Incremental and innovative pathways towards more adequate minimum income protection

After two decades of relative neglect, minimum income provisions (MIPs) were not in the best of shape in most European countries when the financial crisis of 2008 morphed into the severest and longest economic recession in recent memory. Despite much talk about the need for adequate support of those affected by unemployment or underemployment, minimum income protection provisions still fall well short of commonly accepted poverty thresholds in all but a few EU member states. This begs the question: why is that? Is it a consequence of a lack of genuine political commitment, or are there other barriers to raising income floors to minimally acceptable levels?

There are at least two very obvious potential barriers: first, “adequate minimum income protection for all is simply not affordable” and second, “it would fatally undermine work incentives”. The first possible barrier – that the cost of lifting every poor person just above the poverty line would be prohibitive – is less daunting than it may intuitively appear.  First round calculations under various assumptions suggest that the aggregate income transfer needed to fill the poverty gap rarely exceeds more than a couple of percentage points of GDP in most countries. While such calculations ignore the potential impact of behavioural changes, they serve to illustrate that the cost of adequate MIP is not necessarily outside of the realm of the conceivable.

Furthermore, despite widespread concerns over the potential disincentive effects of adequate MIP empirical studies tell a more nuanced story. Clearly, some countries manage to combine comparatively high levels of MIP with low chronic dependence. Elaborate active labour market policies, coupled with intensive monitoring and sanctioning appear to play a key role here, in addition to contextual factors like the strength of overall labour demand. Replicating these contextual factors elsewhere may well be difficult for various reasons.

But perhaps the most real barrier is that MIP take are stuck in a incomes hierarchy that is not moving up at the same pace as median living standards, and hence relative poverty thresholds. Partially apart from work incentive considerations, it is a given that as a matter of principle and legitimacy social assistance benefits need to be below the level of the minimum wage. This follows from the core norm that work needs to pay more than passively living on a benefit. The core problem is that minimum wage levels tend to fall short of poverty thresholds nowadays. This in turn appears to be related to the fact that median living standards, and thus relative poverty thresholds, have outpaced real wage growth, including real growth of minimum wage floors (set by statutory minimum wages or other institutions). One factor here is that living standards have been pushed up by proliferating dual earnership rather than by rising individual earnings. Capital income has probably become more important also. In countries where the gap between social assistance benefits and net incomes at minimum wage is small, the only way to increase minimum income floors is through simultaneously increasing minimum wages. The crux of the matter here is that the minimum wage hikes that would be needed to reach income adequacy relative to widely accepted poverty thresholds would be quite substantial in many countries and arguably politically nor economically realistic.

Thus there appear to be limits to incrementalism in the realm of minimum income protection. That is to say, it would appear that more effective redistribution will come from augmenting/expanding the traditional channels of income support: social assistance, social insurance and minimum wages. Apart from the constraints noted these incremental options are seen not only as failing to address today’s social risks and needs, but as exacerbating underlying problems such as exclusion from the labour market and entrapment in passive benefit dependency. They are considered by some as standing in the way of innovative mechanisms of social protection that are pro-active and self-sufficiency enhancing.

The option is to consider then are innovative income support provision that provide some level of income protection but that are also conducive to labour market participation. Referred to variously as “in-work benefit” or “employment-conditional earnings subsidy”, these are best exemplified by the Working Tax Credit (WTC) in the United Kingdom and the Earned Income Credit (EITC) in the United States”. Several European countries have contemplated introducing Anglo-Saxon-style tax credits, or have done so in some form. Yet the reality is that most of these schemes exhibit only a faint resemblance to the American EITC or the British WTC.  Interest in EITC type schemes remains strong, however, in the public debate and in the academic literature. That interest seems legitimate. The expansion of EITC, in combination with other policy reforms and several increases in the minimum wage, produced some significant results, including increases in labour supply and improvements in living standards among some segments of the population, especially single-parent households. It needs to be noted, however, that these initial results happened in favourable economic circumstances, including strong labour demand and low unemployment. But there are potential downsides to effectively subsidizing low-paid work this way. There are serious issues of non-take up and timeliness. Targeted low-earnings subsidies weaken the incentive for workers and unions to push for higher wages. In addition, micro-simulation studies suggest that in-work benefit schemes that work well in certain settings do not necessarily perform equally well in a different context. Family composition, individual earnings distributions and family income structures drive outcomes in a very substantial way.

Perhaps we should seriously contemplate the potential benefits of introducing a basic income of sorts (e.g. Atkinson’s Participation Income) to overcome the limits to incrementalism. We are not thinking here of a basic income that would replace in any way the existing provisions, but rather one that would lift the floor on which the existing provisions rest, while maintaining the hierarchies between minimum wages, social insurance benefits and social assistance benefits, but at higher and more adequate levels.