The Macroeconomic Effects of Universal Basic Income Programs

What are the consequences of a nationwide reform of a transfer system based on means-testing toward one of unconditional transfers? I answer this question with a quantitative model to assess the general equilibrium, inequality, and welfare effects of substituting the current US income security system with a universal basic income (UBI) policy. To do so, I develop an overlapping generations model with idiosyncratic income risk that incorporates intensive and extensive margins of the labor supply, on-the-job learning, and child-bearing costs. The tax-transfer system closely mimics the US design. I calibrate the model to the US economy and conduct counterfactual analyses that implement reforms toward a UBI. I find that an expenditure-neutral reform has moderate impacts on agents’ labor supply response but induces aggregate capital and output to grow due to larger precautionary savings. A UBI of $1,000 monthly requires a substantial increase in the tax rate of consumption used to clear the government budget and leads to an overall decrease in the macroeconomic aggregates, stemming from a drop in the labor supply. In both cases, the economy has more equally distributed disposable income and consumption. The UBI economy constitutes a welfare loss at the transition if it is expenditure-neutral and results in a gain in the second scenario.

A revised version of this paper has been accepted for publication in the Journal of Monetary Economics.