Labor Market Impacts of a Basic Income Initiative

I wrote a blog post earlier about the Swiss basic income initiative and the political arguments to be made for/against it from a liberal and conservative perspective (from an American political perspective to be clear). But now I am drawn to the economic impact of such an initiative on labor markets.

Earlier in the year, the minimum wage was given a healthy dose of debate thanks to President Obama's minimum wage proclamation during his State of the Union. A national basic income would be an even more dramatic program impacting minimum wage labor markets. In a perfect world (i.e. economic theory), a government-provided basic income would result in the abolishment of the minimum wage. Wages paid out in minimum wage service jobs would drop to the level where wage is equal to marginal revenue product. However, it is much harder to reduce wages in reality than it is in economic theory. The idea of a minimum wage is entrenched in the collective social consciousness and the elimination of that policy would prove difficult, even with the advent of the national basic income. In Switzerland, the effective minimum wage is set through collective bargaining agreements, which might provide the country more flexibility in adjusted its minimum wage policy to fit the new paradigm. Without an adjustment to the new paradigm, a small rise in unemployment as a result of the basic income initiative is likely.

In other sectors of the economy, the initiative might have more impact on wage growth than unemployment. The initiative has the potential to cause upward pressure on wages as workers have more financial security to pursue entrepreneurial projects or commit more time to social responsibilities. Perhaps it won't be reflected in wages but instead in other benefits provided to workers. Work-life balance and the work environment will be more powerful bargaining chips with the increased financial security that a basic income will provide.

The aggregate impact on unemployment will be dependent on how the basic income program is financed. Significant funding could be made available through the elimination of old welfare programs, but an increase in tax revenue would be necessary to make the program anywhere near budge neutral. Anywhere near a significant rise in unemployment would only be likely if the business community was forced to bear the majority of the new tax burden for the program. It might give additional incentive for firms to move toward more capital or technologically intensive operations. For example, the fast food industry might accelerate its process toward automation by replacing workers with kiosks.  

However, there might be interesting long-term trends that could develop as a result of the basic income initiative. It might give additional incentive for firms to move toward more capital or technologically intensive operations. For example, the fast food industry might accelerate its process toward automation by replacing workers with kiosks. Over the past few decades, the return on labor has been fairly stagnant while the return on capital has increased. In the United States, labor is receiving a smaller and smaller proportion of GDP in wages, as shown in the graph below:

The blue line represents the % of GDP that is paid in wages and accrued salary. Paul Krugman wrote about his phenomenon back in December in an attempt to bring the role of the capital/labor relationship to the attention of people worried about rising income inequality. Current trends have capital receiving a far greater share of GDP than it did 30-40 years ago. Real wages have largely stagnated, including in Switzerland. The average growth of real wages in Switzerland has averaged around 0.5% per year as shown below.

 A basic income initiative might be a logical response to the changing composition of the world economy. As capital continues to earn a larger share of GDP, it might be in society's best interest for the government to find a way to distribute the returns to capital among a larger portion of the population. One way to do that would be to increases taxes on capital were increased in order to fund the basic income initiative. Krugman's article brings up fears of a return to the Marxist battle of capital vs. labor but government might be able to help transition society toward a new equilibrium through programs such as a basic income initiative.