Does Basic Income make work pay?

The other aspect of the unemployment trap generated by means-tested guaranteed minimum schemes is the one most commonly stressed by economists. It consists in the lack of a significant positive income differential between no work and low-paid work. At the bottom end of the earnings distribution, if each Euro of earnings is offset, or practically offset, or more than offset, by a loss of one Euro in benefits, one does not need to be particularly lazy to turn down a job that would yield such earnings, or to actively look for such jobs. Given the additional costs, travelling time or child care problems involved, one may not be able to afford to work under such circumstances. Moreover, it would generally not make much sense for employers to design and offer such jobs, as people who would be grateful for being sacked are unlikely to constitute a conscientious and reliable work force. A minimum wage legislation may anyway prevent full-time jobs from being offered a wage lower than the income guarantee, in which case the latter consideration only applies to part-time jobs. The replacement of a means-tested guaranteed income by a universal basic income is often presented as a way of tackling this second aspect of the unemployment trap too. If one gave everyone a universal basic income but taxed at 100% the portion of everyone’s earnings that does not exceed the minimum guarantee (see for example Salverda 1984), the unemployment trap would be the same, in this respect, as under a means-tested guaranteed minimum income. But if one makes the mild assumption that the explicit tax rate applying to the lowest income brackets must remain noticeably lower than 100%, then the following statement holds. Since you can keep the full amount of your basic income, whether working or not, whether rich or poor, you are bound to be better off when working than out of work.