What Can the Minimum Wage Say about UBI?

A look at its effects and how they apply

Even supporters of Universal Basic Income (UBI) are not completely sure about what its effects will be. There are questions about what it will mean for employment, prices, economic growth, et alia. It remains mostly untested, and in areas where it has been attempted, it raises questions about whether or not it has been attempted in economies with enough scale to be informative. In that sense, the only way we will only know the effects of UBI on a large scale is if we finally implement it at a large scale. UBI, like any new policy, therefore requires a level of boldness and proactivity.

If we look at the history of the minimum wage, however, we can learn, perhaps, a few things about how UBI would work. Minimum wage has been a fact of life for the entire American economy and much of the world for several decades now, so we have an idea of its own impact on an economy of scale. Additionally, minimum wage involves more money being funneled toward lower-income people (like UBI), and it has implications about the impact of increased liquidity (flow of money in the economy) on things such as employment and prices. As such, it can be considered a partial test for UBI.

This image shows the divergence between real and nominal American minimum wages over time.

Employment

The impact on employment is mixed. According to Michael Reich and Jesse Rothstein of the University of California, Berkeley, it can cause employers to adjust to the increased payrolls costs by automating some of their labor and laying off employees, particularly those who are low-skilled. More jobs can also be created, generally the higher-skilled ones that would pay more anyway. This can make for an awkward situation, since the low-income people are the ones the job is trying to help. That said, those low-income workers who keep their jobs will enjoy the benefits. As Reich and Rothstein go on to note:

…higher incomes generated by the increase in worker earnings create more purchasing power among households with higher propensities to spend their income, so boost demand, creating jobs.

Thus, the low-skill workers who lose their jobs at first may still manage to find new ones elsewhere, at this higher level of pay, due to the extra business that those who keep their jobs will be able to give to other companies.

When we apply this trend to UBI, what is the picture? Since UBI is not a wage, payroll costs do not increase for businesses, but low-income workers still have an increase in purchasing power. If UBI gives employers more clientele, just as the minimum wage does, then they should also have more incentive to hire, in order to satisfy this new demand in the market. In short, we have reason to believe that jobs will be created with UBI, without the potential for loss that minimum wage sometimes incurs.

Prices

Many believe that increasing the minimum wage can increase prices. There are a couple of thoughts that underlie this assumption. One is that an increase in payrolls costs from higher wages forces producers to increase prices, in order to make up the difference. Another is that inflation is the necessary result of increasing the supply of money in circulation, which is what UBI would also do.

What do the data say? A study of restaurant prices over a period of many years found that smaller, scheduled increases in the minimum wage did increase prices but rather negligibly. Overall, a 10% increase in the minimum wage only produced about a 0.34% of a rise in prices. This means that there was excess for workers to spend, a clear gain.

Former Secretary of Labor Robert Reich notes that, even with increased payroll costs and more money in circulation, prices tend not to rise. As he explains it:

A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices.

To put it in simple terms, if Burger King wants to stay competitive over time, it may forgo a $1 billion profit by keeping prices low in spite of a wage hike, settling for half instead. If McDonald’s were to raise prices in order to keep its own $1 billion profit, many of its customers would shift over to Burger King, who might actually enjoy better profits from its gain in market share. As such, McDonald’s would also need to keep its prices low. Companies from other industries have to weigh this consideration as well.

Once again, UBI does not contribute to a firm’s payroll costs, so that is not a factor. Here, the potential source for price increases seems to be in the expanded money supply; if producers know there is more money out there, they may feel like raising prices to capture a greater share of that. Reich’s logic still applies, however. Businesses who keep their prices low, in order to remain competitive, will get the customers. Moreover, a 10% increase in minimum wage only leading to a 0.34% rise in restaurant prices seems to suggest that a growth in the supply of money by way of UBI would not be very intrusive.

Conclusions

There are other benefits to the economy from an increase in minimum wage. For example, a study of a 2004 increase in China’s minimum wage showed that it had what Florian Mayneris, Sandra Poncet, and Tao Zhan described as a “cleansing effect.” This is due to the cost shock forcing inefficient firms to be knocked out and replaced by more efficient firms that produce more at the same cost. Data points such as these, however, are more specific to the effect of the minimum wage on the cost of doing business, so there is not much more that a look at the minimum wage can tell us about the success or failure of a hypothetical UBI system.

It, however, can provide answers to the two most salient questions: employment and prices. Minimum wage’s history suggests that UBI would improve both. Of course, this would depend on the extent of the UBI, as well as how rapidly it is introduced and how it is funded. Nevertheless, the general principles are optimistic. UBI would be a boon.