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Discuss whether the UBI creates income and/or substitution effects. Based on economic theory, would we expect...

Discuss whether the UBI creates income and/or substitution effects. Based on economic theory, would we expect to see an increase, decrease, or no change in hours of work?

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Answer #1

The universal basic income or UBI transfers to households creates positive income effects leadingvto higher work hours due to higher after tax pay however due to higher marginal tax rates, people tend to work lesser causing substitutions effects.

Thus, the substitutions effect overshadows the incone effects by significant margin and thus overall work hours reduce as earnings and after tax pay declines.

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