Juliane Kästner: The most pressing question that is constantly raised in connection with the guaranteed minimum income is whether the inhabitants of Switzerland will continue working. How do you assess this from a behavioral economics point of view?
Gerhard Fehr: I believe that work represents an elementary part of life for many people. And for this reason, I believe that a large share of the people will continue working despite the guaranteed minimum income. This question alone does not permit an assessment of the guaranteed minimum income.
I think the correct questions are how hard people will work after introduction of such a guaranteed minimum income, and what incentive effects could result from it. Will it crowd out motivation from the labor market? We will have to examine these effects more exactly.
In Switzerland, we have an unemployment rate among qualified labor that is already partially negative. This is one of the problematic areas. In this case, even small changes in important industries can lead to enterprises not having access to the important key employees that they require. And might these employees possibly not do work that the industries absolutely require? This would then have a negative effect on the Swiss ability to compete.
Why do the opponents of the plebiscite make the opposite assumption?
In this case, we can in general claim that the assumption that a large share of the populace would no longer work is false. There are certainly some people for whom – from an economic point of view – the costs of working would be too high.
However, there is in Switzerland, as in many other nations, a social norm to work and also much evidence that unemployment – provided it is not a personal choice – is a stress factor for people and that it at least does not make them happier. As mentioned earlier, the question we must really ask is whether Switzerland would lose its status as a high performance society and thus lose the international ability to compete.
Do you believe that a guaranteed minimum income could change this social norm?
Here, of course, I will present my own observations, experiences, and beliefs, as I have neither hard evidence nor scientifically grounded facts. In the 19th century, we had two tendencies that created a wealthy state, and the two facts were not intended in this form.
Industrialization, and with it, the associated inclusion of the populace in the economy created daily habits and rituals that generate wealth. The systematic, daily pursuit of work and the systematic, daily self-improvement are one of the most important drivers of wealth.
With the introduction of the mandatory school attendance, which took place at the same time as industrialization, we developed new abilities. What is often forgotten, however, is that the school system does not only teach children reading, writing, and arithmetic; children also develop perseverance in school, and learn to keep at something until it is done.
I believe that these two criteria are investments per se that people make in themselves and that they expect a return on them. I do not believe that a guaranteed minimum income would change anything about this norm; this is the same for all countries that had economic success in the last fifty years and that have shown incremental increases in wealth.
Is the idea itself too idealistic?
The guaranteed minimum income is an idea that in my opinion has an extremely good core. And the question is not whether we must decline the core, but instead how additional complementary measures must be designed in order to help this core come to life. This approach assumes that we have an infinitely complicated tax and social benefits system that uses up many resources and that is in itself neither economical nor socially efficient.
I believe that the reason for the strong opposition to the guaranteed minimum income lies in the fact that the approach systematically violates peoples’ fairness preferences. This lies in the fear of having one’s own tax payments support those who do not deserve support – they would be able to work, but instead allow society to carry them.
The greatest achievement of the welfare state in the 20th century was that it enabled people to have a life worth living even if they – for whatever reason – were unable to be gainfully employed. To do this, it required a systematic institutionalization of sharing with others. This is cooperation. People make an expenditure without knowing whether they will get something in return for it. We share conditionally, based on the belief that others behave responsibly with the public good. This requires that all people share certain values and that social benefit schemes be transparent in order to make sure that only those people receive public benefits who truly need them.
In this case, however, even simple irritations – for example, a Carlos, a young social welfare recipient reported about in a television documentary – can complicate this basic understanding of sharing, and make a large share of the populace start thinking completely irrationally and acting accordingly. They do not consider these phenomena as a local incident, but instead believe that this is a systematic occurrence. The welfare state is very fragile and cannot be extended infinitely, in particular because people’s willingness to pay is not infinite.
The human need for fairness and its associated negative reciprocity will result in this plebiscite having no chance at the ballot box. That is my prognosis.
