Arlette Esmee Severins^[1], Social Science, University College Roosevelt

Abstract

This article attempts to research the influence of a basic income on the microeconomic concept of the labour supply. The concept of basic income is gaining in popularity and is appearing on political agendas in multiple countries. The costs and benefits are a vital part of this discussion, and this article aims to summarise some of the arguments for and against basic income. Research is conducted by means of comparing the literature to two extensively reviewed studies of microeconomic models. One model is based on Germany; the other makes use of data from multiple countries. The literature is supposed to represent questions and, to an extent, answers to the most vital ideas surrounding the concept of basic income. The conclusions indicate an influence on the labour supply that might politically be considered beneficial to a country.

Keywords: Basic income, microeconomic, labour supply, social welfare.

Introduction

Switzerland was the first country to try to convert the concept of basic income into policy, holding a referendum on the subject in the summer of 2016. However, people still seemed to have reservations about the consequences of a basic income plan, mainly for the possible negative effects on labour supply; the proposal was rejected by a margin of 77–23 per cent. The plan was to offer a monthly income of 2500 Swiss francs for each adult and 625 Swiss francs for each child ('Switzerland's voters reject basic income plan', 2016). This article will therefore add to this discussion by examining the question of whether a basic income would have an effect on the labour supply, and what this might mean.

Mentions of the idea of basic income appear as early as the fifteenth century, such as in the book Utopia by Thomas More. In this book More described the problems of theft as a result of poverty: 'it were much better to make such good provisions by which every man might be put in a method how to live' (More, 2010). Over the course of centuries several proposals similar to basic income have been made, such as a flat tax, negative income tax and several forms of social welfare. However, it is important to note the differences between the different ideas.

For this article the definition of basic income will be 'a basic income is an income paid by a political community to all its members on an individual basis, without means test or work required' (Van Parijs, 2004). Several scholars have already looked at the effects of basic income or similar constructions on the labour market. For this article the focus will be on research that adopts a similar understanding of basic income as defined here.

In France there is a debate about the system of social benefits, and the idea of basic income is under consideration. However, one of the problems is that basic income may encourage idleness: a survey conducted on young people's intentions showed that 16.9% would work less and 0.4% would stop working completely. Another 12.5% would practise an interesting activity such as participating in a sport or playing in a band. Although some people might consider this idleness, these practices might later on lead to a job. Indeed, other young people seem to consider undertaking personal development: some 11.2% would invest in their human capital by following on-the-job training (7.2%) or resuming education (4%). However, a significant 55.4% indicated that they would not change anything at all if basic income were introduced. This indicates that at least for young people, basic income is no reason to be idle (Gamel, 2006).

Gender might also play a role in the introduction of basic income. Some scholars indicate that the implementation of basic income might reinforce traditional gender roles, possibly increasing the withdrawal of women from the labour market. A spillover effect of this gender role enforcement might mean increased discrimination towards women who do work. However, having an income themselves might also provide women with a better bargaining position in the household (Robeyns, 2001). Perhaps it is even possible to argue that the independence gained by women from basic income would lead them to reconsider relations in which they are forced to remain at home by their male counterpart or family and friends while wishing to work.

In the rest of Europe there have been suggestions to redistribute welfare throughout the European Union. Although this idea seems interesting and is considered affordable, even without taking positive consequences into account complications arise when considering the solidarity of the European Union member states. The European Union is strong but in economic crisis with Greece and with the refugee crisis it has shown that the political foundation is not present. That foundation is needed for a universal basic income to be implemented. Therefore basic income is best implemented and considered on a national level (Mencinger, 2015).

Methodology

The method used in this paper will be an extensive review of two studies that will be commented on and related back to the literature mentioned in the introduction. Both studies model reality on the basis of microeconomic principles. The reason for this choice is that few empirical studies have been conducted because no country has actually adopted basic income yet, although field experiments have been piloted.

The first study compared the social contribution system to the possibility of a basic income system in Germany (Gilroy et al., 2013). In the German constitution it is written that every individual should be guaranteed something in order to at least sustain him- or herself. This means Germany has to have some form of social welfare; the study therefore discusses which option would be better, rather than whether a social welfare system should exist or not. For comparison the neoclassical labour supply model was used. This model assumes that each individual maximises his or her utility with respect to his or her budget constraints. The utility function adopted was the Cobb-Douglas utility function with individual exponents.

The second study used datasets from different countries from EUROMOD in a simulation. Several forms of households are included, all in the age 20–55 range. The reasons given are that people under 20 years or above 55 years old will not be significantly affected. Households can be married or unmarried couples and partners who are unemployed, employed or inactive. This means that singles are excluded along with students, the self-employed and disabled people. The researchers argue that the excluded parties might not significantly differ from the included parties. The study first outlines the elasticity of labour supply with respect to wage rate. The researchers then proceeded to create a microeconometric model for different forms of basic income policies: Guaranteed Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. The countries studied were Denmark, Italy, Portugal and the United Kingdom (Colombino et al., 2010).

