Could UBI Lead to Lower Wages?

By Michael Anthony Lewis 

Professor Silberman School of Social Work

I recently had an exchange about UBI with a statistics professor. This is someone who identifies as politically left, so they aren’t hostile to the government granting income to people even if it does so unconditionally. Yet this person identifies as a UBI skeptic. Their skepticism is rooted in concerns about the impact a UBI might have on the labor market. I covered the relationship between UBI and the labor market in an earlier post in this series. But the nature of this professor’s skepticism isn’t something I covered in that piece. Since this is a concern about UBI that others, especially those on the left, may share, I figured it was worthy of its own post. So, what exactly is the concern in question? 

In a nutshell, it’s that a UBI might result in decreased wages for low wage workers. The argument goes like this. If a UBI were enacted and was large enough to meet people’s basic needs, then people wouldn’t require wages to get their needs met. Employers would know this and would reason that they could decrease wages without having to worry much about resistance from their employees. Employees wouldn’t resist because they wouldn’t care that their wages were lower so long as their needs were being covered by their UBIs. Thus, employers would decrease wages, leaving the rest of society to pick up the tab. 

One thing someone could say in response to this concern is “so what?” Money is money. What matters is that people’s needs are met, not where the money comes from in order to meet them. If employers could pass the cost of housing and feeding their workers on to the rest of us, who cares as long as those workers were being housed and fed by someone? 

I suspect that the above response wouldn’t satisfy those who have this concern. This is because 1) they might regard these employers’ behavior as a form of exploitation, since workers would be paid less than the value of their labor and 2) they may believe that it’s unjust for employers to pass their responsibility to pay their workers a “living wage” on to the rest of us. For the rest of this post, I’m going to put aside philosophical issues raised by questions of exploitation, unjust shifting of responsibility, etc. Instead, I’m going to focus on what economics might have to say about the concern of this set of UBI skeptics. In order to do so, I need to begin with the economic concept of the “reservation wage.”    

A person’s reservation wage is the lowest wage they’d accept in order to participate in the labor market. Suppose a given worker’s reservation wage was $X per hour. Then that worker would be willing to supply labor only if they were paid a wage of at least $X per hour. What are the factors that might go into determining a person’s reservation wage. 

An obvious one is how much they value time spent not selling their labor, that is, non-wage time. It stands to reason that those who value non-wage time more will need a higher wage to get them to spend more time at “work.” That is, they’d require a higher reservation wage. Another factor which influences a person’s reservation wage has to do with the other options they have available for getting their needs met.  

Most of us who’re currently living under the regime of capitalism aren’t independently wealthy. Therefore, we may have to rely on wages, either our own or some else’s we depend on, in order to get our subsistence needs met. Whether we do end up having to rely on wages depends on what alternatives to selling our labor are available. One alternative is stealing, but that could land us in jail. So, many people may not be inclined to take that route. Another is begging, but it might take an infeasible amount of begging in order to make enough money to consistently buy food and housing. 

In a world without a UBI, those who don’t want to steal, beg, and who don’t qualify for other welfare state programs are under tremendous pressure to sell their labor. This will tend to lower their reservation wages. Here it’s instructive to consider what might be a combined reservation wage. That is, workers might be under pressure to take more than one job in order to obtain the “aggregate reservation wage” they require. But I want to underline the main point: all else equal, workers in a world with a subsistence level UBI would be under less pressure to sell their labor than workers in a world without one. So, it could be argued that workers in a UBI world would likely have higher reservation wages than would workers in a non-UBI world.

What I’ve said so far, suggests that those who’re concerned that UBI might lower wages might not have much to worry about. If people could get their basic needs met without having to sell their labor and this led to an increase in their reservation wages, it seems that employers would have to raise wages to get people to work for them. So, a UBI could increase wages, not decrease them. But not so fast. There’s a phenomenon I’ll call the “unpaid intern problem” that we ought to think about. 

Here’s the unpaid intern problem. You have a kid or young adult who wants to pursue a certain career, let’s say in musical theater. This is a career, like many, which relies heavily on networks. That is, opportunities may come more readily to those who “know the right people.” And knowing the right people may result from getting one’s “foot in the door,” through working in jobs where one has contacts with the right people or with those who know them. A person who’s really committed to getting into their career of interest may want to make these connections so badly that they’d be willing to “work” for free. That is, they’d be willing to become an unpaid intern. Now, of course, the only way people can do this full-time is if their needs are being taken care of in some other way. Commonly these needs are met by parents or others taking care of them. What on earth does any of this have to do with UBI? 

Think of the parents as providing the intern with a UBI. Think of the place where the intern is volunteering as a stand-in for employers. The fact that the intern is receiving a UBI has apparently reduced the intern’s reservation wage to 0. In other words, the UBI has allowed the employer to obtain free labor. This is the “UBI will decrease the wages of low wage workers” concern. This certainly could happen. But there’s a possible “so what?” response here too.  

If having their basic needs met means that people would be more inclined to take advantage of what they view as career enhancing opportunities, even unpaid ones, what’s wrong with that? Even if they’d be exploited by their employers, there’s a world of difference between being exploited in a world where your basic needs are assured, whether or not you “work,” and one where you must work in order to meet those needs. Again, this takes us into philosophical territory. As an economic matter, though, it seems clear that a UBI could decrease wages. 

There’s an obvious policy response to this concern. Right now, the U.S. has a minimum wage law in place. Some argue that the U.S. federal government should go further and enact a higher “living wage” minimum. This isn’t the place to get into the ongoing debate, among economists as well as politicians, about whether a minimum wage is good or bad public policy. The reason I brought it up is merely to point out that with a minimum wage in place, a UBI could only lower wages to a certain point. 

But people who’re making more than the minimum wage might still be regarded as low wage workers. And, by way of the unpaid intern problem, a UBI might lower their wages down to the legislated minimum. So, those worried that UBI might lower wages may still have something to worry about. 

Where does all this leave us? A UBI could result in two opposing outcomes: it could both lower wages and raise them. Which of these two outcomes would dominate the other is an empirical question. The only way to find out the answer is to implement a UBI and see what happens. 

 

2 replies
  1. Steve Richardson
    Steve Richardson says:

    Thanks, Prof. Lewis, for addressing an important issue. There is no doubt that a UBI would offer workers more options, such as whether to accept more or less work for more or less pay. Some will be exploited and some will make poor choices, but that goes for spending the cash, too. Unconditional assistance is the core of the basic income guarantee. It means respecting the freedom to make our own choices.

    Reply

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