A Basic Income Is Smarter Than a Minimum Wage
Just as the U.K. raises its minimum wage and as Bernie Sanders's demands for a 50 percent increase in minimum pay keep winning him votes in the U.S., some politicians in one of the world's most socialist countries, Sweden, are in favor of going in the opposite direction. They could be right, especially if nations can find a way to unhitch basic subsistence from work.
Sweden, along with some other countries with big social safety nets -- Denmark, Norway, Switzerland -- doesn't have a legally mandated minimum wage. Instead, the minimum salary is collectively bargained. The country's strong unions and socially responsible employers make sure that, at 20,000 kronor ($2,468) per month, it reaches about 64 percent of the average wage -- more than twice the U.S. rate. Now, though, three opposition parties in the Swedish parliament are in favor of legislating to lower it as a way to adjust for the arrival of an army of immigrants with relatively low skills.
It's not happening yet, since the ruling coalition is against government interference with the labor market's workings, but it's a logical idea. Though Sweden's unemployment rate, at 7.6 percent, is not alarmingly high, it's not exactly comfortable for a country where only slightly more than 5 percent of the workforce was unemployed before the 2008 financial crisis. Besides, Sweden has one of the rich world's biggest gaps between native and immigrant employment rates. Youth joblessness is 70 percent higher among the foreign-born than among Swedes. Lowering the minimum wage could draw more of the new, mainly Middle Eastern population, into the workforce and reduce social and ethnic tension.
Minimum wage laws or strong unions that bargain up wages are a problem in any country with big immigrant inflows. Newcomers are at a disadvantage because of poor language skills and educational backgrounds that are often incompatible with the host countries' labor market requirements. No one wants to hire them at a high minimum wage, especially when locals are readily available. Instead of working for social justice, high minimum wages create an extra barrier for the integration of the least socially secure people into society. Such barriers can result in ghettos, rioting and the recruitment of disenfranchised immigrant youths by terrorist groups. The U.K., France and Belgium, all among the top 10 European countries by minimum wage size, have recently seen their share of those ills. Germany, which only introduced a national minimum wage last year and then opened its doors wide to immigrants, is in the process of manufacturing a similar problem.
The International Monetary Fund acknowledged this in a January paper:
While empirical evidence remains scarce, existing studies suggest that immigrants’ employment rates and the quality of the jobs they hold are higher in countries with low entry level wages, less employment protection, and a less dualistic labor market.
The IMF backed the idea of temporary exceptions from minimum wage laws for refugees, such as the German proposal that they be allowed to work for less during the first six months after getting refugee status, but warned that "the benefits of these targeted interventions should be carefully weighed against the risk of creating labor market dualities that may be difficult to unwind."
The immigrant problem is just one illustration of why it may not be a good idea for governments to try to regulate the labor market instead of pursuing their ultimate goal -- that of making sure people aren't "dying on the street," as Donald Trump likes to put it. It's dawning on politicians in some countries that tying basic subsistence to work through the minimum wage is not the most logical way to achieve social justice.
These countries are experimenting with a universal basic income that will be paid to all, whether they work or not. A Finnish government working group tasked with trying out the scheme proposed parameters for a pilot project on Wednesday: Up to 10,000 people are to start receiving 550 euros ($627) per month next year. Finland's economy is struggling -- it's still smaller than it was in 2008 -- but the government calculates it can provide a basic, secure income to its entire population by cutting up the current benefit system.
Other countries looking at the scheme include Canada, where the province of Ontario is starting a pilot project this year, New Zealand, where the second biggest party in parliament is interested in adopting the idea as part of its platform, and the Netherlands, where four cities are piloting basic income programs. In June, Switzerland will hold a referendum on universal basic income, but the chances of success there are rather slim.
The idea is radical and it sounds like money for nothing to many people, but it has more of a libertarian flavor than a Communist one. By guaranteeing basic survival, a government provides a service as necessary as, say, policing the streets or fighting off foreign enemies. At the same time, once this service is provided, the government can get out of trying to regulate the labor market: Its goal of keeping people fed and clothed is already achieved. The Finnish government believes the basic income scheme will encourage the currently unemployed to take part-time jobs, which they avoided for fear of losing their benefits.
Many people may agree to work for less than the current minimum wage, and on more flexible terms, if they're supplementing a guaranteed income, not scrambling to avoid having to beg for food. There should be little incentive not to work at all: The amount proposed in Finland hardly provides a comfortable existence. And Finland's ability to earmark the money from existing programs shows many critics' fears that universal basic income may require impossibly high taxes may be misplaced.
One problem with a universal basic income, of course, is that it will make a country attractive to even more immigrants from poor countries where 550 euros a month looks like a princely amount. Keeping borders open will hardly be an option. Yet even regardless of basic income schemes, European countries need to bring their immigration procedures into line with increasing inflows, and they have already done a lot to reduce chaos compared with last year. And with basic income, the immigrants who have already arrived may integrate faster than they are doing now, because labor markets will be livelier and less forbidding.
It's not the government's business to tell private companies how much they should pay their workers. It is the government's business, however, to help citizens feel less precarious and more secure. Businesses and wealthy individuals may well be prepared to trade the end of wage regulation and other rigid labor market rules for the higher taxes that may be necessary to make basic income work.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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