Employment-centered welfare policies might not adequately improve employment outcomes, especially if an increase in monetary incentives peaks at higher wage levels and people have been unemployed longer than 12 months, according to new research based on a universal basic income trial in Finland.

In the two-year experiment, 2,000 recipients of unemployment benefits in Finland were selected at random to receive a monthly basic income stipend of EUR 560 ($631). At the same time, participation tax rates were lowered for full-time employment by 23 percentage points, and job-search requirements were waived in an attempt to remove potential welfare traps posed by bureaucratic or administrative barriers. The outcomes of the randomized treatment group were then compared with those of a control group, whose members continued to receive traditional unemployment benefits.

According to an analysis of the experiment, forthcoming in the American Economic Journal: Economic Policy, people with the most difficulties in the labor market were surprisingly willing to engage with bureaucracy and reemployment services. The findings also suggest that filing unemployment claims online has become so straightforward and accessible in Finland that people continue filing them, even when not required to do so.

Participation in reemployment services offered by the government also remained high, leading researchers to suspect that members of the treatment group were reluctant to give up prior access to reemployment services and unemployment benefits despite receiving a basic income that was not dependent on their demonstrated effort to find work.

However, monetary incentives for employment, such as guaranteed basic income subsidies and reduced tax rates on income from full-time positions, appeared to be an ineffective method of helping candidates who were already struggling to obtain employment, especially if the increase in employment incentives offered peaked at relatively high wage levels.

"These findings are particularly relevant for many European countries, where one sees labor market institutions similar to those in Finland," the researchers wrote, "in that they have a high level of long-term unemployment, relatively high minimum wages and extensive social safety nets."

Long-term unemployment refers to people who have been unemployed for 12 months or more, according to the Organisation for Economic Co-operation and Development. 

The implementation of Finland's basic income experiment required legislative approval, as the new scheme modified some aspects of the existing Finnish social security system for two years. Interestingly, the employment status of people receiving the basic income remained statistically unchanged in the first year of the experiment, despite the lower tax-rate incentive offered for those employed full time. Researchers estimated that in the first year, people who received the basic income increased their employment by 1.5 days in the first year and 6.6 days in the second year compared with an average of 49 days per year in employment in the control group.

In 2020, Kela, the government agency that administers Finland's social security programs, said the experiment had small effects on employment but improved recipients' perception of their income and economic well-being.

Jouko Verho, co-author of the American Economic Journal study and a senior researcher at the VATT Institute for Economic Research, said the lack of a larger employment response among participants was surprising, given the experiment's incentives.

"Previous studies on employment subsidies, such as earned income tax credit in the U.S., have generally found that people increase their labor supply when work incentives are improved," Verho told The Academic Times. "We found only negligible or minor employment effects in the Finnish experiment, and we think one of the key reasons explaining our result is that the Finnish experiment targeted mainly long-term unemployed, which is a hard-to-employ population."

The researchers say these findings highlight the need for realism in the debate on universal basic income and welfare policy reform in advanced countries. In Finland, at least, Verho and his co-authors suspect that labor market policies might have perhaps become too generous, to the point that they created welfare traps and encouraged unemployed people to cycle through active labor market policy offerings. These include policies focused on matching unemployed people with gainful employment, such as labor market training, apprenticeship programs and rehabilitative work.

Participants' willingness to prolong engagement with traditional unemployment services and other welfare benefits could be viewed as a positive sign, since the basic income supplement did not require proof of job-search efforts. However, Verho believes the group's continued participation in active labor market policy programs also presents potential problems from a policymaking perspective.

"Many of these long-term unemployed had participated several times in different types of ALMPs in the past, but these programs had not resulted in finding employment," Verho said. "So, while it is positive that people are willing to participate, the programs appear to be quite inefficient in their primary objective, which is to improve [the] job-finding rate."

It is also possible that the overrepresentation of less-educated individuals in the treatment group, as well as some participants' health problems and employment-rate discrepancies between urban and rural districts in Finland, affected employment outcomes in the study.

Verho said that in the future he would like to continue studying potential improvements to the Nordic social security model.

"Although the Finnish experiment turned out to be less successful in improving employment, I think the experiment can still provide new lessons to improve the social security system, and I plan to continue research on this experiment," Verho said.

The study, "Removing welfare traps: Employment responses in the Finnish basic income experiment," forthcoming in the American Economic Journal: Economic Policy, was authored by Jouko Verho and Kari Hämäläinen, VATT Institute for Economic Research, Finland; and Ohto Kanninen, Labour Institute for Economic Research.