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Economics/Labour costs as city center distance increases

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QUESTION: Hi Eklimur Raza,

Last time I asked a question was almost a year ago, I believe ("Productivity effect on prices for less productive sectors"). Today, a year later, I come up with a new question I'm wondering about.

I started working in a major big city. People here usually make more money, and the cost of living is also fairly higher than my previous city. Last week I traveled further away from the city center, to other locations. As I got further, I noticed the dynamics of the city: Less man structure, more fields, more space to build, more production-oriented industries. (At this point, I was like 25 km away from the inner city capital center).

So, now, my question: as soil get cheaper and more available, what happens to the minimum acceptable wages by workers? should that, also, decline, as a result to the lower cost of living? I know that makes sense to happen in different cities with different size and dynamics, but does it make sense within the same city/geographical region (but different and further from city center locations?)

Thank you, nice to see a good teacher is still around here :)
Best regards,
Luís

ANSWER: Hi Luis,

Thank you for your question.

Although your reasoning appears plausible in a general context, there is something more to it than meets the eye. If you go deeper into the dynamics of a particular country against the backdrop of global economy, you may run into an opposite reasoning. Let me explain it at two parts.

First, even though all countries are interdependent internationally in a globalized world economy, every country does maintain a kind of aloofness within a setup of open-market global economy (and it is more so for countries like Cuba). Portugal, even if contiguous with Spain and at least part of it (maybe the littoral zone) may be exactly like that of Spain, will maintain its national geopolitical entity. Similarly, the U.S. will maintain its individual geopolitical entity different from that of Canada. So, Portugal will have its set of variables and parameters determining costs and prices which are unique to Portugal, and that is significantly different than that in Spain.

Take the case of Canada and the U.S. Wages in general are higher for low-income and medium-income brackets in Canada than than in the U.S. For example, a retail-shop worker in the U.S. may be paid about $7 an hour as against about $11 and hour, or a school teacher in the U.S. may get about $17 an hour as against $25 an hour for a school teacher in Canada. And that makes not much different whether a Canadian is in Toronto or in Windsor, from where Detroit in the U.S. is only a few kilometers off. While Windsor is about 3 hours' drive from Toronto, wages are more or less the same in Windsor as in Toronto. Yet, while Detroit is only a few minutes drive from Windsor, wages are different between Windsor and Detroit. On the other hand, even if New York is more than half a day's drive from Detroit, wages are more or less the same in these two locations. The question is, Why?

This is because each country has its set economic and social policies. Wages are determined by different variables and parameters impact the nation, even though slightly different in different places. No doubt, if within a country, one goes too far out of the way, into remote places, some variations are likely. Yet some sort of similar conditions and determinants are present throughout the country.

One big reason is that overall the cost of living within a country remain inter-spatially stable at any particular time period. Whether you are in the city or in the outskirts of the city, you are going to get your clothes, furniture, home appliances, almost at national prices. Even though some food products you may be getting at cheaper rates, some other manufactured products you may be getting dearer because of extra cost of transportation plus smaller amounts of sales, such that overall changes in prices tend to cancel each other out.

Secondly, more availability of land in far-off places may allow for relatively larger homes at prices that are available in large city, but that does not go without some hidden costs. If one wants to maintain the same standard as in a large city with all the amenities flowing in continuously, the spurt in maintenance cost offsets the reduced cost of land (thought construction cost itself would be no less, if not even higher, than that in the city). Also, suppose one has defray expenses for school children. The cost simply cannot be less than that as in the city for the same standard of education: you won't get the similarly qualifies teachers at lower salaries (if not you have to pay even higher salaries to give the teachers incentive to move to far-off areas). This applies to other cases as well.

CONCLUSION: If the distant area from the large city is within the same country, cost of living is not likely to be different.

I hope, Luis, this goes to answer your query. If you have need for further clarification, please do not hesitate to ask me. Best.   

---------- FOLLOW-UP ----------

QUESTION: Hi once more Eklimur Raza,

Thank you for your answer. I will follow up, as I'd like to precise my question.
I agree with your statements. I believe price dynamics are different for different cities of different countries. Tradable goods prices, however, should roughly cancel each other out. Yes, it makes sense, or else there would be arbitrage opportunities.

I'm talking, however, about different cities Whithin the same country. I've found some substantial differences for prices of some service sectors, particularly for restaurants, but other services too, as I compare this big city to my native city of fairly lower dimensions.

I remind you that I lived in a smaller town before, and now I'm living and working in a much larger city, within the same and my country. Cost of living here is higher... and rents are significantly higher.

Thank you,
Luís

Answer
Hi Louis,

Even though average prices on the whole may not be much different from cities to cities within the same country, there are reasons to believe that prices in some sectors may show quite a lot of differences because of what economists call (a) occupational mobility and (b) geographical mobility (by "geographical" here is meant locational changes).

In large cities there are more job opportunities, and there is movement from smaller cities to larger cities. Demand for labor causes wages to be relatively higher in large cities. Besides, jobs being fewer in smaller cities, demand for labor being lower, surplus labor tend to bid down nominal wages in small cities. Yet supply of labor, especially skilled labor, is rather limited, which tends to keep wages from going down in small cities.

In smaller cities cost of living is relatively lower on average, especially as pushed down by easier and cheaper availability of housing. Poorer amenities definitely entail lower costs, but residents have to bear with that anyway, and at the end of the day they end up paying less for rent and other amenities which they would not have otherwise bothered to do away with in large cities. This incrementally lower cost in smaller cities is borne out of necessity rather than by preference.

In real terms, if you compare lifestyles, there is hardly any difference --this is the "relativity theory" of economics.

Best.

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Eklimur Raza

Expertise

It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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