Universal Basic Income Is Better Than a Higher Minimum Wage

On January 19th, the Long Beach City Council approved a measure that raised the salaries of grocery store workers. During the pandemic, these workers are among those that are considered essential and the city wanted to show its appreciation for these heroes.

It’s a nice gesture, isn’t it?

As far as the details — the unanimous vote mandated a 4-month increase of $4 an hour for those who worked at supermarkets with at least 300 employees nationwide. In other words, the big chain grocery stores, the ones that can totally afford to pay their workers more, right?

That $4 an hour could make a huge difference in the lives of those hard-working essential workers, right?

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Raising wages led to job losses

Well, it did make a big difference, but probably not in the way the City Council had anticipated.

Kroger closed two store locations. In response, the city put out a statement that said Kroger’s decision was “unfortunate”.

I’d say it’s more than “unfortunate” for those who are now out of work. On the other hand, by getting rid of a couple of Kroger’s, this does make the local bodegas more competitive. Perhaps the laid off workers can get jobs there.

One would think that after this episode, the members of the Los Angeles City Council would have reconsidered their idea of a $5 an hour hike for grocery store workers. However, one would be wrong. Los Angeles passed the pay increase and, lo and behold, three more supermarkets closed their doors.

Lest people think this is an abuse by greedy capitalists — grocery store margins are razor thin. How thin? In a conventional grocery store, the average profit margin is 2.2%. That means for every dollar in sales, the store only makes a little over two cents of profit.

Labor costs, meanwhile, run over between 20–30% of the total costs of operation. Given that the salaries of the Kroger employees prior to the pay hikes was $18 an hour, how much was the new law going to cost the supermarket chain in those locations?

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Let’s do the math.

A $4 wage hike (we’ll use the lower of the two numbers) on an $18 an hour wage results in a 22% increase in salary. Assuming that labor costs are at the lower end of the range, or 20%, then the total cost to the employer of this wage hike is about 4.5%.

That doesn’t seem too bad until you compare it to the low 2.2% profit that the supermarket makes.

In order to pay its employees an extra $4 an hour, Kroger would have had to operate at a loss. Unfortunately, that is not an option for supermarkets.

This example, writ large, exemplifies some of the problems of hiking the minimum wage.

Now, some would argue — if you do a universal hike to $15 an hour, no exceptions, then supermarkets, etc., could raise prices to cover the cost and not worry that this would make them uncompetitive. This was not an option Kroger had because smaller stores would not have had to pay the higher wages, so they could have kept their prices lower.

However, as this article makes clear, many businesses with thin margins will turn to technology to help maintain profitability.

The technology for automating many businesses such as fast food restaurants, supermarkets, etc., already exists, but due to the up front expense many shops avoided moving forward. When Covid hit, many companies finally took the plunge. With jobs for lower income workers already becoming more scarce due to the rising pace of innovation, do we really need to add yet more stress to this market through higher minimum wages? How high do we want to push unemployment rates for those at the margins?

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Why UBI?

A better idea than hiking minimum wages, with apologies to AOC, is to do what Andrew Yang suggested — have a Universal Basic Income, or UBI.

First of all, a UBI is not going to lead to more unemployment. If anything, it may lead to a tighter job market for employers as many workers realize they don’t need to work two or three minimum-wage jobs to make ends meet. This could actually lead to a gradual increase in wages over time as the market adapts to a diminished supply in labor.

This is something we’ve seen historically. After the Black Plague, for example, workers’ wages increased dramatically. Part of this was because the peasant classes were hit harder by the plague and died off in greater numbers, creating a relative as well as absolute labor shortage. We’ve seen a similar increase in wages every time labor supply decreases.

Aside from these tangential affects to employers, however, UBI does not burden them. When the government raises minimum wages, industries that hire those workers are disproportionately affected. When the government institutes a UBI, on the other hand, the cost is spread over society as a whole.

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UBI is the ultimate social safety net

UBI provides a basic social safety net that protects everyone in society, though, not just low income workers.

It provides options for those suffering from abuse of all kinds. Someone could more easily leave an abusive spouse, for example, without worrying that they won’t be able to feed their children if they do so. Those working for abusive employers can more easily leave. Right now, you have to be downsized to qualify for unemployment which makes it tougher for workers to quit. This could change with UBI.

UBI would also give families more options. Some parents might choose to stay home with their children. Others might choose to work part time so they could help care for an elderly parent.

Because UBI would come with no strings attached, unlike other government programs, people would have more freedom to make the choices that are best for them. Some people might use the money to buy more nutritious food for their families. Others might use it to finance an education, or to move to a safe neighborhood, or to get reliable transportation.

The bottom line — UBI would trust people to make the decisions that are best for them instead of having the government decide how they spend the money.

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Has UBI ever worked?

Several countries, from the Netherlands to Kenya, have tried limited forms of UBI. The results are promising. These small-scale trials show that there were many unexpected benefits of having a UBI, while the fears of critics were not warranted.

The evidence has shown that when people get a basic income without strings attached, they tend to be happier, experience better health, and that their trust in the government and other citizens goes up. School attendance was also positively impacted, and crime rates were reduced.

These benefits came without any serious negative consequences. For example, one fear of critics is that UBI would make people less likely to work. That doesn’t seem to happen. People getting UBI were not more likely to be unemployed.

However, people are more likely to make decisions within a long-term framework. That means that some people might choose to focus on education so they can qualify for a better job tomorrow rather than working several unsatisfying jobs today.

In Kenya, preliminary results suggest that cash transfers not only stimulated the local economy but helped people in nearby villages as well. In Namibia and India, experimental UBI programs resulted in child malnutrition rates dropping, school enrollment going up and crime rates falling. All of this happened without adversely affecting labor supply.

In Japan, a billionaire, Yusaka Maezawa gave away 1 billion yen to 1,000 randomly selected Twitter followers as a “serious social experiment”. The results? Reduced divorce rates among recipients, a reported significant increase in happiness, and an increased interest in starting new businesses.

Is UBI affordable?

Another critique is that UBI is unaffordable. However, when you add up the costs of administrating all the social programs we currently have, UBI suddenly seems to make sense. It would cut down dramatically on the red tape and would make our social safety net much simpler to provide.

Andrew Yang makes a good case for how to make UBI affordable. Fiscal conservatives such as Jack Kemp have come up with UBI proposals, and even Richard Nixon suggested a basic minimum income for poor families.

The reality is that if we want to help lift people out of poverty, the worst thing we can do is pass a law that will make lower end jobs disappear. That hurts the very people who most need a hand.

UBI, because it does not cause harmful market repercussions, is the most humane way to help lift people out of poverty.

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This post was previously published on The Shadow.

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