Thursday, November 4, 2010

Low Income Workers: How Dependent are We?

Earlier today my wife sent me a link to an article on the BBC News website titled, "Do the Poor Have a Right to Live in Expensive Areas?".  The British Parliament will soon vote on a bill to limit housing support money transferred to low income Britons to £21,000.The title of the article struck me as an absurd question because it represents actions far beyond securing basic living standards; but, uses taxpayer dollars to fulfill a desire to live in a nicer location. However, some of the questions raised within the article are worth some consideration because they are common mistakes made by non-economists. I will address the first question today and the second one later on.
1. How much do we depend upon lower income workers? How much do we value low income workers?

Below is quote from Lynsey Hanley regarding the value of low income workers.
"We need these people to do many of the minimum-wage jobs on which we depend - cleaning, catering, retail and so on," she says. "If you take away housing benefit and shift them out, this country's high transport costs mean they'll have no incentive to come into our cities to work.What I'd say to David Cameron is: come back to me when the minimum wage is £12 an hour." -Lynsey Hanley
What Ms. Hanley is saying is that a lack of housing benefits will cause these low income workers, some of whom I depend upon, to leave and not come back to the community.  This is completely possible. If the costs of transportation push their spending beyond the total wages received these workers will not maintain their current job but may find work closer to home.However, the notion that minimum wage would need to increase in order to entice people to work in these low wage jobs is suspect because it acts as though there is no labor market. I've included two diagrams below to illustrate this point.

Labor Demand: All employers seeking to hire workers

Labor Supply: All workers seeking to supply their labor

Story #1: The first diagram drawn in black shows that employers really depend on low wage workers. Note that the employer's quantity demanded does not change very much as price increases or decreases.  This means that the employer needs these workers for the success of their operation.  The labor supply curve shifts to the left because the increased transportation costs increase their cost to providing labor.This is the story Ms. Hanley sets forth, and if it's true then the market will respond with a high wage because businesses must have these employees to maintain a viable operation.

Story #2: The second diagram written in red sets forth employer's that do not think these low wage workers are critical to their operation. That is, if the price needed to entice their workers increased (because the cost of transportation increased) they would replace them with technology or ask current workers to multitask.

Notice that the wage increases much more when the demand curve is steeper, that is the case where the low income worker is vital to the operation of business. Both of these diagrams assume that the costs for all the low income workers will increase. In fact, this is not likely the case. Many of the low income jobs would be filled by middle income teenagers living in London that do not face increased costs to supply their labor.

Also, there are many times where it seems that people intimate that because people are paid a low wage, their dignity is lessened. If I were paid a low wage would I think that my life was less meaningful? If I didn't have access to a nice apartment would I begin to think that God and my family loved me less? This was not in the statement posed by Ms. Hanley but I think deep down that it is the thought process that occurs in many people's minds.

The second question (that I will tackle on Monday) is this, "What happens to the displaced people in a gentrified area? Also, normatively, is it really important for the rich and poor to be intermixed in the same neighborhood like this article suggests?"

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