Results

The current social welfare system in Germany is heavily criticised and the study 'Basic income and labour supply: The German case' attempts to add to this discussion by comparing the social welfare system to a system of universal basic income in a microeconomic labour supply model (Gilroy et al., 2013).

From the literature there already seemed to be an indication that social welfare creates idleness in people and the discussion in Germany seems to have adopted this standpoint. However in the current welfare system in Germany this is most likely not idleness but rather due to a loss of incentive. The unemployment trap in Germany is possibly caused by the fact that working activities can cause a reduction in the social benefit received. In the literature several scholars indicate that basic income may introduce idleness as well. However, this argument might be derived from people's perception of the unemployment trap in the current welfare system. It seems that within an unemployment trap it is not improbable that people will not work because in certain cases it does not benefit them and might even harm them. It is interesting to note that basic income does not have the restriction that cause the unemployment trap in Germany. Basic income is unconditional, which means that people can start working and still receive the same amount, which means they will always benefit more if they start working.

With this unemployment trap in mind the researchers continued to apply the model. The first conclusion that is drawn is that when looking at the model a system without social security would be most beneficial. The model illustrated that people with a higher income will have a lower utility and a corresponding lower indifference curve with the introduction of basic income compared to the current social welfare system. People with a higher income will work approximately the same for a lower consumption. However, both the medium income and low income will have a higher utility. Both will have an increase in their consumption. The medium income group will see an increase in leisure consumption and therefore a decrease in worked hours. The lower income group will see a decrease in leisure consumption and therefore an increase in worked hours.

The model illustrates the unemployment trap as well. There is a minimalistic representation of the minimum consumption, as written in the German constitution mentioned above, and this standard is also used for the basic income amount. The maximum amount of leisure consumed in the model is, however, lower than the constitution requires. This means that people can spend all their time on leisure and still have the same amount of consumption, that gap is the unemployment trap. Only when someone wants to work more than a certain point will it become beneficial to him or her and increase their consumption.

From this study it is possible to conclude three effects. The first is that basic income will end the unemployment trap present in the current social welfare system. The second is built on the first conclusion. It seems that basic income might actually avoid idleness rather than enforce it. A person will, according to the graph, always benefit by having a higher consumption if the person starts working. This means that basic income gives a person incentive to work rather than incentive not to work. However, it is not clear if the gain of the lower income group to start working balances the medium income group, who start working less. Thirdly, although the medium and lower income groups will benefit from basic income, the higher incomes will be harmed. Although it is unfortunate that the higher incomes might be harmed, this does not mean that basic income should not be implemented. Basic income was generally presented in the literature as solving problems related to poverty, and basic income does assist in eradicating poverty while not having the disadvantage of the unemployment trap that causes idleness. Consequently it can be argued that the problems caused by poverty might also be lessened.

The second study broadens the research by including multiple countries and multiple forms of social benefits including universal basic income (Colombino et al., 2010). To consider the effect of basic income on the labour supply the researchers presented a table with the elasticity of labour supply compared to the wage rate. This means the percentage change in labour supply as a response to a 1% increase in the wage rate. Labour supply is divided into two parts. The first part is the number of hours worked; do people work more or less when their wage rate increases? The second part is the effect on the participation; how many people will actually start to work or stop working? The different countries are presented as well as any possible effect related to gender differences.

It is interesting to see the differences between countries. The most noticeable elasticity in the wage rate and the total expected hours of work seem to be Portugal. The elasticity for males and total expected work hours seem to be elastic, indicating that a rise in the wage has a more than 1-for-1 effect on the total expected hours of work. For the other countries the elasticity of the male wage rate compared to the total expected hours of work seems to be inelastic for both males and females. Italy has the most inelastic elasticity, meaning that a rise in the wage of males will have nearly no effect on their total expected hours of work. For the female wage rate it is interesting to see a different elasticity. For all countries the female wage rate with respect to the total expected hours of work seems to be elastic in varies degrees. This means that an increase in female wage will lead to an increase in the total expected hours of work in all countries. However, the table also shows that, although inelastic, there seems to be a negative effect of the female wage rate on the total expected hours of work for males in all countries but Portugal.

The second factor of labour supply is the participation rate. For the elasticity of the participation rate of both males and females with respect to the wage of males, none of the countries are elastic. This means that an increase in the wage rate of males has little to no effect on the participation rate of both males and females. For the female wage rate Italy and Portugal both show elastic supply for females, while Denmark and the UK do not. None of the countries report an elastic supply for the participation rate with respect to the female wage rate. Interestingly also in the male participation rate with respect to female wage there seems to be an inelastic but negative elasticity. This means that although inelastic males might participate less in the labour force if females earn a higher wage.

