Do we have a feasible case for an economy-wide UBI policy that is a Pareto Improvement over the status-quo?

Abstract: The question, merits and normative underpinnings of a Universal Basic Income policy have a long-standing genealogy in the various schools of thought that straddle economic reasoning. The demand for an exercise in dynamic general equilibrium macroeconomics, with microeconomic foundations, has been expressed by Ghatak and Maniquet (2019), Banerjee et al. (2019), Hoynes and Rothstein (2019) and Hasdell (2020). In the following work, we attempt to satisfy this demand by developing a microeconomic model with novel architecture, allowing us to make macroeconomic aggregations. We develop a closed economy model with locally stochastic but globally deterministic wages and where agents decide their allocation between leisure and consumption in an ex ante infinite time horizon and study the implications of a UBI policy on economy-wide welfare for the scenario that allows comparison to the best case baseline. We run simulations to rank order the counterfactual and validate the results by comparing the UBI policy to the baseline in this rank-ordered sensitivity analysis. The results show that a minimum income guarantee scheme is far more likely to succeed in an economy with a robust work ethic and sufficiently high participation in the formal labor market than in an economy whose extant social assistance programmes are so bloated that it has rendered the populace dependent to a large extent on either guaranteed social welfare budgets or non-labor incomes. The main contributions of this paper are two-fold: we provide the fundamental linkages that allow us to extend the micro-economic UBI analysis of Ghatak and Maniquet (2019) to a dynamic stochastic general equilibrium setting that lets us uncover the results above; since the results above necessarily constitute a global lower bound for every analysis that can be carried out on the question, we provide a benchmark that addresses the absence of analysis in the literature in this direction on this topic, including in the most rigorous work on this question Daruich and Fernández (2020).