Removing Welfare Traps: Employment Responses in the Finnish Basic Income Experiment

Abstract

This paper provides evidence that replacing minimum unemployment benefits with a basic income of equal size has minor employment effects at best. We examine an experiment in Finland in which 2,000 benefit recipients were randomized to receive a monthly basic income. The experiment lowered participation tax rates by 23 percentage points for full-time employment. Despite the considerable increase in work incentives, days in employment remained statistically unchanged in the first year of the experiment. Moreover, even though all job search requirements were waived, participation in reemployment services remained high. (JEL C93, H24, H53, I38, J64, J65)

A Truly Missed Opportunity: The Political Context and Impact of the Basic Income Experiment in Finland

“…When the long-awaited results from the two-year Finnish basic income experiment were finally released in May 2019, almost 18 months after the experiment had been concluded, the verdict was that there was very little difference in employment or earned income between the experiment and control groups (Kangas et al, 2020). The average number of days of employment between November 2017 and October 2018 was 78 for the basic income group, while the corresponding figure for the control group was 73 (Verho et al, 2022). Over the first year of the experiment, there was no difference between the groups.…”

“…More surprisingly, the results from the final Finnish basic income experiment report revealed that many members of the basic income group did not want to abandon employment services and active labour market policy measures (Verho et al, 2022). They were in no way obliged to register with the employment office, but a great majority of them still decided to do so.…”

“…The research group concluded that the basic income model - together with the additional “exemption from income taxes” carrot included in the experimented basic income - did not actually work in increasing employment (Verho et al, 2022). The final report of the Finnish basic income experiment also discussed survey results that showed the basic income group had clearly higher subjective wellbeing across a large variety of measures (Kangas et al, 2020).…”

“…The activation model basically invalidated the basic income experiment results for the second year (Kangas et al, 2020), which was a major setback for an experiment with already a tight time frame. Due to the activation model, the effects of the second year of the experiment cannot be separated from the effects of the activation model (Verho et al, 2022). This was not only a technical failure in a research experiment, but it also reflected major change in the Government’s policy to promote evidence-based decision-making.…”

Design and Evaluation of the Finnish Basic Income Experiment

“…This resulted in a substantial increase in work incentives, which was expected to improve employment among basic income recipients. However, the evaluation of the experiment by Verho et al (2022) shows that no noticeable employment effects materialized. This paper describes the evolution of the Finnish basic income experiment from a political initiative to the actual experiment and its evaluation, the particular focus being on how different family types responded to the changes in their work incentives.…”