’s blueprint of a fair and efficient economy comprises a social dividend funded out of the return on publicly owned productive assets. • This is not in the sense of redistribution but distribution. In my opinion, Meade’s suggestion is more feasible for China, and that is why I use “social dividend” in the title.

8. Social dividend and employment • Social security schemes in most countries are complicated and overlapped, but they seldom can really solve the problems of poverty and unemployment. Several reasons will be discussed here.

9. First, some people who are eligible for the benefits do not in fact claim them. This is partly due to ignorance of their rights and the procedures for making a claim, and partly due to the means-test. • In fact, all of the schemes implemented have different kinds of requirement or means-test. Some people think it is humiliated to be investigated and fill in lots of forms. Especially, every kind of social stigma is attached to the applied benefits.

10. Second, the cost to implement the schemes is very large. • During the testing process, all kinds of particular situations must be evaluated, which is very expensive and leading the final lack of the benefits. And the implementers can not make sure that all the needed can get the minimum security as regulated.

11. Third, there are severe negative incentives to work in low-income class. • This is a very important problem in the traditional schemes. The sticking point is the offset between income and compensation. • For example, in many cities of China, there are minimum guaranteed income schemes, say 400 yuan a month. So a couple with a dependent child will have the income not less than 1200 yuan a month.

12. Suppose the mother have no skills and can not find a job. Then the father must find a job with income not less than 1200 yuan a month. • Otherwise, he would rather lose his job and rely on the benefit from government. If he engages to a job with income of 800 yuan a month, the government will pay the whole family another 400 yuan only to meet the standard. • The tax rate for the working income is equal to 100 percent. This is the negative incentive to work. It is big burden for the administers to persuade and threaten people to go to work which they help to find to alleviate the financial pressure.

13. In developing countries like China, lots of jobs’ income is low. This one to one unit setoff must be changed. Social dividend can avoid this trouble. It is just like a separate income. Whether you have a job or not, it will not change. People can make money to add to their basic income. The working income will only be influenced by tax, and it must not be lower than 100 percent. • At the same time, social dividend can encourage people to do some even lower income jobs with valuable experience and helpful for their future career. And by this job expanding, the scheme will wash out worthless work with low income naturally. Because people have more freedom to choose among different jobs.

14. The challenges • Social dividend is confronted with two main kinds of challenges, and these are the big difficulties in my future research. But of course they are not the whole challenges. • First is how to justify it. There are no conditions when paying the basic income to every one in the community. What are logic and justification behind it? Why do the people who have no willingness to work have the rights to get the benefit? Why should the limited money be paid to the rich? • Second is how to afford it. The basic income is paid to the rich and the poor at the same time and on a regular basis. How to determine the amount and afford it? There must be stable sources to make sure the regular basis.

15. Basic income and related schemes • In each of the following graphs, the horizontal and vertical axes correspond to gross and net income, respectively. Hence, the dotted 45° line, which matches to each level of gross income an equal level of net income, represents what the net income would be if there were no redistribution whatever, while the bold curve indicates how a person’s net income changes as her gross income increases when the tax-and-transfer scheme represented by the graph is in place.

16. Figure 1. Conventional minimum guaranteed income.

17. Figure 2. Basic income with trap.

18. Figure 3. Linear negative income tax.

19. Figure 4. Basic income combined with flat tax.

20. Figure 5. Non-linear negative income tax

21. Figure 6. Basic income with low earners’ overcharge.

22. Figure 7. Partial basic income

23. The end Thanks! Hope for suggestions and advices!