Basic Income and Labor Supply: The German Case

This paper deals with the effects of implementing a basic income on the labor supply side. The German welfare as well as tax and social contributions system are investigated. The results clarify that the abolishment of the so-called unemployment trap due to a basic income policy is a decisive advantage of this approach. In order to demonstrate possible labor supply side reactions to a basic income policy, we use the neoclassical labor supply model and adapt it for our purposes. We compare the effects of implementing a basic income on different types of employees concerning their consumption preferences. We show that, even in the neoclassical labor supply model without intrinsic work motivation, the basic income increases the participation rate in the labor market. Furthermore, current employees are partially incited to increase their labor supply. Therefore, a basic income would not only reduce unemployment but could also expand the magnitude of employment.