The Effects of Universal Basic Income & the Effect on Wages
Kyle Brewster
Introduction
What’s Up with Markets?
Changes in the characteristics of the labor markets over
time are natural and inevitable. Technology progresses, people devise more
innovative ideas, capital becomes more efficient, defining historical events or
crises occur (e.g. COVID-19), demographics shift, cultures change, populations
increase, legislation is passed, new issues arise… You get the point.
One of the few things that economists can agree upon is
that one of the few constants in our world is the fact that people have a demand
for goods and services to satisfy their wants and needs. In order to satisfy
those wants and needs, people must have money to make those exchanges possible.
Since we live in a world of scarcity, not all of those wants and needs can
always be satisfied.
Scarcity becomes a core issue when it comes to the
conversation of human rights. While the Constitution has defined how some
rights are guaranteed protections since its ratification along with the Bill of
Rights, there is much ambiguity regarding how a “right” is defined and to what
role the government plays in advocating for those rights.
A Brief Recapitulation on US History of Minimum Wage
Since 1938 with the passing of the Fair Labor Standards Act,
the government has used minimum wage as a means of attempting to ensure that individuals
have protection from the profit-seeking exploitation of their employers and so
that they have the means to meeting their basic needs
While the idea of having a federally enforced minimum wage
to protect individuals may have a noble intention, the real-value of the
benefits provided by minimum wages have been inconsistent over time. According
to the Economic Policy Institute, the federal minimum wage is worth 17 percent
less than it was 10 years ago and 31 percent less than it was worth in 1968
The fact that minimum-wage-earing-workers have been
experiencing a decrease in purchasing power for most of the past 50 years has
gathered public outcry from policymakers and individuals alike. Some ideas that
have been proposed to address this continuing issue have included minimum wage
hikes, the establishment of a “living wage”, and the possibility of turning to
universal basic income to provide individuals with minimum needs to satisfy
their basic needs.
Our Study and the Government’s Role in Welfare Provision
In order to ensure the most-basic needs can be afforded to
individuals, the question then becomes “What government-sanctioned policy
alternative is the optimal method of ensuring that basic needs of individuals
can be met?”.
For the sake of maximizing total welfare, especially for
those who are lower income, it would be interesting to know what would be the
best choice in public policy to attain this goal. Would it be with a minimum
wage? Would it be with a living wage? Would it be with UBI? Or would it be with
a combination of different measures?
In this analysis, we will be focusing on UBI. Specifically, the
question that we will be seeking to answer is if the benefits of UBI are in
fact tangible and what is the relationship between those benefits and minimum
wage laws.
Literature Review
What is Universal Basic Income?
Universal basic income (UBI) can be defined as an
unconditional cash transfer from a government to an individual. UBI differs
from a minimum wage in the fact that employment is not a necessary stipulation
to be eligible to receive UBI benefits
Minimum Wage
While there are empirical studies that suggest there would
be negative results from raising the minimum wage, there is also ample research
suggesting the results would be positive. In a study by Card and Krueger, they
show that fast food stores in a state that had a minum wage increase
experienced a positive gain in employment within the market compared to the
stores in the state without a change in minum wage (although prices increased
due to the new minimum wage)
In response to a 2021 policy introduced in Congress that
would increase the federal minimum wage in increments to $15 per hour by 2025,
the Congressional Budget Office (CBO) - a nonpartisan consulting agency for
Congress – published a reporting predicting the expected budgetary effects from
an increase in the minimum wage
The CBO predicted the cost of a minimum-wage increase to $15
would increase the cumulative budget deficit by $54 billion from 2021-2023
(which would accrue an additional interest cost of $16 billion). They predict
there would be a $333 billion net increase in cumulative pay of affected
individuals (the same value of increase in additional costs of labor for firms
paying minimum wages) and that employment would be reduced by 1.4 million by
2025.
