Monday, September 01, 2014

Repairing LA's Aging Infrastructure is Inhibited by the Generous Public Sector Wage Premium

LA boomed in the 1950s and 1960s and much of this infrastructure is now old and depreciating. Durable capital depreciates over time.  Walk around my Little Holmby neighborhood in Westwood and you will see some ugly 1950s homes whose current owners are investing in upgrading.  These are private homes and the owner has the right incentives to invest efficiently. In the case of the public capital stock, will it be upgraded efficiently?  The NY Times reports a long piece about the challenges of upgrading this city's infrastructure.  As I read the piece, I could find no mention of high LA public sector wages.  While this is good news for those who have these jobs, these wages paid by LADWP means that for every $1000 it spends on repairing infrastructure that the physical quantity of new and improved infrastructure is low because the wages and benefits it pays are so high.  I would guess that if these jobs could be filled through competitive markets that the cost would fall by 60% to 75%.  Demand curves slow down. Labor is the major cost in improving infrastructure. If labor could be purchased at a 75% lower price, there would be much greater demand for improving LA's infrastructure.  The NY Times again drops the ball as it refuses to engage in discussing the real econ 101 issues at the heart of many issues it investigates.

I'm now co-writing a new paper on the causes and consequences of urban public sector wages and will blog about this issue in the future.