Where will the Basic Income push our salaries?

When I presented the Basic Income idea in one event in March 2016 someone asked me: could there be a threat that the employers will try to pull the salaries down as basic income will rise our income anyway? I answered: yes, and they may have success if some agreement with workers would be reached. But not only by this direction – we have many reasons to be ready also for pressure to increase wages in particular levels.

We know that the workers will get both Basic Icome and salary for job – that means anyway more than with no work – but still presuming that if the salary net for full time job is less than BI then having this job would not be so motivating than we probably wish. So we have good reason to increase the minimum wage, right? It could rise also other salaries lower than average and decrease the difference between them. At the same time we expect some increasing of income tax amounts. Therefore we should be ready for the scenario that people with higher income will demand increasing of their gross wages as otherwise they will loose in net income. Between them will be an area where employers could well work with scissors – without causing any loose in worker’s net income.

To be clearer let’s take a possible example model. I created for this purpose a hypothetic model where the Basic Income amount is equal to one proposed by Portugese activists for their county – 435 euros. National accounts like GDP per capita and price level in Estoina and Portugal are quite close to each other.

Wage pressure up and down

Implementation of the basic income may trigger a pressure both for rising and cutting salaries depending on the wages before and how one’s net income would change without changing the gross wage. Raising or cutting wages may have the following goals:

  • to preserve the competitiveness (towards the Basic Income) of the minimum wage and other wages for low-paid jobs and keep them motivating
  • to minimize or avoid the immediate raising of total labor costs
  • to preserve workers net income at least in the previous level
  • to keep the salaries hiararchy unchanged

Case when employer has no need to change salaries

If there were implemented an UBI model like the example shown in this article, the situation before the transition would be like it actually is (in Estonia) and all workers of an organisation would get salaries between 730 and 1864 euros per month, then an employer wouldn’t have any reasonable need to change salaries, as there are also no pressure to increase salaries and therefore no need for “compensations” through cutoffs.

Pressure on the minimum wage and all low wages

GW 2016 Net 2016 Pressure GW@BI435 Net+435
430 363 +128 558 870
575 473 +70 645 909
730 592 0 730 948

To ensure that the net mnimum wage would be equal or bigger than the basic income it has to be raised by at least 128 euros from the initial level. (430) until 558 euroni. The whole net income would be 870 euros.

Higher wages than 430 euros could be increased by smaller and smaller amount until the wage ca 730 euros that would be unchanged.

Pressure for salary cutoff

GW 2016 Net 2016 Pressure GW@BI435 Net+435
730 592 0 730 948
859 690 -70 789 974
1352 1067 -357 995 1067
1763 1381 -70 1693 1381
1864 1458 0 1864 1458

The following salary range could be available for decreasing. The range is approximately between 730 and 1864 eurot. The cutoff amount varies between 0 and 357 eurros. The peak point is at 1352 euros gross wage that would be 995 euros.

After that the possibilty for any salary cutoff decreases as the taxes became very quickly “positive” for income bigger than 1125 per month. Warning: the real tax amount increases step by step.

Salary advance for well-payed

GW 2016 Net 2016 Pressure GW@BI435 Net+435
1864 1458 0 1864 1458
1964 1534 +70 2033 1534
2375 1849 +357 2732 1849
3440 2662 +1100 4540 2662
6880 5290 +3500 10380 5290
13760 10547 +8301 22061 10547

The workers with initial salaries of 1850 euros could well start to demand higher salary. The real tax burden increases progressively and now it’s about 22%.

Those who have earned 1964 euros per month could demand to add 70 euros. 3440 euros per month should be increased by 1100 euros to not to loose in net income.

If the gross salary of 13760 euros would increased proportionally with the minimum wage then the gross wage would be increased to 17856 eurons, However, to keep the living level untouched then the neow salary should bee 22061 euros.

Possible model used in examples – BI 435 euros

To explain more clearly let’s use a possible example model. The amount of basic income in this model is the same that Portugese activists have proposed for their country – 435 euros. They believe this amount would be executable for Portugal. Estonian figures like GDP per capita and price level are very close to Portugal’s ones. Tax levels are a little bit higher here than in their model. Additionally we assume that the basic income and related additional taxes are for those only who have the citizenship. Note: this is only an example model described especially for this article.

  • basic income – 435 eurot
    • not taken in account as an income
    • may or not be only for citizens (incl. those foreigners whose countries of origin have implemented the basic income as well (regardless of their amounts))
    • essentially this is a tax return (being until some point higher than paid taxes)
  • minimum wage before the basic income – 430 euros per month (2016, Estonia)
  • post-transition minimum wage as a result of wage pressure – 558 euros per month
    • in case if for citizens only – foreigner’s amount: national minimum wage + addition equal to the basic income (558+435, paid only by employer)
  • personal income tax amount 20%
    • retained form all income of citizens
    • in case if for citizens only – tax allowance for foreigners eqals to the basic income amount
  • citizen’s social contribution 33%
    • a new tax to help cover the basic income costs
    • only for those who are eligible to get the basic income
    • allowance equals to the whole minimum wage to minimize the pressure on lower wages
  • pension insurance 2%
  • foreigner’s unemployment insurance 1,6%