To What Extent Does Social Welfare in the Labour Market Benefit the Poorest in Europe?

Written by Julia Kastner (BSc Politics and Economics)

After several economic and social crises, welfare benefits have become a set part of the modern liberal democratic state. In most instances, some kind of conditional basic income has been implemented. However, in some European states, there have been debates on the introduction of an unconditional basic income, sometimes also called universal basic income. Discussions have also arisen concerning the conditions imposed by conditional basic income. This article sets out to determine, which form of basic income would be the welfare benefit best suited to support those in need.

The role of the state

First, the purpose of the state from the perspective of those who are disadvantaged must be determined. Since the most effective form of government can only be pursued independently of anyone’s social position in that state, one can analogously ask what the general purpose of the state is. Otherwise, the pursuit of an answer would be biased and render the state dysfunctional. In the following, the broad purpose of the state shall be hypothesised. This is the general role of the state that I think most people living in a democracy would probably agree on.

The role of the state is to secure the functioning of society while maximising the well-being of each individual. For this purpose, the state must be just. This might be assessed by developing the concept of a “wellbeing market” where logical processes always lead to a just outcome. One cannot take something from somebody else without having to give something away. This is a fundamental principle in economics called a Pareto efficient allocation. This allocation should be fair as long as everyone’s endowment is the amount of time one has to contribute to the well-being of society and others. In a simplified world, everyone has the same amount of time in a week to give to others. Hence at the endowment point everyone is equal. In this market, we shall observe what an individual is contributing and what society in the form of the government is giving in return. Moreover, we must take into account how very low levels of well-being of certain individuals might affect others. While those individuals might not contribute anything to society, the government might still choose to improve their well-being as this would improve the well-being of other members of society who suffer from increased criminality, drug abuse etc. But most importantly, the state must ensure everyone has access to this “wellbeing market” and has the possibility to contribute to society.

Universal basic income

Now that the role of the state has been established, we shall turn to the concept of universal basic income and the arguments that can be made for and against it. Universal basic income guarantees every individual in a society a set income, usually per month.

Very often, an ethical argument is proposed in favour of universal basic income. It secures everybody in society human dignity as a minimal quality of life is guaranteed (Grethel and Hilsenbeck, 2023). It is also in accordance with the principle of equal rights of all citizens (Dwyer, 2004) and freedom, as it empowers all citizens to make their independent decisions. Hence, universal basic income fits the role of the state as it ensures that every individual has access to the “well-being market”. Additionally, it improves the wellbeing of all, by alleviating the suffering of others in society.

However, one may claim that it is not moral for some people to receive a service from society without contributing to it (Dwyer, 2004). This draws attention to the case where an individual does have access to society but willingly chooses not to contribute. In this case, it would not necessarily be the purpose of the state to improve their situation. Even though this would also depend on the extent to which supporting those individuals benefits the rest of society.

Moreover, it has also been argued that it is unfair to pay benefits to the higher and middle classes who do not need them (Mestrum, 2023). In our conception of the state, one could explain that those classes are already receiving an appropriate trade-off for their contributions. Nonetheless, this point will become more relevant in our following discussion of the efficiency of unconditional basic income.

The main argument concerning efficiency is that the more is given universally, the less can be given to those who truly need it (Kearney and Mogstad, 2019). This is against the goal of the state as it impedes it from fairly maximising the well-being of each individual.

Furthermore, while it has been shown for example in the context of foreign aid that the individual people to be aided know best what is needed to alleviate their situation, this situation is different when looking at helping the own population. One’s knowledge of what is best for oneself is highly dependent on the social and cultural capital and thus one’s socioeconomic background. This can be observed through lower rates of educational mobility when education systems let children choose an isolated specialised path at a young age (Pfeffer, 2008). The younger the child, the more important is the socioeconomic background in making the decision and the worse they evaluate their options to improve their prospects in life. Thus, people often do not know best how to improve their well-being themselves. The role of the state would have to be to determine the best way to improve the well-being of individuals and educate them in this respect.

Another point raised against universal basic income is that it makes citizens extremely dependent on those benefits. The panic that can arise when those benefits are suddenly cancelled was seen in Italy after the government notified citizens of the cancellation via SMS (Grethel and Hilsenbeck, 2023). Many did not know how they would be able to pay for food and essential goods anymore. Additionally, it removes incentives for workers to fight for higher wages and weakens labour unions as the state guarantees a fixed level of income (Mestrum, 2023). This aspect similarly facilitates the development of precautious flexi and mini-jobs (Mestrum, 2023). Hence, it does not fall under the responsibility of the state to introduce a universal basic income as it would not effectively lead to an increase in well-being. The living standards would remain the same while more money would be spent by the government instead of employers.

Yet, a strong efficiency argument that can be made for this policy is that it secures a minimal standard of living conditions in the face of any unpredictable crisis. This was for example the case during the Covid pandemic (Campos and Ludwig, 2024). In this light, it would be wise of the state to implement universal basic income. However, it is not the only policy that can guarantee human dignity at the dawn of unpredicted crises. Flexibility in the structures of social welfare policies would suffice to react appropriately.

There are also several economic arguments that can be made. On the one hand, universal basic income is said to boost creativity in the economy as people are encouraged to become self-employed (Klesla et al. 2018).  Since this would improve the economic performance and increase the funds available to maximise the well-being of individuals, this should encourage the state to implement the policy.

