Why a UBI Will Never Be High Enough

Abstract

ABSTRACTSchemes to replace traditional welfare programmes with a universal basic income (UBI) are sometimes presented as a way to reduce overall economic inequality. But because they lower the implicit marginal taxation rate of individuals entering the workforce, they have the effect of increasing economic inequality between those who opt out of the workforce and those who choose to participate. This article examines the effect that an increase in this income gap can be expected to have on the perceived adequacy of the UBI payment level as an alternative to paid employment. The first question involves the extent to which individuals living on UBI payments will assess the adequacy of their condition by comparing themselves to those who are adjacent to them in the income distribution. If this looms large in their assessment, then the UBI, by increasing inequality within this segment of the income distribution, will tend to increase the perception of its own inadequacy. The second question involves the importance of the consumption of positional goods in determining the adequacy of the UBI. If these are significant then again this will increase the perception of inadequacy, because those in paid employment will enjoy a great deal more than those who opt out.