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Choosy workfare: a model for a basic income guarantee.

Since the great crisis of the year 2008 unemployment rates rose across all developed countries, and even in the economies that recovered previous GDP levels labor participation remains substantially lower than before. Many economists are talking about a “jobless recovery”, and the longer term outlook does not seem to be rosier from the workers’ point of view, especially for younger people. Probably we are just at the beginning of a period of steady depression similar to that of years 1873-1894 1), when extraordinary technological gains in productivity and progress in output didn’t turn out to be healthy for the social welfare. Automation and advancements in artificial intelligence may destroy, according to some studies2), up to forty percent of existing jobs. New models of thinking about social participation and income seem to be needed. Devcoin, of course, is an interesting experiment among them. Unfortunately, in some countries, such as those in southern Europe, there is simply no time to wait for a decentralized economy to take place and even in the future It will probably be difficult to rely only on the value of seigneurage to respond to the needs of the entire unemployed population.

This model was originally conceived for Italy, one of the developed countries facing today’s economic ordeal, but seems suitable for many situations as a promising improvement in the concept itself of unemployment or low income subsidies. The model aims to solve several problems usually found in connection with the war on poverty and the active labor policies, especially in rigid European-like labor markets, but brings also an economically viable alternative concept of labor with wide philosophical implications.

The problems with unemployment benefits.

Firstly, a permanent basic income policy could be very onerous for government expenditure, weighting on the taxation of productive activities. Secondly, benefits may lead to abuses, as it happened in many countries such as Germany, with people working in the informal economy: a phenomenon that in turn causes lower wage levels for some jobs and additional costs for governmental controls. Thirdly, and this can be seen as the main problem with such kind of policies, unemployed can be caught in a so called “poverty trap”: they don’t accept temporary jobs or other opportunities that could eventually lead them to a suitable employment, fearing to lose the benefits.

All those problems led the introduction of the Workfare3) (welfare+work) philosophy in which unemployed receive a subsidy conditioned upon community work and/or participation in private sector partnerships. Among the principal countries adopting Workfare: England, US, Australia and recently Netherlands. In Germany the Hartz IV concept is somewhat conducible to this kind of scheme. If Workfare has a good chance to cut the cost of benefits (the 1996 US introduction of the policy halved the number of applications) it has no clear effects on careers. Workfare is highly authoritarian and sometimes, especially within the private partnerships, it can degenerate in a kind of modern slavery4).

The solution: a “choosy” workfare.

To fight against poverty and poverty traps at the same time, to be sure that only people who are needy just because they don’t actually find a decent job or because they need to develop further skills (as it would be the case for most people in the near future, given the progress in automation) it would be ideal if the unemployed could get paid for whatever job they feel to be suited for, or they want to learn, either in the private or in the public sector. Volunteer work should be paid, but also enterprises that produce value for the society, or to the employees, an externality which is not rewarded in dollar terms, should be rewarded . Finally it should be possible for the employee to freely invest his work in a company, just as a capitalist can freely switch his capital to the most promising opportunity, without the compulsion of the urgent needs even if his skills are not presently fully remunerative to the employer.

Let’s consider a country in which the poverty line stands at 600 Euros income/month(this is the Italian case). The model was originally thought as a tool against extreme poverty, but it is easy to see that the same line of reasoning could be applied, with a change in the figures, to a visionary proposal for the role of labor in the society.

The scheme.

1 the unemployed (from now cworker) receives a subsidy of 600 Euros every month.

2 the cworker has the obligation to “redeem” the subsidy paying back 300 Euros to the State.

3 the State accepts as a payment 80 hours of volunteer work, approved by the local community of cworkers, that could include attending classes.

4 the cworker can collect 300 Euros working in the private sector after a trilateral bargaining with an employer and the representatives of the local cworkers community. The bargaining will be repeated every three months with a complex scheme, as explained later, which aims to lead the cworker to a “real” employment as fast as possible, so as to not damage the whole labor market.

5 if the cworker ‘s income exceeds 300 Euros he can keep half of the exceeding part, the other half is taxed and given back to the community for financing classes, and volunteer’s working capital.

An example:

A worker collects 600 Euros for an 80 hours job (which is an average part time income in our model country, he redeems the subsidy with 300 euros and he can keep 150 Euros of the exceeding income. So his total revenue is: 600+150=750 Euros. (The model is partially inspired by Milton Friedman’s Negative Income Tax (NIT)5)proposal of an universal basic income/tax exemption, but, in our opinion, is an enormous improvement from the workers' point of view. The NIT in our terms would work as follows: everyone, even the wealthiest, receives a tax credit of 600 euros and pays half of his income in taxes, so if a job brings 100 Euro of income the total income would be 650. We will consider the notable issues with Friedman’s proposal in another article.)

The basic technical novelty of the Choosy Workfare in rapport of workfare schemes is that the work obligation is not expressed in working hours, but in monetary terms, as a 300 Euros redemption. We can clarify its implications by a rapid comparison with the “Ein Euro Jobs” German scheme in which the unemployed gets 1 euro for for each working hour on top of the fixed subsidy. Even if the total income could be the same, the huge difference consists in both the very different dignity given to the worker ‘s effort and in the pernicious effects on the labor market as a whole.

