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Basic Income Studies

Ed. by Haagh, Anne-Louise / Howard, Michael

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Basic Income and Labour Supply: The German Case

Bernard Michael Gilroy / Anastasia Heimann / Mark Schopf
Published Online: 2013-07-24 | DOI: https://doi.org/10.1515/bis-2012-0009


This paper deals with labour supply side effects of implementing an unconditional basic income scheme. Specifically, the German welfare as well as tax and social contributions system are investigated. The results clarify that the abolishment of the so-called unemployment trap due to a basic income policy is a decisive advantage of this approach. In order to demonstrate possible labour supply side reactions to a basic income policy, we use the neoclassical labour supply model and adapt it to our purposes. We compare the effects of implementing a basic income on different types of employees concerning their consumption preferences. We show that, even in the neoclassical labour supply model without intrinsic work motivation, an unconditional basic income increases the participation rate in the labour market. Furthermore, current employees are given only partial incentives to increase their labour supply. Therefore, a basic income not only would reduce unemployment but also could expand the magnitude of employment

Keywords: basic income; neoclassical labour supply; unemployment trap


About the article

Published Online: 2013-07-24

For further information, see, for example, Hohenleitner and Straubhaar (2008), Jacobi and Strengmann-Kuhn (2012), and Werner, Eichhorn, and Friedrich (2012).

The core of this perspective is a rational individual acting in a way such as to maximize his or her own utility. In modern labour motivational dynamics terminology, intrinsic, i.e. non-pecuniary elements and rewards, such as a sense of meaningfulness, a sense of choice, a sense of competence, and a sense of progress, also reflect changing work requirements and changed worker expectations. The increasing relevance of psychic or intrinsic rewards and the decline of material or extrinsic reward factors is commonly mentioned in the literature [see, for example, Kenneth (2009)].

See Ehrenberg (1994), Freeman (2008), Mihai Yiannaki (2010), and Standing (1997).

Such as Belgium, Denmark, Japan, Slovenia, Switzerland, and the United Kingdom. See Table 2 in the Appendix.

See Emmler and Poreski (2006), Althaus (2011), Werner (2012), and Hohenleitner and Straubhaar (2008); the German terms for Green Basic Security, Solidary Citizen’s Income, Basic Income Proposal, and Ideal-typical Basic Income are Grüne Grundsicherung, Solidarisches Bürgergeld, Grundeinkommensvorschlag, and Idealtypisches Grundeinkommen, respectively.

For further information on the linkage between non-wage income and the neoclassical labour supply model, see, for example, Ehrenberg and Smith (2011)and Green (1968).

For a general critique of means-tested approaches, see, for example, Atkinson (1996).

The unemployment trap refers to a situation “where unemployed persons with low earnings potential and/or receiving relatively generous unemployment benefits face a situation where taking up employment may lead to little (or no) increase in disposable income as a result of the combined effects of benefit withdrawal and higher tax burdens on in-work earnings” (Carone, Immervoll, Paturot, and Salomäki, 2004, p. 8). For a broader discussion of the linkage between basic income and unemployment, see, for example, Clark and Kavanagh (1996).

See Bundesagentur für Arbeit (2012a); exemption of 1,200 euro, 80% from 1,200 to 12,000 euro, 90% from 12,000 to 14,400 and 18,000 euro without and with children, respectively, 100% afterwards.

See Bundesagentur für Arbeit (2012c); (2 × 184 × 12 euro).

See Bundesagentur für Arbeit (2012b)and Senatsverwaltung für Gesundheit und Soziales (2012); maximum child benefits (1 × 374 × 12 + 2 × 299 × 12 euro), adequate housing in Berlin (6,504 euro).

See Hohenleitner and Straubhaar (2008); variant 1B (3 × 600 × 12 euro).

Sources for figures in this section are Akademische Arbeitsgemeinschaft Verlag (2011), Bundesagentur für Arbeit (2012a, 2012b, 2012c), Bundesministerium der Justiz (2011), Bundesministerium der Justiz (2012a, 2012b), Bundesministerium für Arbeit und Soziales (2011), Hohenleitner and Straubhaar (2008), IMACC (2012), Senatsverwaltung für Gesundheit und Soziales (2012), and own calculations.

“The at-risk-of-poverty rate is the share of people with an equivalised disposable income (after social transfer) below the at-risk-of-poverty threshold, which is set at 60% of the national median equivalised disposable income after social transfers” (European Commission, 2013).

For utility functions with a constant elasticity of substitution (CES), see “CES utility functions” in the Appendix.

For reasons of simplicity, we keep the nominal gross hourly wage constant.

Algebraically, the indifference curves are derived by rearranging the utility functions on the commodity good consumptions and keeping the utility levels constant. In our example, this is .

See below for explanations of these effects.

According to article 1, passage 1 of the Grundgesetz in conjunction with article 20, passage 1 of the Grundgesetz, there is the claim for a humane minimum subsistence level.

If an individual worked as much as before, he or she could not consume as much as before.

There are two methods to measure these effects. The Hicks Decomposition quantifies the SE by shifting the final budget constraint until it is tangent to the initial indifference curve, thereby keeping the initial utility level constant, and observing the substitution of the one to the other good. The Slutsky Decomposition quantifies the SE by shifting the final budget constraint until it passes through the initial consumption point, thereby keeping the initial income level constant and observing the substitution of the one to the other good. Both methods measure the IE by subtracting the SE from the overall effect. For further information, see Hicks and Allen (1934) and Slutsky (1952).

Even individuals who preferred a higher commodity good consumption before would now prefer to be unemployed.

Where A, B, and C stands for an individual with a high, medium, and low consumption affinity, respectively, IE means income effect, SE means substitution effect,OE means overall effect, NSSmeans no social security,CSS means conditional social security, UBI means unconditional basic income, and –, O, +, and – + stands for a negative, nonexistent, positive, and ambiguous effect on labour supply, respectively.

Citation Information: Basic Income Studies, ISSN (Online) 1932-0183, ISSN (Print) 2194-6094, DOI: https://doi.org/10.1515/bis-2012-0009.

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©2013 by Walter de Gruyter Berlin / Boston. Copyright Clearance Center

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