How do you think generation Z would act if there were a guaranteed minimum income?
Have people changed in the last twenty years? No. Social preferences have remained the same; neither patience nor trust has changed significantly. Of course, young peoples’ values are different. As soon as generation Y or Z must pay for their values, however, I believe that they will not be willing to bear the associated costs.
Why does the present group of young people behave differently on the labor market? This could be because the labor market has changed. The baby boomers are withdrawing from the labor market. At the same time, fewer employees are entering the market, which leads to a changed equilibrium of supply and demand.
Parallel to this, for example, living conditions have changed. In the old days, young people liked to move out from home, away from their parents and their apartment measuring 60m2. Today, however, one can live comfortably in the parents’ 120m2 apartment.
These changed framework conditions would mean, combined with the guaranteed minimum income, that generation Z’s market entry would be a bit later. This comfort provides an incentive to take a bit more time – if this does not cost too much. This is purely a hypothesis, however – I have not examined this question intensively enough to be able to present an ultimate opinion.
How will people of working age behave if they do not do any sort of remunerative work? What will they do with their free time? Huge expectations have been raised for increased innovation.
In fact, we already have the phenomenon of a work-free basic income as of age 65. However, we do not see any founder generation after age 65. I do not believe that the guaranteed minimum income will have an effect on the amount of innovation. If we want more innovation, for example, we will have to change the education system and teach children in a manner that favors experimentation.
I could imagine that the guaranteed minimum income will have a positive influence on the feelings of those people who are already dependent on the social welfare system. In a certain way, they remain under constant suspicion of taking advantage of the system.
How will employers behave? What effects could the guaranteed minimum income have on leadership styles or the design of job descriptions in an enterprise?
I do not believe that this will have much of an effect on leadership styles or job descriptions. I believe that we already face a large amount of pressure due to the shortage of qualified employees, and that even so we did not change much.
In theory, this situation could become even more acute, and there could be a greater shortage of qualified employees. In theory, prices on the labor market could increase seriously, which would also be bad for the economy.
I am trying to present the situation a bit more dramatically. If the profitability of enterprises becomes worse, this could even have a negative effect on leadership styles because people are even under more pressure and must perform even more effectively.
But if I as an employee now have more options due to the shortage of qualified workers, would I not have the opportunity to change employers if the management model is not my preferred style?
The social norm to work remains intact, and people will not leave the labor market. I do not believe that people will make greater demands with a guaranteed minimum income.
The last time that I really thought I had a lot of options was when I graduated from the university. Then I really had the unbelievable situation of having twelve job offers. That has not happened to me since then. Perhaps this a literal anecdote for the situation that looking for outside options is hard and takes lots of time. Only a very few people are strongly rational and screen the labor market systematically for new positions. Most would like to have a place to work and to enter into a long-term, psychological contract with the employer. It was always a need for people to be treated respectfully at their place of work. Today, however, respectful treatment is different than it was twenty years ago.
The reason why we need flat hierarchies, decentralized organization forms, and more own responsibility is primarily due to the fact that we live in a knowledge society. If I want to lead an enterprise in a high performance manner, I cannot afford to ignore my employees’ knowledge. Enterprises that use their employees’ abilities cleverly will prevail.
Your final comments?
I believe that behavioral economics and the knowledge gleaned from this field in the last twenty to thirty years is well equipped to explain why the guaranteed minimum income has a limited practical chance of realization. It explains very well why this is an approach that a priori intends to solve social problems. It shows, however, that people have social preferences that are not infinite, and that they are not willing to provide long-term, financial support for social welfare benefit schemes with designs like this.
When looking at political interventions, I must not just analyze what the intervention does for those who benefit from it, but must also examine the effects on the people who are asked to fund it but who will probably not profit from it. Many plebiscites that do not take these facts into account fail at the ballot box or do not have a sustainable basis in society.
Mister Fehr, thank you very much for this interview.