Benefits of UBI
There are many alleged benefits of UBI as a government means
of welfare provision. Conventional economic theory tells us that minimum wage
laws result in higher unemployment than would be otherwise in the market
equilibrium where the wage is determined by the interaction of supply and
demand factors. Since UBI is a direct unconditional cash transfer, there is no
deadweight loss since the value of the payment increase net income of the
recipient rather than increasing their relative purchasing power for one
specific good.
Another benefit of unconditional cash transfers is that they
provide compensation to those who exert time and labor in traditionally unpaid
roles. For example, mothers who drop out of the workforce to become raise
families at home, those who take care of aging/sick family members, and others
who aren’t paid for completing the same services that would receive a wage if
performed under contract of employment at a firm (a popular logical-argument
against GDP as a measure of welfare for a county/municipality, but that is
another paper for another time – perhaps in Advanced Microeconomic Theory next
semester).
This form of government policy differs from other
welfare-providing measures because it has very little administrative costs apart
from determining who meets the requirements and then mailing the check (or
sending an electronic cash transfer). No applications would need to be filled
out, no applications need to be processed, so it would provide low-income
families with immediate financial assistance without the stress, time, or knowledge
needed to apply for programs (or determining if they meet all of the specific
requirements of eligibility in the first place). Some studies have even been
able to quantify this benefit in terms of physical and mental health
Negative Effects of UBI
Along with the alleged benefits, there are also many potential
downsides to UBI. For example, unconditional cash payments can provide
incentives for individuals to drop out from the labor force. If the annual
amount of the UBI transfers is comparable to the annual amount of earned income
from employment (or even perhaps for other reasons), then an individual may opt
to stop working and earn the same (or a higher) effective wage from only UBI
payments while also increasing their leisure time. While this would technically
lead to a decrease in unemployment (since unemployment is calculated by
[#-of-employed persons]/[Labor Force]), the real effect in common-understanding
would be negative.
Another downside of UBI is that it can be expensive to
implement. Consider the costs of the stimulus-payments provided during the
COVID-19 pandemic. Less than three months after the CARES Act was signed, the
total cost of the direct stimulus payments to families and individuals (159
million eligible recipients) was $267 billion
Comments on the Downsides of UBI
As aforementioned, an alleged downside of UBI is lowers the
incentive for an individual to remain in the labor force. While UBI may have an
impact, it is also important to have a long term vision of the labor market
rather than interpreting the impact of UBI only in the short term.
Automation of labor is a topic of growing concerns as we
have seen in during the COVID-19 pandemic as we can see with LFP rate trends.
According to the Federal reserve, LFP rates from 1950 were trending upward
until peaking in the late 90s and declining ever since (I would expect this
decline is largely attributed to the invention of the internet and improvement
in computing technology)
Places Currently with UBI Policies
Apart from limited-term experiments that have tested the
concept of UBI in practice, there is no place in the US that has truly
implemented such a program. The closest case-study that we have in the US is
with Alaska. The state that has essentially had UBI payments since the
establishment of the Alaskan Permanent Fund in the 1980s. In a NBER working
paper by Jones and Marinescu (hereafter referenced to as “J&M”), the
figures from CPS survey data show that the Alaskan labor market experienced a
1.8 percentage point (17 percent) increase in part-time employment since these
cash payments were first implemented and no effect on full time employment when
compared to figures of control states. While there were some observable
negative effects on employment in micro-analysis of different sectors, the
positive-macro effects outweighed the negative effects at the margin
J&M in Context of our
Research Design
When we see the positive effects
of UBI in Alaska, we must think about the context. There are several aspects of
the Alaskan model that make it unique compared to how UBI would be implemented
nationwide: (1) The Alaskan model has a reliable source of funding that is not
paid for with tax revenue, but rather with oil revenues from the sale of oil
reserves; (2) Every Alaskan citizen receives the cash payment (as opposed to
only specific individuals based on income or need); (3) The annual amount of
cash payments received by Alaskans is small relative to the amount that would
be required for a nationwide implementation of UBI to have the desired effect).
