Basic Income and Labour Supply: The German Case

Abstract

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