Dissertations, Theses, and Capstone Projects

Date of Degree

6-2021

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Sangeeta Pratap

Committee Members

Randall Filer

Lilia Maliar

George Vachadze

Subject Categories

Macroeconomics

Keywords

Universal Basic Income, Wealth Distribution, Precautionary Savings, Heterogeneous Agents, Inequality, Minimum Consumption Requirement

Abstract

Universal Basic Income (UBI) is a program in which individuals receive a regular sum of money, usually from the government. The transfer amount is thought to be unconditional of income and enough to cover all subsistence needs. Such a system is easy and cheap to administer because the government does not need to check the eligibility of each applicant. UBI programs are growing as more cities, states and countries (Stockton, California, Newark, New Jersey, Ontario, Canada, Kenya, Finland, Germany, Spain, China, etc) implement experiments of such programs. The idea of a UBI is gaining ground in the U.S.. One of the main responses of the U.S. to high unemployment caused by the COVID-19 pandemic and quarantine was a modified version of a temporary country-wide UBI program in 2020 (CARES Act). 30 mayors across the U.S. created a coalition - Mayors for a Guaranteed Income - to explore cash payment programs and address the racial wealth inequality. UBI is actively discussed to be a potential policy that can mitigate adverse impact of accelerated automation on wages and employment. Thus, it is important to understand what we have learned from UBI experiments, what macroeconomic models predict in the UBI environment, and what is the best approach to implement such programs. This dissertation consists of three chapters. In the first chapter I review the literature on a Universal Basic Income (UBI) policy. I explore the UBI experiments that have been conducted worldwide, their limitations, and lessons that we have learned from them. I also review the macroeconomic models that address the idea of unconditional transfers, their limitations and the required future developments to evaluate how UBI works in a more complex and realistic environment. In the second chapter, I use general equilibrium model of heterogeneous agents to evaluate the impact of the UBI system, on aggregate levels and distributions of wealth, consumption, labor, and welfare. I contrast this with a targeted transfers system where people need to meet certain eligibility criteria (usually, income) to qualify for transfers. I find that in the UBI system with $1,000 monthly payments, the level of aggregate capital falls by 16% and the inequality of wealth increases no matter how the UBI system is financed: through taxes or through foreign aid. Guaranteed payments induce people to save less because of less precautionary needs. As precautionary savings motive is stronger for the asset poor, people in the lowest wealth quintiles reduce their savings more, which increases the inequality of wealth. Even though the welfare of the least skilled and the asset poor increases significantly because of unconditional transfers, the tax-financed UBI system requires a consumption tax rate to be equal to 43% that slightly reduces the welfare of the wealthier. Even though consumption tax rate is unrealistically high, the effective consumption tax rate (consumption tax net of transfers) decreases on average and aggregate welfare increases by 15.7% as measured by consumption equivalent variation. A hybrid model with both targeted transfers and partial UBI (monthly payments of $500) with low, 5% capital income tax rate (to encourage savings) is more efficient as it provides significant, almost 8% gain in welfare with only 22% consumption tax rate and without compromising output or welfare of the asset rich. In the third chapter, I study the impact of a Universal Basic Income (UBI) policy on aggregate output and welfare when there is an automation of production technologies. When the productivity of robots increases, robots substitute for labor and thus, the share of labor in value added decreases. I use general equilibrium models with heterogeneous agents who face idiosyncratic earnings risk and Cobb-Douglas technology with Traditional Capital and Labor Services. Traditional capital does not include robots and can be employed in production only with labor services. Labor services is a CES nest of robot capital and Human capital that can substitute each other. I calibrate the economy to match the evolution of the labor share in the last three decades. If the productivity of robots doubles, I find that output increases in the new equilibrium and the welfare of wealth poor households decreases significantly resulting in more than 6% decrease in aggregate welfare (measured as consumption equivalent variation, CEV). In such a setting, the transition to a UBI system increases welfare significantly, by more than 15%, however, reduces output by 12% because it reduces the precautionary savings motive. The hybrid system in which every household receives 50% of subsistence requirement and the eligibility threshold for targeted transfers equals 50% of subsistence requirement works well as it is less detrimental to output while increasing aggregate welfare by 4% as CEV. Further increase in output in the UBI and Hybrid systems can be achieved by a lower capital income tax rate.

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