After considering the characteristics that make Alaska a
unique case study for UBI, we can still apply the conclusions from J&M to
the research design of this paper. J&M believe that the cash dividend
results in increase of labor demanded as a result from an increase in
consumption and helps explain the positive effect of the payments on part-time
employment. Perhaps the same increase would happen if UBI is applied towards a
targeted group, with a larger annual sum, and a broader distribution
Proposed Data & Methodology
On Labor Demand, Supply, Wages, and Employment
If we have a
complete set on information on wages and labor for areas places experiencing
implementing UBI policies, we would be able to determine the responsiveness of
labor with respect to changes in wage. Since conventional economic theory tells
us that wage and labor-supply are positively correlated and wage and labor
demand are negatively correlated, I predict that we could fit a linear regression
to the wage/price relationship in our data set and expect the two would have a
strong positive correlation. Formally put, with our regression analysis we could
determine the responsiveness of labor to changes in wage before and after UBI with
a numerical figure.
My prediction would
be that that labor supplied would become more responsive to changes in wage following
the implementation of the UBI policy, and a diff-and-diff analysis could
illustrate if such differences actually occurred. The intuition is that, since
hours worked is no longer the sole source of income, workers would have the
opportunity to seek better paying employment if they were unsatisfied with
their job, but had initially remained employed because it was their sole source
of income. Instead, they would be able to rely on UBI payments to survive while
in the job-searching process in search of a better-paying job or one that
offers job-market training.
These trends would
be important to consider when also thinking about the total effect on labor
supply that results from people dropping out of the labor force all together. Naturally
there will be some people that become solely reliant on the UBI payments for
their living needs/expenses, thus shifting total supply at any given wage to a
lower labor supplied
After the market has finished adjusting to all
changes and we are able to observe the complete and total effect, I imagine
that our regression equations would look similar to the graph shown below. The
green and blue line represent hypothetical regression equations for data on
wages. The change from the white-supply to the blue supply would be explained
by the decrease in LFP rate from implementation of UBI, and the green line
represent a hypothesized effect that considers both that individuals will leave
the labor market and that those remaining in the labor force are more responsive
to price (that is, they understand that they have the UBI payments to support
them, even if they have no earned income)
Depending on the sizes of the change in the supply curve and the change in responsiveness of labor to changes in wages (while assuming demand still remains constant), we can imagine how the new equilibrium wage following the implementation of UBI will increase. This is where the relationship of UBI and minimum wage comes into our analysis.
If UBI payments increase market wages without the government need for intervention, then perhaps the findings could conclude that the government would then no longer be necessary for enforcing a minimum wage if the change increase in market wages from UBI (combined with the UBI payment itself) is significant enough. In addition to no longer requiring government oversight, having a market minimum wage that is set naturally and artificially higher than otherwise would be without UBI payments would peg wages to increases in inflation. Accounting for inflation is something that the federal minimum wage has done for poorly over the decades.
Suppose we have a data set containing infomration on a lower-wage industry. We can calculate for the new average market wage several years after the UBI implementation (controlling for inflation) and have an idea of how much UBI increased natural wages relative to that which would be required with a living wage (or in the case of a society with UBI, “real living wage=living wage-UBI payments”).
Economic
Cost per Dollar of UBI Payment
One way that macro-effects that would be likely to occur after implementation of UBI is an overall increase in consumption. This is one way which the conditions of this analysis can by hypothesized based on the Alaskan Permanent Fund analysis. Logic follows that if everybody has more money, then more money will be spent.
For the sake of our analysis, we could run a series of diff-and-diff
analyses to test our assumptions if we were to look at the result of
implementation of a UBI policy that provides direct cash transfers to the
bottom 90 percent of the population in terms of income distribution (a more
generous version of our hypothetical policy proposal) or the bottom 60 percent
(for a more conservative proposal).