The symmetric novelty is that, in turn, the minimum wage is in a certain sense expressed in kind as the cworker always has the opportunity to freely choose the community volunteer jobs, if its utility is superior. This is a protection of the worker which is not rigid in monetary terms and so does not affect directly the demand of labor. (Every part of the scheme is necessary for this double inversion process that provides a non- monetary utility environment ).

The cworker can basically follow a very personal mix of three basic different strategies:

1 INVEST: a cworker can freely choose to work full time for a very low hourly fee in the private sector as he sees this job as an opportunity of real or satisfying employment. He can develop his skills without being a burden for the employer. He can also consider his effort as a financing to the employer ultimately given by the State, a quite unheard and promising bottom–up allocation of government subsidies to the enterprises.

2 BUY TIME: a cworker can choose to work let’s say 40 hours a month for the same salary he could get with an 80 hours part time. In this case he could invest on a personal business or have the time to study for a degree.

3 EVOLVE: a cworker can gradually get a real job with a regular wage through the bargaining process.

One of the most intriguing consequences of the scheme is that the worse jobs are paid more than the best ones (strategy 2 VS strategy one.). Theoretically (as it is falsely stated in some mainstream models of labor market) this should be the rule, but, as everybody knows, worse jobs have often lower productivity and lower skill requirements so are paid less. That’s not wholly “natural”, as one might think, but it is a phenomenon that ultimately depends on the unfair asymmetry between labor and capital: since every human being has different skills (but can evolve, provided enough time!) he cannot choose the job he wants, whereas the capitalist can freely choose his investments in different sector switching between them in no time. So if the latter has actually free choices, we can’t say the same for the former. Freedom is symmetry. That would be different in a pure barter economy in which no merchandise have a legal tender or privileged status.

The bargaining process.

The Choosy Workfare scheme aims to allocate subsides to the industry in an efficient bottom up strategy. The cworkers themselves are in charge in this process: since their redemption obligation is expressed in monetary terms, their interest is aligned to the interest of the State, and they will behave as rational agents on behalf of it. The main issue with rigid hiring incentives is the so called “deadweight losses” problem: employers hire the same workers that would be hired even without the subsidy. In the bargaining process the cworker, aided by his community, fine-tunes the subsidy avoiding such losses as much as possible:

1 every three months the bargaining is repeated

2 at every bargaining date either the wage is at least raised by a certain rate, at least 10%, or, alternatively, the employer pays the previous salary, but the worker receives 5% less, devolving this sum to the local community’s budget. (which is needed to fund volunteer jobs). In the second case the scheduled salary increase is accounted as firing/leaving cost: if the employer decides to fire the worker or if simply the worker decides to leave the employer, he gets all the sum accounted in a “personal endowment fund” that he can bring as a dowry to the firm that will eventually hire him for good.

3 The bargaining tutor, from the local community has the exclusive power to determine in advance and /or update the scheduling of salary increments. His aim is to represent the interest of the state (and, actually of the employee itself) in the bargaining, trying to avoid any deadweight loss: he sets the terms of the game, but has no authoritative power over the bargain itself. Maybe the policy could be updated giving the possibility to change the tutor once for every job and could be provided a special procedure for authoritatively interrupting some contracts in exceptional cases.

4 in every case the cworkers revenue can’ t be reduced under the 660 Euros limit.

5 the bargaining process stops when a cworker is hired under ordinary job conditions (in Europe this is often referred to national wage levels, determined by Unions)

6 as an alternative to the dowry, the cworker may settle for shares of the company or warrants on future earnings.

The bargaining scheme avoids abuses by the employers: if a cworker stays too long in a subsidized regimen his revenue drops to 660 Euros, which is only 10% more than what he gets for volunteer jobs. Both the cworker and the community are highly incentivized to raise the wage, that in every case cannot be static. If a cworker accepts a drop in his revenue, we can be fairly confident that it is because he definitely has the will to subsidize the employer for some good non-monetary reason, which can be social or deriving from real and verified opportunities of personal career. At the same time, if a firm fails to reward such commitment has to pay for the dowry, which is beneficial to another firm. This competition cuts deadweight losses.

This is another attempt to correct the distortions that arise in a monetary system with respect to an utility/opportunity based economy.

Economic viability.

Wage subsidies can produce a substantial rise in employment levels especially in the sectors with higher demand elasticity to the price, as is the case for lower-paid jobs. However, in the Choosy workfare scheme the principal aim is to create a new category of buffer employment, maximizing the human development opportunities: the low-wage jobs face the concurrence of the volunteer ones, so the cworkers that chooses the ”buy time strategy” are indemnified with less working hour for the same income. In the Choosy workfare scheme the effects on demand could be quite substantial, but focused in the most promising sectors (it depends on the choice of the worker) that could attract a personal investment. The self-sustaining job centers (cworkers local communities) and the fine tuning of bargaining processes should be an optimal strategy to reduce the so called frictional unemployment.

In the case of rigid budget constraints, so the financing of the project requiring some taxation, it could be interesting to distribute work coupons with 1 euro of nominal value to indemnify for the additional taxes. The owners could sell those coupons or pay workers with them at nominal value, since accepted for the 300 euro redemption. That should work very well in southern European countries, burdened by problems of monetary flexibility.

For a mathematical model of wage subsidies’ impact on labor participation

Mortensen-Pissarides:Taxes, Subsides and Equilibrium Labor Market Outcomes

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Economics | Work |Welfare |Labour economics |Basic income guarantee


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