Intended versus unintended consequences: evaluating the New Orleans living wage ordinance.

Author:Pollin, Robert

In February 2002, citizens of New Orleans, Louisiana, USA, endorsed with a 63 percent majority a ballot initiative that proposed to raise the minimum wage within the city by one dollar above the federal minimum wage. If this proposal were implemented, it would mean that all workers in New Orleans, with the exception of those in job categories that are explicitly exempted from the law, would have to be paid at least $6.15 an hour, 19.4 percent above the current national minimum wage of $5.15. The New Orleans law would also mean that workers within the city would get raises each time the federal minimum increased in order for New Orleans workers to maintain its one dollar increment above the federal minimum.

Despite overwhelming support from New Orleans voters, this measure will not be implemented as law, at least in the current political environment. In 1997, the Louisiana State Legislature had passed a law prohibiting New Orleans from implementing a living wage ordinance and, after a many-layered legal battle, in September 2002, the State Supreme Court upheld the Legislature's overriding authority in this matter.

Nevertheless, the New Orleans ordinance remains as one important model for crafting living wage ordinances and therefore deserves careful attention. This paper presents the main findings of a longer study we conducted assessing the likely impact of the New Orleans proposal (Pollin, Luce, and Brenner 1999) and considers some broader methodological issues for assessing the viability of such proposals. The cornerstone of our previous study was an extensive survey we conducted in 1999 of New Orleans businesses as to their employment levels, labor costs, and total operating budgets.

The petition prepared by supporters of the proposal to the New Orleans City Council states that the current federal minimum of $5.15 is "insufficient to provide a living wage under conditions existing in the City of New Orleans." This view about the inadequacies of the current national minimum wage is certainly consistent with the basic fact that the real value of the national minimum wage has fallen sharply over the past two decades. The current national minimum wage of $5.15 an hour is, in 2001 dollars, about 37 percent below its peak in 1968 of $8.14 (in 2001 dollars), even though the US economy was roughly 80 percent more productive in 2001 than in 1968. More to the point, someone who works full time for 52 weeks at $5.15 would earn $10,712 over a year. This figure is 12.2 percent below the 2001 national poverty threshold of $12,207 for a family of two (one adult, one child), and a broad range of researchers consider such official poverty thresholds themselves to be between 25 and 50 percent too low. (1) A family of four living on the earnings of two full-time minimum wage workers would still achieve a living standard only 19 percent above the government's stringent official poverty line. Of course, such families are eligible to receive an earned income tax credit, food stamps, and Medicaid. But the need for such programs to support families which include full-time workers only emphasizes further the low level to which the national minimum wage has fallen.

The eroding real value of the minimum wage has led to a movement throughout the country for legally mandated "living wage" floors, i.e., minimum wage rates at least high enough to keep workers and their families out of poverty. This movement has been focused primarily at the level of municipalities, but there have also been statewide initiatives. The first victory of a municipal living wage campaign was in Baltimore in 1994. The ordinance there stipulated that firms that hold service contracts with the city paid a minimum wage that began at $6.10 an hour in 1996 and then rose to $8.20 an hour by 2001. Broadly similar ordinances have since passed in more than eighty other municipalities, and approximately seventy other campaigns in behalf of such measures are ongoing. These are in addition to the statewide minimum wage measures that surpass the federal minimum in Alaska, California, Connecticut, Delaware, Hawaii, Maine, Massachusetts, Oregon, Rhode Island, Vermont, and Washington.

The proposal in New Orleans is one expression of this broader living wage movement. In terms of its specifics, it is a hybrid of the municipal and statewide measures. This is because it would be a municipal ordinance, but, corresponding to the various statewide measures, it would cover all workers within the municipality, not only those employed by city contractors.

The primary intended consequence of the proposal is straightforward: to raise living standards for as many as possible of the more than 40 percent of all households in the New Orleans area that are poor or near poor. At most, however, the proposal is likely to reach no more than about half of the area's low-income households, since only half of these households include members with jobs.