I would choose these particular values after encountering
some data from the Federal Reserve showing that savings rates since the 1990s
as a percentage of income has been negative as much as it has been positive (as
opposed to the top 10 percent with rates averaging close to 10-20 percent
depending on the year), so having a robust data set and from a reliable soruce
will help establish confidence in our findings
These trends continue over the years because the lower and
middle classes have constrained income and often spend more than their income,
which leads to debt. As their debt continues to grow, so does their inability save.
There is strong evidence to suggest that these trends played a fundamental role
in the Financial Crises of 2007 since families constrained income turned to
mortgages and other borrowing to maintain their spending. Perhaps we could
explore how UBI could play a part in mitigating the impact of economic
recessions…
Automation in the Workforce
As mentioned before, it would be interesting to better
understand how UBI help mitigate the negative effects of automation in the
workforce. As aforementioned, LFP rates have been declining since the 1990s.
Looking at the data since 1950, comparing the trends during times of
recessions, we can observe that there was an abnormally large drop in LFP
during the COVID-19 recession
Data
Construction
It would be helpful determine an aggregate value for a variable that shows the information on wages and employment relative to a baseline population. Such a data set would also have to consider differences in wages across cities with regards to purchasing power. The federal reserve, census bureau, or state-level government agencies might have facts and figures that would be helpful in construing our data set such that we are minimizing potential confounded that could skew the accuracy of our data. It would be helpful to include only aggregations to include places that are homogenous in labor market characteristics, such as cost of living or median income levels.
Detailed data on what we would be looking for in this analysis would likely not be conveniently available at the federal level. Instead, what we could do is to, similar in the Card and Kruger paper, we would be to complete our own survey that provides a robust perspective of the market of low-wage jobs and lower-income areas that would be more-significantly affected by UBI than affluent areas. We would just have to keep in mind te time and money cost of such an operation if we want a large enough sample to be confident in our predictions.
In such a survey, it would be helpful to look at low-wage labor market industries as well as low-income areas in general. These demographics would be the most helpful in assessing the impact of UBI on real wage and market dictated minimum wages. Similar to how Card and Krueger looked a similar arear that areas separated by a state border that were the same in nearly every respect apart from experiencing a minum wage increase, we could conduct such diff-and-diff analysis in many components of this entire research proposal/design.
Conclusion
As a result, UBI in effect may essentially act as a mechanism
of raising wages that would (1) remove the need for the government to legislate
minum wage policies (that have deadweight losses and other implications) and
(2) would create market conditions that wouldn’t require government oversight
to continuously monitor and change minimum wage to keep pace with inflation/COLAs/etc.
oversight that also could have a tangible administrative/opportunity cost in
terms of time, (3) increase the base income of the homeless and unemployed
thereby enabling provision of base needs to encourage upward social mobility.
In terms of the UBI policy itself, people in lower income brackets would circulate more of the UBI payment back into the economy as opposed to a wealthier person (who would be more likely to save it) and thus only giving UBI payments to qualifying individuals, say bottom 60 percent of income bracket, would be more cost-effective than trying giving payments “universally” to everyone.
Further Thoughts
- The effect on homelessness - would UBI reduce rates homeless and thus reduce cost of “free riders” who also become taxpayers thereby increasing tax pool by allowing opportunities for upward social mobility from a guaranteed based income?
- Crime rates – Specifically, we could look at rates of recidivism for felons. If we think about the high rate of recidivism, I wonder if guaranteeing a base source of income would have at least some effects on returns to criminal activity. For example, working a job at the federal minum wage wouldn’t be enough to cover cost of living in some places, so crime might be a preferable alternative to an individual. If total income is now represented by the UBI payments plus the minimum wage salary, then perhaps crime will be a less attractive alternative considering the risks associated with criminal activity. Would hypothetically reduce strain on justice system, in rase tax pool, lower rates of crime, etc.
- Look more into European models of minimum per/hour pay and UBI policies in effect. Looking at different countries in the EU could provide insight for effect of different domestic policies
Works Cited
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https://www.epi.org/publication/labor-day-2019-minimum-wage/
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