Editors’ Note: Adapted from The New York Times, October 26, 2019.
By Esther Duflo and
[The authors were just awarded the Nobel Prize in economics.]
At least since Adam Smith and his famous B’s (“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”), a fundamental premise of economics has been that financial incentives are the primary driver of human behavior. Over the last few decades, this faith in the power of economic incentives led policymakers in the United States and elsewhere to focus, often with the best of intentions, on a narrow range of “incentive-compatible” policies.
Financial incentives are nowhere near as powerful as they are usually assumed to be.
This is unfortunate, because economists have somehow managed to hide in plain sight an enormously consequential finding from their research: Financial incentives are nowhere near as powerful as they are usually assumed to be.
We see it among the rich. No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap. Research shows that when top tax rates go up, tax evasion increases (and people try to move), but the rich don’t work less. The famous Reagan tax cuts did raise taxable income briefly, but only because people changed what they reported to tax authorities; once this was over, the effect disappeared.
We see it among the poor. Notwithstanding talk about “welfare queens,” 40 years of evidence shows that the poor do not stop working when welfare becomes more generous. In the famous negative income tax experiments of the 1970s, participants were guaranteed a minimum income that was taxed away as they earned more, effectively taxing extra earnings at rates ranging from 30 percent to 70 percent, and yet men’s labor hours went down by less than 10 percent. More recently, when members of the Cherokee tribe started getting dividends from the casino on their land, which made them 50 percent richer on average, there was no evidence that they worked less.
And it is true of everyone else as well — tax incentives do very little. For example, in famously “money-minded” Switzerland, when people got a two-year tax holiday because the tax code changed, there was absolutely no change in the labor supply. In the United States, economists have studied many temporary changes in the tax rate or in retirement incentives, and for the most part the impact of labor hours was minimal. Nor do people slack off if they are guaranteed an income: The Alaska Permanent Fund, which, since 1982, has handed out a yearly dividend of about $5,000 per household, has had no adverse impact on employment.
PART-TIME EMPLOYMENT RATE
Employment has tracked that of similar states since the dividend began. It did not lag, as might be expected (people would work less thanks to extra income). Instead, extra spending may have led to more commerce that kept people in the work force.
The part-time employment rate also rose, diverging from similar states. One possible reason: More spending, and commerce, drew people into the part-time work force.
On the flip side, when jobs vanish and the local economy collapses, we cannot count on people’s desire to seek out a better life to smooth things out. The United States population is surprisingly immobile now. Seven percent of the population used to move to another county every year in the 1950s. Fewer than 4 percent did so in 2018. The decline started in 1990 and accelerated in the mid-2000s, precisely at the time when the industries in some regions were hit by competition from Chinese imports. When jobs disappeared in the counties that were producing toys, clothing or furniture, few people looked for jobs elsewhere. Nor did they demand help to move or to retrain — they stayed put and hoped things would improve. As a result, one million jobs were lost and wages and purchasing power fell in those communities, setting off a downward spiral of blight and hopelessness. Marriage rates and fertility fell, and more children were born into poverty.
Despite this, the faith in incentives is widely shared. We encountered this mismatch firsthand, when, in the fall of 2018, we (along with the economist Stefanie Stantcheva) conducted a survey of 10,000 Americans. We asked half of them what they thought someone should do if he or she were unemployed and a job was available 200 miles away. Sixty-two percent said the person should move. Fifty percent also said that they expected at least some people to stop working if taxes went up, and 60 percent thought that Medicaid beneficiaries are discouraged from working by the lack of a work requirement. Forty-nine percent answered yes when asked whether “many people” would stop working if there were a universal basic income of $13,000 a year with no strings attached.
But here is the twist: When we asked the other half of our sample the very same questions in reference to themselves, we got very different responses. Only 52 percent said they would move for a job, and this fell to 32 percent of those who were actually unemployed. Seventy-two percent of them declared that an increase in taxes would “not at all” lead them to stop working. Thirteen percent of respondents said they would probably work less if they received Medicaid without a work requirement; 12 percent said they would stop working if there were a universal basic income. In other words, “Everyone else responds to incentives, but I don’t.”