Nevertheless, there are also many economic reservations regarding a universal basic income. One would be that it disincentivises work (Kearney and Mogstad, 2019), yet it does so less than a basic income conditional on being unemployed (Klesla et al. 2018). Thus, the state should prefer universal basic income to such a form of conditional basic income. Even though it would nevertheless be in contrast with the purpose of the state.

Further concerns raised in line with the aforementioned danger posed to economic performance are the massive costs resulting from a universal basic income and the macroeconomic effect of artificially increasing the purchasing power of the economy (Klesla et al. 2018). The costs may be partially covered by the replacement of current systems of social security and welfare, yet not all social benefits could be accounted for (Klesla et al. 2018).

Another crucial argument against universal basic income is that it disincentivises studying and improving the prospects of future earnings, which is going to be a vital aspect of future society in a world of massive innovation and changes in the job markets due to AI (Klesla et al. 2018).  It would not correspond to the role of the state to deteriorate the well-being of individuals in the long term.

This first discussion has shown that from an ethical, efficacy as well as economic perspective universal basic income may have its advantages but is certainly not the best possible way to support those in need.

Conditional basic income

This article will now turn to the discussion of conditional basic income. This social benefit is usually conditional on making a certain contribution to society or not being able to do so for various possible reasons. Such conditions may be a disability, being over the pension age or under the working age, providing care for others, doing social work or studying.

We shall again begin by presenting the ethical argument. A basic income based on conditions is said to patronise the poor and to be punitive and criminalising (Fletcher, 2020). It attributes the responsibility for poverty to the attitudes and behaviour of some individuals and groups (Fletcher, 2020). Moreover, it creates a hierarchy of those who are entitled and others who are not (Dwyer, 2004) and can lead to the reemergence of the concept of an “underclass”, which is accused of refusing to work (Fletcher, 2020). This marginalisation of certain individuals in society is not the purpose of the state as it hinders citizens from contributing to the wellbeing of others. However, this issue could be avoided through policies that aim at reintegrating people into society.

This leads directly to the efficiency argument as one important advantage of conditional basic income is that it can incentivise reintegration into society (Fletcher, 2020). Reintegration would for example be incentivised by making benefits conditional on such efforts. This is in accordance with the role of the state as it ensures that everyone can participate in society and has access to the “wellbeing market”. Yet, it has also been pointed out that the negative mental health effect of the pressure and judgement created by this policy impedes reintegration (Fletcher, 2020).

Furthermore, in the case where the conditions include studies, conditional basic income might not be as effective as appears. Gaining a degree does not automatically guarantee employment and thus a long-term improvement in well-being (Klesla et al. 2018). Therefore, the state would not necessarily be fulfilling its role of maximising the well-being of individuals.

On the economic front, one argument has already been made. If the benefit is conditional on being unemployed, it disincentivises work. This poses a conflict to the goal of the state as it marginalises those who choose not to work and decreases the resources available to the state through taxes to improve the well-being of its population.

A very grave point that can further be raised against conditional basic income is that historically the state has had a tendency to be very inefficient in allocating resources without market mechanisms. Often in instances where the state widely nationalised companies it could not predict the demand accurately. Hence, there is a risk of the state wasting resources by forcing or pressuring people to pursue a certain pathway, may it be a certain career, study or voluntary work, which is not sustainable and fails to improve the lives of those individuals. Therefore, the state would not be maximising the well-being of individuals.

This discussion has revealed that particularly from an ethical perspective, conditional basic income bears greater risks. Nonetheless, it also has greater potential considering efficacy and economic arguments. Overall, the effects of conditional basic income strongly depend on how the policy is designed.

Possible designs of conditional basic income

There have been various proposals made to avoid some of the most prominent shortcomings of conditional basic income.

One is an “earned income tax credit”, where the beneficiaries are exempt from a portion of taxes depending on their earned income. It would incentivise work and improve intergenerational equity (Kearney and Mogstad, 2019) as smaller increases in income and economic capital would allow for bigger increases in social and cultural capital over generations. Yet, this policy design would not prevent the creation of hierarchical structures and does not strongly incentivise the increase of cultural capital for the current generation. Hence, in various respects, it would still impede the state in fulfilling its purpose.

Another proposal is a “participation income” available to everyone who performs a social task. This may be volunteer work, informal care or an education. Thus, it does not marginalise individuals and incentivises contributions to others’ wellbeing. Additionally, this policy would help internalise some of the externalities of our markets. However, the question remains how the state should ensure that the educational path chosen is sustainable and that its structures are sufficiently flexible to react in the case of a crisis.

One suggestion that could be made is that instead of paying out a fixed income, the state may pay out loans to students such that long-term considerations are encouraged, and the costs to society are kept at a minimum. Moreover, a safety net could be taken into account, which would be conditional on having consistently been in work or having transitioned from education to work in the previous five or such years. This safety net could come into place when someone has lost their job due to no own fault. In case of a crisis, this would give the state time to implement targeted policies to help those most affected by the crisis.

Conclusion

In this article, we have discussed the unconditional and conditional basic income. It has been shown that unconditional basic income is inherently bound by several ethical, efficacy and economic concerns, which conflict with the responsibility the state bears with respect to those in need.

The general concept of conditional basic income has proven to be more compatible with the role of the state when the right design is applied. One proposal that seems to help the state fulfil its purpose is the payout of a “participation income” to those who do voluntary work or informal care and a “participation loan” to those who pursue an educational degree. An additional safety net would further allow the state to react to unexpected crises.

Certainly, the proposed participation income and safety net would also have their risks and disadvantages that are to be shown. Nevertheless, conditional basic income allows the state to design a legislature which may indeed benefit those in need, unlike unconditional basic income.