How do transfers and universal basic income impact the labor market and inequality?

Christopher Rauh and Marcelo R. Santos

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper studies the impact of existing and universal transfer programs on vacancy creation, wages, and welfare using a search-and-matching model with heterogeneous agents and on-the-job human capital accumulation. We calibrate the general equilibrium model to match key moments concerning unemployment, wage and wealth distributions, as well as the distribution of EITC and transfers. In addition, unemployment insurance benefits are related to pre-unemployment earnings and subject to exhaustion, after which agents can only rely on transfers and savings. First, we show that existing transfers hamper economic activity but provide sizeable welfare gains. Next, we show that a universal basic income of nearly $12,500 to each household per year, which replaces all existing transfer programs and unemployment benefits, can lead to small aggregate welfare gains. These welfare gains mostly accrue to less skilled individuals despite their sizable fall in wages, and the overall rise in skill premia and wage inequality. Albeit the extra burden of higher taxes to finance UBI, we show that the increased action in hiring is a key channel though which outcomes for low education groups improve with the reform. However, if we keep the UI benefits in place, the positive effects on job creation vanish and UBI does not improve upon the current system.

Keywords: Transfer programs; EITC; Means-tested transfers; Welfare programs; Labor supply; On-the-job human capital accumulation; Life cycle; Inequality; Universal basic income; UBI; Unemployment; General equilibrium (search for similar items in EconPapers)
Date: 2022-01-31
New Economics Papers: this item is included in nep-dge, nep-his, nep-lab and nep-pbe
Note: cr542
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: How do transfers and universal basic income impact the labor market and inequality? (2022)
Working Paper: How do transfers and universal basic income impact the labor market and inequality? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2208

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