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Basic Income and minimum wage

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A minimum wage, mandated by government, is justified by its proponents on the basis that employers may find it easier to withhold employment than workers would find it to withhold their labour. Wage negotiations for low-paying, unskilled jobs in an economy below full employment, where potential employees may be plentiful and easily substitutable, tend to drive down the levels of pay, potentially below the level that provides a dignified quality of life (if unsupplemented by welfare). A minimum wage helps to right the balance somewhat in these wage negotiations for low-paid jobs.

The costs of a minimum wage

Economists point out that the effect of minimum wages is likely, at least in part, to be the destruction of jobs rather than the raising of the levels of remuneration. If the marginal value that an additional employee brings to a company is less than the minimum wage, then that job will not be offered, even if someone would have been inclined to take it at a lower wage that matched the marginal value. Likewise, in difficult economic times, preventing wages from reducing to a level that allows a company to break even will result at least in the loss of those jobs (rather than their maintenance at lower pay) and possibly in greater difficulty for the company and the loss of many other jobs, if the company could not carry out its activities effectively without the jobs made unpreservable by the minimum wage.

Welfare constrains wage settlements

State benefits and other support (e.g. charitable, mutual or self-insurance), rather than a minimum wage, should be the first line of defence for employees in wage negotiations. If an employer offers less than the employee would receive on benefits, the employee will have no incentive to accept the wage offer. In this sense, we already have inefficiencies that prevent the creation of unskilled jobs without the addition of a minimum wage. However, the conditionality and means-testing placed on current benefits render this assurance ineffective. A lower level of pay might not mean a commensurate reduction in the employee's disposable income, because of the effect of means-tested benefits. The employee might still, therefore be better off accepting a very low wage than rejecting the offer in favour of relying on benefits.

Basic Income equalizes wage negotiations without destroying jobs

A Basic Income resolves these conflicts. Because it is not conditional, workers offered unacceptable terms could choose to say no. And because it is not means-tested (and should be accompanies by a Flat Tax at a modest rate), a job at any level of pay will add materially to the household's disposable income, and in one sense will therefore be worth having. The judgment will simply be whether the improvement in the household's disposable income justifies the lost leisure opportunity cost (the value to someone of using working hours for leisure purposes instead).

Basic Income must be minimal to avoid voluntary unemployment

This is a major reason why the Basic Income should be set at the lowest level consistent with a dignified quality of life. Even at the minimum level, there will be some people who would rather live a life of indolence on just enough money to survive, than work to enjoy a better quality of life, just as there are people who choose and understand how to play the current benefit system. The higher the level of welfare-provision (whether BI or means-tested), the more people will judge that they are satisfied with the quality of life they can enjoy without working. Any welfare system should aim to minimize the number of people capable of work who nevertheless choose not to.

Basic Income makes minimum wage redundant

A Basic Income makes a minimum wage unnecessary. As a minimum wage has harmful effects (the destruction of jobs), the introduction of a Basic Income should be accompanied by the abolition of minimum-wage legislation.



Dr. Radut Consulting