Social protection in rich countries: How to do better than a UBI (while also reaping the gains from international migration)

A Universal Basic Income (UBI) gives everyone the same transfer amount. Of course, the net benefit may not be uniform after the extra taxes, or spending cuts, used to finance the UBI. However, the question here is whether it is feasible to do better than a UBI—to assure that more goes to poor people who clearly need it more. There are many ways in practice of doing that—or at least trying to do so. The solutions proposed, or found in practice, vary greatly in their efficacy. Information and incentive constraints are known to loom large. (Incentive effects may well be less of a concern than information.)

In a new paper, “The Missing Market for Work Permits,” Michael Lokshin and I have argued that creating  a two-sided market in work permits would provide both pro-poor social protection in high-wage economies and new options for migration from low-wage economies. (A revised version is found here, with a fuller treatment of the literature.)

The idea is to create a market that helps capture the gains from international economic migration, while keeping the host government in control of domestic employment. An anonymous market exchange would allow workers to rent out their right-to-work (RTW). There is clearly much they could then do, including financing education or training, homecare of loved ones, or taking a long vacation. Simultaneously, someone else pays for a work permit (WP) and is then free to take up any job offer in that country.

A competitive market mechanism can be implemented (such as through a computerized double auction) to determine the market prices of these new WPs, conditional on the stipulated length of time and start date. Once that period ends, the seller gets back her RTW. The marketable WP is fully disembodied from the person selling it, and also independent of who is buying it. The market is anonymous.

Transaction costs would probably be low—almost certainly lower than for immigrant sponsorship schemes. The WPs could be taxed to finance the scheme’s costs, and (if desired) support other objectives. Development agencies and financial institutions could help applicants from developing countries, including in financing the costs of the WPs.

The currently missing market would no longer be missing. This can be seen as a social protection policy as well as an efficient policy for managing immigration, while capturing at least some of the (seemingly huge) economic gains from freer international migration. And freer migration would become a more popular idea—relieving public concerns by helping to internalize the externalities in host countries generated by migrants (or at least perceived to be). If the option of selling your RTW is confined to those in the workforce then aggregate labor supply would stay the same. A broader base of eligibility would allow rising employment. That is a policy choice.

Going back to the question I posed at the outset, our proposal will undoubtedly have a more pro-poor incidence than a UBI; specifically, it will bring both direct (first-order) gains to relatively low-wage workers who take up the option of renting out their RTW—a “self-targeting” mechanism—and indirect gains to others via the likely tightening in the low-wage labor market.

We probably can do better than a UBI, which can be a rather blunt instrument. For example, a UBI has been advocated as a means of addressing job-loss due to automation. But why would one give the transfer to everyone, including those who stay working? Our scheme would directly help those who lose their job due to automation.

Also, unlike a UBI, it is self-financing. This overcomes a widespread concern about UBI proposals that require higher domestic taxes or are only available as an option to existing welfare programs, thus reducing the net gains to poor people from the UBI.