Labor is a market distortion, We Need VAT and UBI - Wilsons Blog

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Labor is a market distortion, We Need VAT and UBI

There is a pretty serious gap in how the economy functions right now, has been for decades, and we have to close it.

I’m not here to be all “tax the rich” even though I maybe think that’s a good idea too.

I’m not here to say “free markets are amazing” even though I kinda do believe that as well.

This is a simple, mechanical problem that needs fixing, and we fix it with VAT and UBI. If you so much as whisper “that’s socialist” or “you’re defending the bourgeoisie” I will beat you to death with a sickle tied to a demand curve (joking!). By that I mean: please try not to see this as a political post 1

I know that me using the terms “VAT” and “UBI” carries a lot of existing assumptions. Each of them individually have significant drawbacks and effects when used on their own. For that reason please don’t carry the usual assumptions surrounding VAT and UBI whilst reading this, the combined system behaves very differently to how you might expect. Regardless, I will anyways cover all the standard conceptions surrounding both such as questions regarding inflation, whether VAT is regressive, redistribution, and changing incentives to work.

Labor is a market distortion

Labor, in economic terms, is a good. People offer their labor (supply) and workplaces create jobs (demand).

Except, the supply of labor is forced.

Imagine a good like iron ore, except every country in the world is maximising it’s output. Policies are designed to mine iron. Mines were shamed if they weren’t maximising their output of iron. Iron was put onto the market regardless of the price because we had to sell as much iron as possible. The economy itself, through consumption, was linked to iron production. If iron production dropped, so did consumption, and the economy would crash.

Now imagine that iron is 60% of the economy. Not necessarily because it should be, but because we forced it to be there.

This is currently the world for labor. 60% of GDP goes to labor. Now, labor is of course still very important to production, but working hours and wages disconnected from productivity 50 years ago. That’s 50 years of market distortion. The possible damage is vast. I believe this is one of the main culprits behind the great stagnation.

Why do we need VAT and UBI?

Because automation has moved labor markets so much that labor can no longer be the only way that people get money to participate in the economy. We have automated away jobs tied to the most basic goods that we need, and the jobs we create are tied to marginal gains in utility that are poor measures of output. Important necessities have been highly productive for decades, meaning a single person employed by say, the agriculture industry, can feed exceedingly many people.

Automation replaces jobs, and yet, the economy is wonderful in that we can and will always create new jobs, we will never run out of work for people. But that is also a runaway train, we need to stop and ask “do we want all those new jobs?”. The economy (and society at large) cannot ever say no, because almost all consumption is driven by labor.

Here are the main reasons we need VAT and UBI:

The mechanism for creating new jobs is not instantaneous, it creates instability proportional to the speed of automation. That instability isn’t just societal or political, it causes consumption to be unstable as well. It’s less and less of a given that an individual can transition into one of the categories of unautomatable work, in so far as those continue to exist, in their remaining lifetime.

Institutions such as education and retirement have been absorbing the loss of labor demand quietly. It’s not just that people are getting older that means we have more retirees, labor demand pressure is also pushing people out. This can be seen in age cohort labor participation2.

We are distorting the economy. Because people must work to live (unless they can find a way to be on welfare or become dependents) wages can’t be set efficiently, and more importantly jobs that maybe shouldn’t exist get forced into being. Some new jobs just, aren’t that useful? Do we really need foodora drivers or escalator attendants?

I am intentionally avoiding using much data in this piece, as I want to focus on the policy itself and illustrating need is an incredibly complex subject. However, if there is one graph that might be most effective in showing that something is going on, it’s this one.

This is an estimated (because data is spotty) participation rate in labor across the entire world. It is asking what percentage of people over 15 are working. This 10% relative drop over 35 years is not something you can easily hand wave away. I use world data because it has no externalities beyond, say, the covid pandemic which you can see for the 2020 data. Crucially, there is very little we can do to reverse this trend in...