UBI Would End Wage Stagnation

And it's not even about the $12k raise.

Universal Basic Income (in the style of Andrew Yang) would single-handedly end wage stagnation. Maybe not entirely, and maybe not for everyone. But, it’d be the greatest force against wage stagnation we’ve seen for multiple generations. And I don’t mean the $1000 a month itself being the end. That would just move stagnation to a different point.

That said, an extra $12k every year would be a significant raise for most people. I’m going to start this post by first explaining why the “Won’t employers just decrease pay?” argument fails. It’s simple economics. In fact, all of this is simple economics.

So to begin, employers don’t sit down and think “What amount do my employees need?” and then offer them that much. They set wages based on things like how much supply there is in the labor marker, what competing firms are paying, and the value that employee brings to the company (relative to the value of the next-best hire or BATNA, more on that concept later). If UBI were passed, all the normal competitive market forces are still at work. Drop your pay in response and all your talent will move to the competition. And, if employers could just pay less without their workforce fleeing, they already would do that.

Imagine you inherited half a million dollars from a relative. That’s about 40 years worth of UBI. Then imagine word about that leaked around your office. How long would it be until your boss sat you down and said they’ve decided to cut your pay because you don’t need all of it any more? It’d never happen. You’d quit and go somewhere else, and they know it. And that brings us to the first reason why wages would go up:

BATNA – Best Alternative To Negotiated Agreement

We tend to think of negotiations as the back and forth heated positional bargaining where someone throws out a number, someone counters with a number, and there’s some back and forth until there’s an agreement. There’s a lot more at work though, even within that stereotypical Hollywood portrayal.

The first important concept is the ZOPA, Zone of Possible Agreement. A seller has a minimum price they’re willing to sell for, and a buyer has a maximum price. If those numbers overlap, then a deal will be struck somewhere in the middle. A fruit vender has apples listed at $3/lb. However, you’re only willing to pay $2.50. Secretly, the fruit vendor is willing to go as low as $1.50. You decide to haggle and offer $2.00. After some back and forth, you’ll arrive at a price somewhere between $2.00 and $2.50. That range is the ZOPA, and unless one of you offends the other, a deal will be struck.

BATNA, or Best Alternative To Negotiated Agreement, is what happens if a deal is not struck. There’s another fruit vendor across town who you know sells apples for $2.25/lb, but it’s out of the way and you’d prefer to avoid the inconvenience. Having that alternative puts you in a stronger position to bargain with the current vendor in front of you though. You know that you can walk away and get apples elsewhere. The better your alternatives, the better settlement you get within that zone of possible agreement. Without the alternative, if the vendor says “$2.50, take it or leave it,” you’ll take it. With the alternative, now you can credibly tell the vendor, “$2.35, take it or leave it,” and they’ll take it. What we’re left with is a very simple rule of thumb: Better alternatives lead to more favorable agreements within your ZOPA.

Now we apply that to UBI and the labor market.

Take an unskilled laborer making $18,000 annually, a little above minimum wage. When he goes to ask for a raise, odds are his BATNA is $15,000 (min wage) somewhere else. This isn’t a very strong position to be in, and it’s why he’s probably going to ask for a raise rather than credibly threaten to leave if no deal over a raise can be met. The employer’s BATNA is bringing in a cheaper but less reliable employee. Good chance our employee is leaving that meeting with nothing more than a promise to reconsider a raise in 6 months, and if he’s lucky, it’s an honest promise.

But, let’s change the scenario by adding UBI into the picture. His total income is now $30k (original $18k + 12k UBI), and the alternative is $27k ($15k+12k) elsewhere. If he threatens to quit and go somewhere else, he risks losing just 10% of his income instead of 20%. [And his position is even stronger when taking diminishing marginal utility of money into account.] Now a realistic outcome may be something like a $500 raise because the employer truly does risk having to bring in and train some un-tested newbie. Better alternatives, better settlement within the ZOPA.

This also explains why, after having inherited half a million from dear old Aunt Patricia, your boss doesn’t suddenly decide to cut your pay. Your bargaining position just got massively stronger, and in fact that extra money can empower you to ask for a raise.

UBI also greatly strengthens the bargaining position of people in tough labor markets where they can’t simply go across town to another alternative. These are folks with skills that don’t easily move from one employer to the next, or are in industries with very few or one employer (an elementary school teacher in a town with only one school), or in an industry where the market is so saturated with labor that finding alternative work is difficult. In those situations, BATNA is commonly $0, and UBI would change it to $12,000. That empowers an employee to be able to spend a few months living on UBI and some savings while waiting for a new opportunity to emerge. It also helps facilitate moving, which creates new alternatives.

So there’s our first reason UBI raises wages. It strengthens labor’s bargaining position.

Decreased Supply of Labor

One of the concepts about UBI that scares some people at first is the idea that some people will just drop out of the labor market. What worries people is that we’ll create a new class of UBI-drifters who’ve just disconnected and sit around all day smoking pot and playing video games. There will be a few folks like that, but so few as to not be worth caring about. Pot isn’t free, and you can’t both pay rent and smoke up on just $12k.

But, we will still see a lot of people quitting their jobs. And I think we’d agree they ought to. These are folks like the 14% of working mothers who work part-time because they need the income, but would prefer to focus on childcare full-time. These are the more than 10% of 16 and 17 year olds with a single parent working more than 20 hours a week to help support their families. These are people working two jobs who can now afford to quit the second, shittier one. These are the people who’d leave the workforce, or just participate less, where it should be uncontroversial to say this is a net positive for society.

It should also be uncontroversial to point out how the basic rules of supply and demand work. Lower the supply of labor, and wages go up. Anyone in a saturated job market has felt this pain and cursed the line of identical workers ready to take his spot when he goes to ask for more money. Typically, he won’t even bother because he already knows the answer.

So there’s our second reason UBI raises wages. It strengthens labor’s bargaining position.

One final note to close out on, because I know this comes up anytime someone talks about increasing wages: “Won’t that cost get passed on to consumers?” No. If companies could simply raise their prices to make more money, they’d have already done that. There’s a reason why prices are where they are, and it’s not because businesses are saying, “we’re making enough money, no need to make more.” Market forces don’t disappear because of UBI. What UBI does is put a thumb on the scale in favor of labor at a time when they damn well need it.