The Universal Basic Income Perverts Labor Incentives

November 29, 2018

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This is somewhat old news, at least at the speed that news goes in the Trump era and on the internet, but recently Ontario has decided to scrap its experiment with the Universal Basic Income (UBI).

The subject of welfare, even the UBI, can be contentious among libertarians. The arguments against taxation by libertarians are well known, and by extension it seems that welfare should be widely opposed, yet one of the most influential libertarian minds of the 20th century, Friedrich Hayek, was in support of it, though he never explained why.

It’s fairly easy to find arguments against the UBI: that it would incentivize laziness, that it would be too expensive, or that the increased taxes would drive away, or deteriorate entrepreneurship.

The subject of the UBI was something I’d thought about some in the past, and for some time I was kind of in support of it. My feelings on it have always been kind of mixed, but when I heard a discussion about in on the Leading Liberty Podcast, with Jenn Gray and Bo Brown, I started to sway a little more toward supporting it.

Some things that have always appealed to me about the UBI were that it doesn’t create an incentive for working less, like our current welfare system. With the UBI, everyone, regardless of their wage, is guaranteed a basic income. That means that there is no downside to getting a job. It also doesn’t perpetuate current incentives to be a single mother.

Most surprising was when I learned, through that Jenn Gray podcast, that Charles Murray had concluded that if all the current social welfare programs were scrapped, along with the bureaucracies required to maintain them, and were replaced with the UBI, it would be able to provide $13,000 annually per person in the US.

It was pretty easy to see how that could be beneficial at a time when I was working 60 hours per week to keep up with my bills and pay off my debts. I thought that if I had that extra income then I wouldn’t need to work so much, and could focus on developing skills that would enable me to earn a higher wage.

Now, however, after giving it a bit more thought, there are some problems that I can see. In particular, the UBI actually perverts labor, and production incentives. When I say that, I don’t mean in the way it is typically discussed when concerning welfare, but that it diverts labor and production away from where it is most needed.

To understand this, we have to think of wages and profits as market signals for distribution of scarce resources, a kind of economic thought I most commonly associate with Thomas Sowell. If you imagine two businesses that make use of the same resource, and one of them is willing to pay more for that resource, the business is signaling to the market that it has a greater demand for that resource than the other. The same principle applies to labor.

When you are looking for a job, the fact that you could work at McDonald’s for minimum wage, or get a job as a welder for anywhere from $15 – $24 p/hr depending on the region is a market signal that there is a greater demand (relative to supply) in the labor market for welders than there is for McDonald’s workers.

The profit to you in working at McDonald’s versus as a welder has to be weighed by yourself, and the employer, but profit isn’t always measured as your dollars per hour. Suppose, for example, that you were able to find a job working for $14 p/hr in a nice, cushy, air conditioned office, as opposed to $15 as a welder. The benefit of comfort, and lower risk of injury in the office job might be considered enough of a profit to you that you decide not to work as a welder, even if the market demand for it is enough that they sent out the stronger signal.

While the UBI would make it easier to survive on any wage, it would also distort the market incentives to work in jobs that are in high demand. With the UBI you could reasonably abandon a job that pays $13.50p/hr for a minimum wage job, even though the market demand for the higher paying job is greater.

The problem here isn’t that people would be “lazier”. The problem is that it distorts the incentives to work higher paying, higher demand jobs, to make higher demand goods and services. If those high demand goods and services can’t get the laborers they require to meet that demand, that could be damaging to the economy.

Often a worry with welfare services is that they’d incur higher taxes, and those would drive away, reduce, or disincentivize entrepreneurship, but since Charles Murray’s calculations are based on reworking the entire system without increasing funding, that shouldn’t be an issue. However, to my knowledge, no government spending program has ever been instituted that didn’t grow in time. Ultimately I think that an UBI would be better than our current welfare system, but I still don’t think it would work, and its failure everywhere that’s tried it might be an indication of that.