Question

In response to increased knowledge about the negative effects of trade on some communities, some economists have begun to offer policy advice. In a recent New York Times op-ed, Ed Glaeser, Larry Summers, and Ben Austin called for targeted wage subsidies which subsidize the employment of workers in distressed communities. The subsidy is designed to avoid the negative effects of a minimum wage while providing a benefit which minimally impacts the incentive to work (unlike a monthly check).

a. Some argue that people in declining areas should move to better areas or gain skills in new fields. What are some reasons you can think of why workers are less likely to make these kinds of changes?

b. What is the likely effect of this wage subsidy on the incentives of workers to move/retrain?

Answer 1

A.

The first reason of workers not doing so, is the change cost. They lack funds to move from one area to another area that is better. It makes workers to remain at the same place and depend upon the aid given to them. The second reason is the higher level of expenses to be incurred in those areas that are better. It may be in the form of higher rent, higher cost of food and traveling expenses. The third reason is the lack of funds in balance to spend while they pursue new skills. The lack of sufficient buffer funds, and Condition of daily earning and daily consuming, makes them unable to go for the new skills. The fourth reason is the fear of relinquishing the government support if they move to a new area or acquire new skills. If they do it, then the government support can be withdrawn, making them suffer more than before.

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B.

The wage subsidy, is based upon employment given to people in specific areas. Hence, once people move from those areas, the wage subsidy to specific individuals will not be given. Hence, this type of subsidy becomes negative effect upon incentives to move or retrain on new skills. As a result, people would like to remain in the same place where wage subsidy is given to them upon their employment.