Homelessness and Non-Linear Money

July 4, 2011

That pound in your pocket. How much is it worth to you? The haters of rhetoric will say, “A pound, you fool.” The ingenious economists will say, “An amount of goods and services determined by a combination of market forces and fiscal policy”. This is to miss the operative part of the question: how much is it worth to you?

One of the greatest flaws in contemporary discourse is the assumption that money has a linear value; that if you earn £100, then increasing your wages by £100 will double the amount you earn. This would come as a colossal surprise to certain isolated tribes; previously you were earning some, now you are earning more. What appears to be a linear scale of value is in fact a logarithmic scale.  Smaller amounts of money are worth more to an individual than in aggregate if that individual possesses more.

This idea has an immediate level of plausibility if you think of it in terms of our needs. Money necessary to house, clothe and feed oneself is far more important than a tenner to buy trinkets. Indeed, if one thinks in terms of a hierarchy of needs, one could identify the ways in which a given amount of money has more value depending on how fulfilled your needs are. For example, the money required to look after your family has more value than the money required to buy yourself a new CD.

Why is this important? Well, your willingness to do work depends not simply on the amount of money you’ll get as a consequence, but the value of that money to you. Iain Duncan Smith’s call for British employers to recruit more British staff should be seen in this light. It is the case that a significant proportion of immigrants who come here to work do so not simply to live, but to support their families. Remittances to Poland from the UK during the boom years were nearly £1 billion per quarter. That’s a whole lot of plumbing.

In contrast, UK-based unemployed people, especially the young, do not need to support their family as a consequence of the welfare state. Therefore, the cost of their labour is higher, as to make the same work worth their while – to fulfil secondary and tertiary needs which are less important – they need to be paid more. The market price for their labour is not wholly determined by their competence, but by a combination of their competence and the fulfilment of their needs. If the relative needs of immigrants are higher, then they will charge less for providing a given level of competence.

I do not believe for a second that British employees have suddenly become feckless and illiterate, especially as the literacy rate continues to rise. Rather, the people going for the jobs that immigrants are going for are simply out-skilled by immigrants who need them more. If you want British people at the same skill level as immigrants, you have to pay more.

However, that’s not the approach taken by the Government. Instead of raising wages, they’ve opted to raise need. I agree with the benefits cap – it’s a necessary step to take to ensure that the welfare state continues to be perceived as just – but to pretend that it wouldn’t create need is simply disingenuous. People were always going to be forced out of their houses in high-price areas, and conveniently for the employers of London, insufficient work has been done to ensure that spaces are available for them outside the capital. All of a sudden, at the same time as the ‘immigration cap’ is being put in place, London will once again have a supply of cheap labour from people who really, really need the work.

But, of course, Government isn’t joined-up enough to have such a master plan.


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