Giving people unconditional aid causes them to work less. That’s the conclusion of a new study that’s breeding increased skepticism of policies that rely on unrestricted cash transfers to reduce poverty. In a carefully conducted randomized controlled trial involving 3,000 participants, the authors find that giving low-income families $12,000 annually reduced the share who work by two percentage points.
The new study is the latest in a line of recent research finding significant employment loss from giving people cash. Earlier this year, a study published in the Quarterly Journal of Economics found that lottery winners in the United States reduced their earnings by $0.50 for every dollar of lottery winnings. A different working paper exploits the fact that in 2021, families with young children received more money from the Child Tax Credit than families with older children, and found that higher payments reduced employment among the younger families who received higher payments.
The employment declines in these studies are important, despite the fact that they are based on short-term cash infusions that likely understate the effect of a permanent, nationwide policy. They suggest that a true Universal Basic Income (UBI), layered on top of existing benefits to low-income families, would reduce work effort. But they are only the tip of the iceberg when it comes to employment concerns.
In reality, a UBI of $12,000 for every adult in the United States would be impossibly expensive, costing over $3 trillion per year. It is hard to imagine Congress greenlighting a policy to increase federal spending by more than 50 percent—not to mention reigniting inflation—while already-high federal debt continues to climb.
Policymakers would more likely attempt to control costs by phasing out the benefit as families earn more. That would ensure that families who don’t need as much help don’t receive the payments. While this sensible modification would save money, it would also lead to much larger employment loss than the latest studies suggest. That’s because the studies don’t consider situations in which benefits phase out as families earn more.
An extehttps://www.aei.org/opportunity-social-mobility/new-study-exposes-the-problem-with-unconditional-aid/nsive academic literature shows that phasing out benefits does a lot more to reduce work than simply transferring the same amount of cash to everyone. The reason is that phasing out benefits imposes a penalty on working. Every dollar you earn causes you to lose some of the benefits you were previously receiving. So whatever employment loss the latest studies find from a pure cash transfer, the ultimate employment effect would be much larger for a realistic policy that phases out benefits for higher income families.
Herein lies the problem with recent policy efforts to adopt unconditional cash transfers. A true UBI, available to all families, would be prohibitively expensive and significantly reduce employment. But the alternative—restricting benefits to lower income families in order to reduce its cost—would create large penalties on work and thus cause even more employment loss.
For instance, recent efforts to adopt a child allowance would increase benefits for most families and, as a result, modestly reduce employment. But the much larger employment loss would result from the policy’s imposition of a larger penalty on working, due to no longer allowing the current Child Tax Credit to offset the phase-out of other benefits targeted to low-income families.
A more productive debate would focus on how to better support low-income families while conditioning support on steps toward building self-sufficiency. That means making temporary assistance available to families falling on hard times, expanding work requirements for longer term support for non-disabled, working-age adults, and mitigating penalties on marriage.
It is nonetheless important to continue monitoring the groundswell of research evaluating the effects UBI-like interventions, despite the inherent limitations of these studies for understanding the effects of a permanent, nationwide UBI. AEI’s Center on Opportunity and Social Mobility will be monitoring the various UBI studies being conducted across the country, and assessing and contextualizing their results.
