Which is better: a guaranteed job or a guaranteed income?

May 17, 2018

     By Duncan Green     

Guest post from Eleanor Chowns of Bath University

Martin Ravallion (former Chief Economist of the World Bank, now at CGD) published a useful paper this week asking exactly this question.  As he says, there’s no simple answer – which is why the question is so interesting.

Both ‘the right to work’ and ‘the right to income’ aim to secure a more fundamental right: freedom from poverty.  Workfare has a long history, notably in India, where the National Rural Employment Guarantee Act (NREGA) guarantees (in theory) up to 100 days work per year, paid at a minimum wage, to anyone who requests it.

Cash transfers (often with conditions) have expanded enormously in recent years, while the hot topic of Universal Basic Income (UBI) has advocates across the political spectrum. Which of these approaches is most cost-effective?  Ravallion sets out the arguments clearly.

Proponents of workfare argue that it solves unemployment, and helps push up the minimum wage.  Workfare is self-targeting: richer people simply won’t bother to do it, so it’s good at reaching the very poor.  And in theory these schemes can build productive assets (roads, drainage, irrigation) that help communities in the long term.

But workfare has costs, too, including supervision of worksites and provision of materials.  Participants face opportunity costs, so the workfare income isn’t fully additional.  Monotonous manual labour is not much fun for anyone, and not much use for those with illness or disability.  And Ravallion gives pages of detail on the problems with implementation, including work rationing and corruption.

So, does it work?  Not nearly as well as it should.  NREGA reduced poverty by only 1 percentage point in Bihar, not the 14-point reduction predicted in theory.  Why?  Because NREGA failed to give work to everyone who needed it, failed to pay them on time, and was costly to implement.  A UBI would have been equally cost-effective in reducing poverty, without imposing a work requirement.

What about cash transfers, then?  Ravallion explains the two approaches to guaranteeing a minimum income: ‘perfect targeting’, and UBI.  Perfect targeting gives anyone below the poverty line a ‘top-up’ of exactly the amount needed to bring them out of poverty.   UBI, in contrast, gives everyone the same regardless of their income.

On the face of it, the ‘top-up’ approach would be far less costly.  One estimate suggests it would cost only $80bn per year to eliminate poverty in this way – about half the global aid budget.  So what are we waiting for?

Ravallion explains four reasons why perfect targeting doesn’t work: 1) information constraints mean that in practice it’s impossible to identify who should get what: one study showed that even using the best available data, 75% of the poor would stay poor; 2) targeting may undermine wider public support for transfers, leaving the poor with ‘a larger share of a smaller pie’; 3) perfect targeting implies that poor recipients would be taxed at 100% on any additional income they earned; and 4) targeted transfers can create stigma.

In contrast, UBI would be administratively simple and cheap, though usually much more expensive overall.  However, in places where a large proportion of people are poor, the costs of a universal approach might still be less than the costs of targeting.

A mid-way approach is what Ravallion calls ‘state-contingent transfers’ (aka ‘categorical targeting’) i.e. universal transfers to particular categories of people, such as ‘children’ or ‘over-60s’.  This is where the paper ends – and where I think the advocacy needs to begin.

Because, in the end, evidence doesn’t drive policy.  It’s all about the politics.

There’s clearly plenty of scope to improve the effectiveness of workfare schemes like NREGA.  But there’s even more scope to expand universal categorical income guarantees, like pensions and child benefit.  Who could really object to ensuring every child and every senior has a dollar a day to ensure a decent basic quality of life?

Of course, guaranteeing income (or employment) won’t solve all development challenges.  Building good health and education systems requires collective public investment.  But while it might be both impractical and relatively ineffective to ‘just give’ half the global aid budget to the poor, there’s surely scope to give more than we do at the moment.  Maybe we need another ODI High Level Panel to look at the role of cash in development aid?

I do wonder sometimes why we don’t hear more about ‘the right to income’ from NGOs.  A cynic might make the ‘turkeys and Christmas’ point: if more aid went directly to the poor, there’d be less to fund NGO projects.  Or maybe we’re all just a little too hesitant in these aid-hostile times?  But ‘more cash for the poorest’ could be a Goldilocks policy, appealing to both left and right of the political spectrum, albeit on different grounds.

So here’s the challenge: how can we ‘think and work politically’ to increase the adoption and expansion of cash transfer programmes – particularly more universalist ones?  Time for a bit of action research, Oxfam?

May 17, 2018
Duncan Green