The study finally presents its results from the microeconometric model of household labour supply with a ranking of the different social welfare policies. If the countries are evaluated based on the number of utility-based winners, the following conclusions emerge:

• All countries differ significantly in their social welfare systems and all have space to improve on their current position.
• Adopting universal policies might be an outcome, since these polices tend to perform better.
• If countries wish to use the behaviour of people to progress it might be interesting to look into progressive tax rules, which seem to work efficient in this respect.

These conclusions are drawn based on the concept of fiscal neutrality. For the simulation the countries first adopted a flat tax; with this simulation it became possible to compare the different policies. The general conclusion seems to be that non-means-tested systems, such as universal basic income and participation basic income, combined with progressive tax rules, are superior to the current systems in all countries if fiscal neutrality is the assumption.

This study provides an interesting insight also on the effect of basic income on emancipation in the labour force effectively affecting its supply. Based on the elastic participation rate with respect to wage rate of females in countries such as Italy and Portugal an argument can be made that perhaps these countries have not yet completely integrated women in the workforce. Interesting also is the negative inelastic participation rate and total expected hours of work with respect to the female wage rate. This might be an indication that if females earn more, they will work more and males will work less or not at all. A possible explanation would be that the increase in income from the female member could mean that the male can work less or not at all without the househol losing income overall. This might be the case, for example, in families with children, where the man decides to stay at home part of the week to take care of the children or to become a stay-at-home dad. This differs from the point of view presented in the literature.

The indication from the simulation that all systems can actually improve by adopting more universal basic income is interesting. This indication supports the conclusions from the German case study that basic income not only has an effect but might also have a positive effect on the labour supply. A positive effect would mean that an increase in wage caused by universal basic income increases the labour supply rather than decreasing it due to idleness, as suggested in the literature.

Discussion

The German case study is based on certain assumptions. It is important to note that this study uses only a single parent with two children as a reference for the model. The choice of this reference point is not explained very clearly, while the standard that is used has some inherent biases. A single parent with two children means there is only one person who can possibly work. At the same time the parent also has the largest burden in taking care of the children and might therefore be less likely to work because of the time invested in the children already. The German case study gives some interesting arguments. However, this study is limited to Germany alone. Although the comparison of basic income to the current welfare system is interesting, it is too limited to consider for other countries as well, especially because social welfare systems differ substantially by country. The constitution in Germany follows the assumption of substantive consumption; not all countries have the same assumption, creating the possibility that other countries do not face the unemployment trap. Therefore it is necessary to look at a broader perspective and compare different countries.

The study of basic income by simulation presented in the second study complements the German case study. The households chosen excluded singles, whereas the German case focused on singles with two children. This broadens the foundation of this article's discussion. However, this paper also excluded the self-employed, disabled people and students, and although the argument is made that these groups might not differ significantly no real arguments were presented to support this. All of the groups excluded would still be granted a universal basic income and these groups do represent different interest in the labour supply. An argument presented in the literature is that students might invest more time and continue studying longer, which does influence the labour supply.

Conclusion

In conclusion, this article has provided arguments to support the research question that a universal basic income will affect the labour supply. The general notion mentioned in the literature that this effect might be negative is not completely supported by the case studies. Although there seems to be an indication that perhaps males would work less there is no support is found in the elasticity of the wage rate with respect to either participation our total expected hours of work. Instead the opposite seems to be more likely. This article also presents counter evidence to the possibility of idleness rising with the introduction of basic income. Basic income might actually discourage idleness if compared to current social welfare systems, especially in Germany. This article encourages more empirical research and tests with basic income to support the theory based models since little empirical microeconomical research has been conducted. This type of experiment can be supported in politics with the argument from this article that there is space in most countries for improvement in the current welfare system, and that basic income principles indicate in theory that it would be an improvement to any current social welfare system.

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Notes

[1] Arlet Severins studied Liberal Arts and Sciences with majors in Economics and Psychology at University College Roosevelt (Utrecht University) and is currently pursuing a (Pre-)Master in Accountancy at Tilburg University.

References

 

To cite this paper please use the following details: Severins, A.E. (2017), 'Effect of Basic Income Supply Curve on Labour', Reinvention: an International Journal of Undergraduate Research, Volume 10 Issue 2: Featuring the Eramus+ BLASTER Project, https://warwick.ac.uk/fac/cross_fac/iatl/reinvention/archive/volume10issue2/blaster/severins. Date accessed [insert date]. If you cite this article or use it in any teaching or other related activities please let us know by e-mailing us at Reinventionjournal at warwick dot ac dot uk.