Among those who did have jobs in New Orleans and were paid below $6.15 at the time of our survey, the average hourly wage was $5.50. This means that the average hourly raise for such workers would be 65 cents, which amounts to an annual increase of about $1,100, given that, on average, low-wage workers in New Orleans are employed approximately 1,700 hours per year. For poor families in New Orleans that include employed workers, a $1,100 annual raise would produce a modest but still significant improvement in their living standard. We have estimated that the pretax family income of such families would increase by roughly 12 percent. After allowing for changes in taxes as well as eligibility for food stamps and the EITC, the net gain for poor families would be 3-4.5 percent.

But a crucial premise underlies these calculations as to the likely benefits of the proposal: that workers now employed in low-wage jobs in New Orleans will retain these same jobs after the living wage ordinance is implemented. But contrary to this premise, economists have long recognized that minimum wage mandates and similar labor market interventions can generate negative unintended consequences. Employment losses for low-wage workers is the unintended consequence that has been most widely recognized and debated in association with minimum wage proposals generally. But in the case of a municipal ordinance such as that proposed for New Orleans, an equally serious potential unintended consequence would be business relocations out of the city to avoid the higher minimum wage requirements.

How significant are these negative unintended consequences of the New Orleans proposal likely to be? As a simple matter of accounting, it is clear that layoffs or business relocations are not the only possible ways New Orleans businesses could respond to an increased municipal minimum wage. Depending on their cost structures and production processes, firms could also absorb the increased costs through three other means: raising prices; raising productivity; or redistributing income within the firm, either through wage compression or a fall in profit shares. The advantage of these three other adjustment mechanisms, relative to layoffs or relocations, is that, within a reasonable range of small adjustments, firms could implement them more quickly and at a lower cost than either layoffs or relocations. (2) Beyond these various adjustment mechanisms, it is also likely that some New Orleans firms could benefit through an expenditure multiplier when the incomes of low-wage workers and their families rise by 3-4.5 p ercent through the ordinance.

Our paper is an effort to establish the most likely effects of the New Orleans proposal. Of course, we cannot say with certainty what any such future outcomes will be if the proposal were to be revived and implemented into law at some later time. As the long-term debate over minimum wage policies makes clear, it is difficult enough to reach definitive conclusions about a policy measure already in place. But such difficulties are greater still in attempting to project the impact of future policies. In the next section of the paper, we report the main results of our survey of New Orleans businesses. In the third section, we draw on these results and other data sources to consider the extent to which firms are likely to absorb these costs through some mix of the five possible responses--price or productivity increases, redistribution within the firm, layoffs, or relocations. In the fourth section, we then consider how large an expenditure multiplier is likely to result through this measure. We do not explore fur ther in this paper either the magnitude of the benefits to workers or the distribution of these benefits across family types. Nevertheless, obtaining a clearer understanding as to how businesses are more likely to respond to the ordinance should itself shed light on whether the proposal's intended or unintended consequences are likely to prevail.

Estimate of Covered Workers and Firms

Mandated Effects

There were approximately 12,700 business firms in New Orleans in 1999, employing about 293,330 workers during our survey period from January to March 1999. In our survey, we received full responses from 444 firms that, overall, employ 68,751 workers, amounting to 23.4 percent of the entire labor force of New Orleans. We generated estimates for the full city from these survey responses using standard statistical methodologies. Details on our survey methodology, data sources, and calculations are presented in appendix 1. In appendix 2, we offer some indicative updated estimates of these cost effects resulting from the fact that the living wage threshold has remained fixed at $6.15 over the three years since we conducted our survey, while inflation and nominal wages have been rising. However, throughout the body of the paper, we present only the results derived from our much more thorough 1999 survey data.

Of the 293,330 workers in the city, we estimate that 77,175...

To continue reading