SADOW: New Orleans’ Minimum Wage Hike Will Further Trash Its Economy

It might be good for some city employees and incumbents in city government running for reelection, but New Orleans’ minimum wage hike for city workers will make its citizens suffer even more.

Deciding to step on the gas on the matter, the City Council ratified a pay schedule that would push the wage to $15 an hour in 2023. Years ago, it established a minimum much higher than the state’s, which defaults to the federal level of $7.25, and indexed it to inflation. It will bump up more than a couple of dollars next year from the current $11.19 and then complete the rise, costing taxpayers around $10 million more.

It’s a sucker punch delivered to citizens as the city continues to reel from the Wuhan coronavirus pandemic’s impact its government’s overreaction to that. With its economy disproportionately dependent upon leisure and hospitality discouraged by the virus, compounded by a ridiculous vaccine passport requirement to patronize these kinds of commercial establishments, city quality of life has suffered more deeply. Just as one indicator that likely reflects worse numbers specifically for New Orleans, statewide 84 percent of restaurants reported reduced profits over the past three months while none noted an increase. Anecdotally, in New Orleans after the requirement kicked in sales dropped 30 to 40 percent.

The minimum wage increases only will make more difficult any kind of city economic turnaround. The academic literature overwhelmingly reports negative overall economic effects for minimum wage increases when applied to an entire country. Even a cursory knowledge of economics reveals why: as free markets price labor according to the productive value it brings to society, artificially pricing it higher than its actual return to society makes inefficient use of resources that limits potential growth otherwise.

However, when assessing localized such hikes, this becomes a more nuanced proposition. The mix of economic activity in the affected area, the composition of the labor force, the mobility of capital, labor, and market participants both on the buying and selling sides, and substitutability of product geographically could exacerbate or ameliorate the negative impact. Most crucially, the relative size of the increase conveys the most negative impact, logically so as the higher it goes from a market-established floor (except for the few employed at the current federal minimum wage that exceeds the actual market-determined value of their work) the more jobs become overpaid.

In a theoretical sense, taking $10 million and moving it to less productive purposes either beggars city government from financing other functions or causes taxes to rise thus removal of resources from the more productive and dynamic private sector, or both. The combination of fewer city services and/or reduced personal wealth and private sector productivity together creates reduced quality of life, except for a small number of direct recipients now overpaid for the actual value of their labor. Typically, the negative impact is felt most by the least skilled in the labor force: the less educated, the younger, and generally economically disadvantaged individuals.

Isolating the impact to just one jurisdiction and just one segment of employment in it adds wrinkles. With the economic mix in New Orleans, its relatively lower standard of living but also its lower cost of living, the jump will have outsized consequences. It will suck employees from the private sector, forcing wage increases there and the ensuing price increases and reduction of available labor force (concentrated at the bottom and reflected not so much in layoffs but in reduction in new hiring) that research has noted typically follow, and usually proportional to the relative size of the increase which in New Orleans’ case will be substantial.

As well, a rippling knock-on effect will occur that will cost the city more than expected. As wages at the bottom go up, workers just above that will expect a raise as well as they will perceive correctly the relatively large gulf in skills and productivity demanded in their positions won’t be matched by wage differentials. Their pressure to leave jobs as a result in seeing greener grass elsewhere will be duplicated in the private sector, having to raise its lowest wages to keep from losing people to the city. Additionally, businesses react in other ways by changing other forms of compensation to maintain overall labor costs, basically shifting compensation towards pay and away from other forms.

Finally, the economy will suffer in the New Orleans area because inflationary price increases will occur on the whole as businesses respond to offset their increased costs (although the city employees benefitting from the transfer of wealth will find themselves better off on the whole). Research indicates slack economies like the area outside the north shore and those particularly dependent on hospitality inordinately suffer in this way.

Again, excepting the tranche of city employees who will enjoy this transfer of wealth, overall the city’s residents and in a more diluted sense those in Jefferson and St. Bernard Parishes will be worse off as a result of this policy decision. Except also incumbent politicians, who can pander for city employee votes in next month’s municipal elections by dangling this act in their campaign communications, hoping the more informed and better critical thinkers in the electorate don’t notice.

Interested in more news from Louisiana? We've got you covered! See More Louisiana News
Previous Article
Next Article
Join the Conversation - Download the Speakeasy App.

Trending on The Hayride