As income inequality and economic upheaval take center stage, is a guaranteed minimum income worth considering? Results from a two-year experiment in Finland offer clues.
By Tera Allas, Jukka Maksimainen, James Manyika, and Navjot Singh. —
Readers who are familiar with the inequality debate or the fears that robots will take all of our jobs will almost certainly have heard about the idea of a universal basic income. As typically conceived, basic-income programs are meant to provide a financial safety net, with no obligations and without the bureaucracy and associated administrative costs of means-tested benefits. Trends in globalization and automation, as well as the rapid rise in the cost of necessities, such as housing, had already started to put pressure on social contracts in many countries before the pandemic. Now, with COVID-19 creating additional economic risks—especially for already-vulnerable groups—questions about how best to support people living on low incomes are bound to become even more important.
The body of quantitative evidence for or against a universal basic income (UBI) is still slim. The context and design of the first wave of policies, from 1960 to 1980 and primarily in North America, make the results hard to generalize. In the 2000s, a new wave of experiments—some funded by charities rather than governments—has sprung up. Municipalities in the Netherlands, Barcelona in Spain, the US city of Stockton, in California, the Brazilian city of Maricá, and the province of Gyeonggi in South Korea are among the places experimenting with a basic income.1
However, to date Finland is the only country that has managed to complete a nationwide randomized control trial of a basic-income program.
The research methods used were particularly diverse and included literature reviews, microsimulations, surveys, data linking, in-depth interviews, and media analysis. In this article, we highlight the insights that we found most interesting. More research is needed in this multifaceted and complex area, not least because of the many unanswered questions on how a universal basic income could be funded—and how it would interact with other sources of government assistance.2 It is also worth noting that the methods and conclusions of the Finnish study were not undisputed (see sidebar, “Research-based policy making”).
In Finland’s two-year study, a treatment group of 2,000 randomly picked, initially unemployed people received a guaranteed, unconditional,3 and automatic cash payment of a modest €560 per month instead of a basic unemployment allowance in similar amounts. Even with a housing allowance, which basic-income recipients were eligible for, this level of support was significantly below the incomes of most Finnish households (Exhibit 1).4 All other unemployed people, who continued to receive standard benefits, formed the control group.
Finland set its experimental basic income at a modest level
The final results from Finland’s experiment are now in, and the findings are intriguing: the basic income in Finland led to a small increase in employment, significantly boosted multiple measures of the recipients’ well-being, and reinforced positive individual and societal feedback loops.
A small increase in employment
In the design of the Finnish experiment, the main research question, agreed to by parliament in the enabling legislation, was the impact of a basic income on employment. Many policy makers assume that an entirely unconditional guaranteed income would reduce incentives to work. After all, the argument goes, why bother with a job if you can have a decent life without one? This assumption has led many countries to deploy active labor-market policies that require people on unemployment benefits to prove their eligibility continually and, often, to participate in some kind of training or to accept jobs offered to them.
Interestingly, the final results of Finland’s program, released this spring, found that a basic income actually had a positive impact on employment.
People on the basic income were more likely to be employed than those in the control group, and the differences were statistically significant, albeit small. Concurrent changes in other unemployment policies make it difficult to ascertain, from this study, whether the basic income, the other changes, or both were responsible for the higher employment levels. However, something about the modest level of the basic income and the lack of conditions attached to receiving it seems to have motivated recipients to seek and accept work they otherwise might not have.5
A critical lesson of the Finnish experiment is the complexity of implementing a basic income. Policy makers need to decide how it should interact with a large number of other policies, such as child benefits, housing benefits, pensions, health insurance, and taxation; for example, in the Finnish experiment, basic-income recipients were eligible for housing allowances but not for basic social-assistance payments. Unless such linkages are streamlined, they could detract from a basic-income system’s potentially considerable savings in administrative costs.
