Economic Impact of a Minimum Income Guarantee: Analysis of economic theory and policy evidence - Executive Summary

Findings from economic theory

Our review of the economic literature on Minimum Income Guarantees and other income guarantee policies focused on six key areas.

Market and policy ‘failures’ a Minimum Income Guarantee could address: Poverty in Scotland (and the UK) has been stubbornly high for the last two decades. Despite some progress in reductions in child and pensioner poverty, working-age poverty has increased over the period. This rise in working-age poverty is linked to a range of economic circumstances and policy choices. These include reductions and freezes applied to core working-age benefits since 2010, the increasing insecurity of jobs at the lower-end of the labour market, and an approach to employment support and requirements placed on jobseekers that prioritises ‘any job’ over tailoring job search and placements to an individual’s existing skills and circumstances. There has also been a sharp increase in the cost of essential goods and services in the context of the ongoing cost-of-living crisis that already insufficient incomes are unable to meet.

Groups who would most benefit: Low-income households, who are currently below the Minimum Income Guarantee level, would be most likely to benefit from a Minimum Income Guarantee. Within this, specific demographic groups that are most likely to benefit would depend on the policy design – but are likely to include long-term unemployed people, lone parents, retired disabled people, and minority ethnic groups with lower labour market outcomes (especially those with Pakistani and Bangladeshi ethnicity).

Microeconomic impacts: A Minimum Income Guarantee will affect labour supply through its impact on the incentive to work, and there is concern that a Minimum Income Guarantee set too high may create a poverty or benefit ‘trap’. However, the precise impact of a Minimum Income Guarantee is dependent on policy design, associated policy responses and business choices. For example, an increase in out-of-work incomes could incentive employers to raise wages and improve the fairness of the labour market to secure necessary labour. Conditionality of the Minimum Income Guarantee may also influence its effect on people’s incentive to work, but empirical evidence suggests its impact is generally small and varies among different groups. More generally, there is also some evidence that more generous welfare systems may improve job matching quality, and reduce the likelihood of people withdrawing from the labour market in the long-term. This can potentially enhance productivity, especially in countries with flexible labour markets.

Macroeconomic impacts: Expected economic benefits include lower unemployment and higher tax revenue in the long-term. The initial fiscal burden may be higher due to increased social-security spending and investment in employment support as the system beds-in, but this could reverse over time as more people find and retain employment. Impacts on the demand side will be shaped by the extent to which tax increases are required, and the potential increase in consumption from lower income households. On the supply side, a Minimum Income Guarantee funded through increased taxation may lead to a reduction in employment due to higher tax rates.

Wellbeing impacts: A Minimum Income Guarantee may improve household income levels and stability, leading to better health outcomes and reduced spending on healthcare and social care. Improved educational outcomes for children in recipient households may in time enhance the occupational outcomes of households across generations, improving earnings, reducing inequality and boosting social mobility.

Impacts on a Just Transition: A Minimum Income Guarantee could help mitigate distributional effects of transitioning to a low-carbon economy by providing an income buffer for affected workers and linking a Minimum Income Guarantee to broader skills retraining efforts. While there is limited economic literature on the distributional consequences of a Just Transition, those that focus on employment level shifts show a small but positive impact.