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Cities like New York, San Francisco, and others enjoy booming local economies that support high-paying jobs in industries like finance and technology. This and other factors have driven the price tenants are willing to pay for rent to astronomical levels, pricing out lower-income workers who then have to make long commutes or take public transit to get to work.

Where I live, the average rent is $2,000, and both that figure and the area affected by inflated rent prices expands every year. As this progresses, help wanted signs and aggressive recruiting for low income jobs have become far more commonplace, indicating a labor shortage in these industries that is steadily increasing as the difficulty of commuting from areas with reasonably priced rent increases.

My city is by no means in a dire labor shortage situation, but I thought it might be interesting to consider a hypothetical city where the area of price-inflated rent becomes so large that basic upkeep from low-paying jobs that "make the world go 'round" is no longer feasible. Is this a real threat to the success of these cities? That is to say, is a labor market correction likely to drive wages up enough to sustain a workforce of extremely long-distance commuters?

Bonus:

Assuming this is a real threat, are rent regulation (San Francisco), high-quality public transit (New York), or anything else effective long term solutions?

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If it was not feasible, then the residents of the city would bid up the price of the services provided by the low-paying jobs until the induced rise in wages (and the fall in rents) would make housing affordable enough for people who are supposed to provide the "make the world go round" services. It's important to note that this process can't create housing units out of nothing; so the restricted supply of housing still leads to inefficiency - if no new houses are constructed, people who are dissatisfied with the lack of affordable basic services have to move out of the city until enough housing is freed up for workers who are going to provide these services. This leads to inefficient allocation of labor, etc etc.

"Labor market corrections" or rent regulation don't solve the underlying problem, which is a shortage of housing units in areas which offer higher productivity to workers. Public transit could help, but how exactly do we make it "high quality"? The best way to improve the quality of public transit is probably to build more roads to alleviate traffic problems during peak times, and these construction projects usually run into the same barriers that housing construction projects do.

The solution I would recommend is to reform some of the environmental regulation, zoning laws and the government's internal review processes which make it so hard to build new housing units, high-speed trains, roads, etc. If the problem is a lack of housing and transportation infrastructure, the correct response should be to remove the supply-side barriers which are contributing to the shortage.

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  • $\begingroup$ This doesn't take into account the fact that such desirable markets typically have a constant influx of new residents who are able to (temporarily) sustain a loss, in terms of income versus cost of living. $\endgroup$ – Bill Clark May 30 at 2:33
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Something missing from more traditional analyses is that a significant number of people may move to a new (expensive) location, take a job that pays a wage insufficient to cover living expenses, and burn through their savings until they're forced to relocate. This happens quite often in "fashionable" locations such as San Francisco.

This is actually a strong argument in favor of a higher minimum wage in such places, even taking a "hard-line" position that such laws only result in the loss of low-paying jobs — because such jobs are a "trap" that lures people (with savings) into an unsustainable situation in which they are exploited until they run out of savings, at which point they are replaced by somebody else with savings to exploit. Eliminating all jobs that pay wages insufficient to actually live (on an ongoing basis) in expensive markets guarantees that such "exploit the newcomers" economies cannot persist for very long.

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  • $\begingroup$ Brilliant tie-in to the minimum wage. Do you have any references to support the claim that these newcomers burning savings and leaving is a common phenomenon? $\endgroup$ – Charlie Jun 16 at 2:00
  • $\begingroup$ It’s mostly personal observation and thus anecdotal but I’ve known a good enough cross section of folks that I don’t think my sample is that biased.. I’ll look to see if I can find more objective references though. Incidentally, I’ve often thought the same thing true of the restaurant industry — that given the high turnover of new restaurants opening and quickly failing (in expensive cities) that they’re effectively being subsidized by people blowing their life savings on their “dream” of having their own restaurant. Which is kinda sad, really. $\endgroup$ – Bill Clark Jun 16 at 21:25

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