Such interactions emphasize the importance of running further experiments and tracking outcomes across a wide range of well-being factors, including not only employment and financial security but also health and happiness. Of course, the effects will vary from one group to another.
A huge boost to well-being
However you read the findings on employment, other effects were clear:
People on the basic income reported significantly better well-being on multiple dimensions. Average life satisfaction among the treatment group was 7.3 out of 10, compared with 6.8 in the control group—a very large increase.
To experience a similar lift in life satisfaction, we estimate that a person’s income would need to go up by as much as €800 to €2,500 per month—60 to 170 percent of the average per-capita household income in the European Union. Indeed, the difference was big enough to erase the gap in life satisfaction between unemployed and employed people.
These significant positive findings on well-being are no mystery: the basic income seems to have improved all the major components of life satisfaction (Exhibit 2). People receiving the basic income reported better health and lower levels of stress, depression, sadness, and loneliness—all major determinants of happiness—than people in the control group.
Recipients of the basic income also demonstrated more confidence in their cognitive skills, assessing their ability to remember, learn, and concentrate at higher levels than the control group did.
And the basic income enabled people to perceive their financial situation as more secure and manageable, even though their incomes were no higher than those of people in the control group. Finally, basic-income recipients expressed higher levels of trust in their own future, their fellow citizens, and public institutions.
Positive feedback loops
The basic income also appears to have had an effect on the dynamic cause-and-effect loops that trap some people in deprivation while others thrive on multiple dimensions. In other words, a relatively small positive intervention seems to have generated multiple mutually reinforcing positive effects. These dynamics could completely change the typical calculus of cost–benefit analyses. The Finnish study finds that the basic income unlocked at least two virtuous cycles: one that operates at the level of individuals (and their families) and another at the level of society.
At the individual level, a monthly, guaranteed, and entirely unconditional cash sum had a liberating effect on many recipients.6
Better feelings of health, happiness, cognitive abilities, and financial security seem to have instilled a sense of confidence that encouraged the recipients to branch out and to seek more expansive opportunities: unpaid work, training, or employment. These activities, in turn, fueled more positive feelings. The recipients’ trust in their own abilities and their positive outlook seem to have acted as self-fulfilling prophecies. In contrast, research has found that people experiencing scarcity and uncertainty tend to suffer from reduced bandwidth, shortened time horizons, and feelings of inadequacy or helplessness.7
At a societal level, Finland’s basic-income experiment promoted another interesting virtuous cycle, around trust. Trust in others and institutions is a fundamental building block of well-functioning societies. When researchers look for determinants of both well-being and economic prosperity, trust regularly crops up as a key variable. Indeed, Finland is a case in point: it ranks at the top of global measures of happiness8 and also boasts the second-highest rating on trust in other people, after Norway (Exhibit 3).
When people trust institutions, such as the police, the judiciary, and public services, their trust in others also tends to increase,9 so it isn’t trivial that Finland’s basic-income program improved that level of trust.
At the end of the two years, basic-income recipients registered elevated levels of trust in other people and institutions, such as Finland’s politicians, political parties, parliament, judiciary, and social-security system.
One explanation could be that the basic-income experiment did not involve bureaucracy, another that the recipients felt society—or “the system”—was not neglecting people who had fallen on hard times.
Author’s note: As with any policy analysis, the results of this experiment remain subject to debate and can’t necessarily be generalized. As a result, the experiment does offer an object lesson in the complexity of designing and implementing a randomized control trial of basic income. Nevertheless, more research on basic income is required. We can hope that Finland’s example will inform and inspire others as they set up their own experiments.
About the Authors: Tera Allas is director of research and economics in McKinsey’s London office. Jukka Maksimainen is a senior partner in the Helsinki office. James Manyika is a senior partner in the San Francisco office and chairman of the McKinsey Global Institute. Navjot Singh is a senior partner in the Boston office.
Original article appeared in McKinsey: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/an-experiment-to-inform-universal-basic-income