Universal basic income or the minimum wage?
Max Davis
1.
Introduction
Ever since the idea first became public policy in New Zealand in the 1890’s, minimum wages have been one of the most debated topics in economics (Neumark and Wascher, 2008). The attraction of a minimum wage is clear: to prevent workers being exploited by employers, and to ensure all workers can maintain a decent standard of living. However, critics argue that minimum wages reduce both employment among low skilled workers and growth in the economy, and ultimately cause more harm than good. A universal basic income (UBI) is a more recent idea and has only started to gain traction in the last few years. It involves providing each citizen in a country with equal, unconditional payments of a set amount per a year in the hope that it will encourage entrepreneurship, attendance at higher education and improve the quality of life for a country’s citizens. However, UBIs are not without their critics, who argue that the policies are unaffordable and promote unproductive behaviours such as alcoholism and drug abuse. While there has been a large amount of research into UBIs in recent years, most economists model a UBI as a replacement for social security schemes, with very few analysing them as replacements for the minimum wage. However, by alleviating the reliance of workers on their jobs and providing a guaranteed means of survival, I believe that a UBI could increase the bargaining power of low skilled workers in the labour market and replace the minimum wage. This dissertation aims to analyse the effectiveness of both these policies, focussing mainly on their economic impact, but also discussing moral and social arguments for each before reaching the conclusion that whilst a UBI is certainly more beneficial to low-skilled workers, funding one large enough to have the desired effects is very difficult and would require a near complete upheaval of the UK’s tax system. Before any analyses can take place however, it is important to define certain terms and assumptions that are made throughout this dissertation. Firstly, I will be modelling a UBI as one that is above the annual living wage and that will be available to everyone over 16 in the UK, with no means testing or phase-out for higher earners. I will also be assuming that goods are produced through a combination of labour and capital and that the labour market is competitive, meaning firms will increase profit wherever possible. Since levels of monopsony power (when a dominant buyer has significant market power) vary widely between industries, I will not be considering it when analysing the economy as a whole.
2.
Advantages and disadvantages of a minimum wage
As mentioned earlier, a minimum wage has unintended implications on growth and unemployment in any economy where it is introduced (Pettinger, 2019). This section of the dissertation will look at these effects, first reviewing the economic theory behind them before using empirical evidence to provide a more accurate description of their impacts and gauge the pros and cons of a minimum wage policy in the UK.
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