APPENDIX
The LookOut Letters to the Editor
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APPENDIX

JOBS objects to the SMART proposal for the following reasons:

 

    1. The proposal represents a drastic, unprecedented increase in the minimum wage which will severely and unfairly impact many Santa Monica businesses.
    2. The current minimum wage in California is $5.75 per hour. Therefore, the proposal’s mandated increase to $10.69 per hour represents an 86% increase, not counting the effect of benefits which, apparently, will be mandatory. Even though there are probably very few Santa Monica workers which are actually being paid $5.75, the increase will be staggering for many businesses.

      As an example, assume a restaurant having 70 employees, 50 of whom are paid less than $10.69 per hour and assume that 25 of these 50 receive $7.00 per hour and 25 receive $9 per hour for an average for the 50 employees of $8. If the average salary for these 50 employees is required to increase by almost $3 per hour, the owner will face a labor increase for them of approximately $300,000, almost 35%. If the assumption is that the owner should simply absorb this dramatic increase in wages through a decrease in profits, that assumption is a fantasy. Such a labor cost increase would undoubtedly be well in excess of what could conceivably be absorbed. Without some drastic changes, this restaurant would be unable to stay in business.

      Reporters have been recently saying that the proposal will include a "hardship exemption" to deal with employers who cannot pay the mandated wages and remain in business. While it is difficult to react to something which has not been distributed in writing (a problem with the entire SMART proposal which even now has never been distributed other than through the press), this is a shocking concept smacking of the Inquisition. The picture is clear:

      The Council or some designated board of inquiry calls the offending employer before it demanding a recanting of his or her heresy of paying wages less than the City deems fair and in exchange for being permitted to stay in business, insisting on adherence to the new orthodoxy. Next will come begging and groveling by the employer and, if the inquisitors are in a particularly nasty mood, by his or her spouse and children. If, through the benevolence of the inquisitors, they agree to consider the request for an exemption, they will submit the employer to the humiliation of a public review of his or her business records, complete with oral scourging as they deem this or that practice to be inconsistent with the people’s interests. The final ordeal for the employer will be the mandatory hardship stories from the employees and their families. The end result, after a feigned agony of decision-making, will be a determination of the level of wages this employer can afford to pay each employee and still earn a "fair" profit in the minds of the inquisitors. After rendering its Solomonic decision as to profit and wages, the board will grant an exemption subject to the appropriate conditions permitting the business to stay open, for which the employer is supposed to be eternally grateful. Of course, any such exemption will not be permanent because, heaven forbid, the business might become more profitable in the future. Therefore, the board’s decision will be for a specified time and a renewal of the exemption will be necessary after one or two years. The employer will, therefore, be expected to pay the requisite indulgences in the form of future campaign contributions and other consideration.

      Some have argued that it is "fair" to require employers in the coastal zone to pay higher wages because of the extent of public assistance which has been provided and which has enabled these businesses to be successful. Despite the fact that one’s sense of "fairness" may differ, there are two responses to this argument.

      First, the public funds which have gone into Santa Monica Place, the Promenade improvements, restoration of the Pier and other projects which might be cited came entirely, either directly or indirectly, from these very businesses and the taxes they bring to the City. If one were to add up the sales tax, transient occupancy tax, utility users tax, property tax increases, property transfer taxes, license fees, valet parking fees, assessments imposed on businesses in the coastal zone, business license taxes and other taxes and fees paid by these businesses, the amount would dwarf the amount spent by the City. How else did the City’s budget increase more than three-fold over the last 15 years?

      Furthermore, funds from these projects go to pay for important social services, such as affordable housing which receives a sizable portion of the increase in property taxes from Santa Monica Place. The City intentionally encouraged these businesses to locate here through the current general plan adopted 15 years ago so that the City could increase its general fund revenue and have sufficient funds to provide fundamental services as well as discretionary tax revenue to provide social services, such as the proposed acquisition of a building for the Ocean Park Community Center. If this effort had not succeeded and the businesses not located here, where would these funds come from? If the City drives away the tourist industry, how will we adequately fund the residents’ desire to provide additional park space? The simple fact is that we will not be able to do so.

      Second, irrespective of what is "fair," the economic impact of the proposal, as discussed below, describes the inevitable consequences. (Perhaps this is why they call economics the "dismal science"--no matter what one tries to achieve, if one’s methods fly in the face of economic reality, they will not succeed.) This reality is that a drastic increase in the minimum wage will only hurt low-wage workers as their jobs are lost, either never to be replaced or lost to workers with greater skills attracted by the higher wages. The dreams being placed in the heads of low-wage workers in the coastal zone will turn into bitter reality for many of them as the proposal turns out to be a cruel hoax, however well intentioned.

      Another argument often heard is that it is "unfair" for a worker to put in an honest days work and not receive sufficient income to support a family of four living in Santa Monica without relying on governmental assistance. I am sure no one could adequately support a family of four in Santa Monica on a minimum wage income. However, I know of no studies which would support the notion that most of the coastal zone workers earning below $10.69 per hour are attempting to support a family. If this were true, it would make the coastal zone a most unusual place. Certainly it stands to reason that employees at this economic level would, like large numbers of other families, be supported by the income from more than one family member.

       

    3. Seemingly arbitrary distinctions between businesses based upon size and location are unfair.
    4.  

      Under the proposal, restaurants on the west side of 4th Street or Lincoln will be required to pay the increased wage while those on the east side will not and those with 49 employees will be exempt while those with 50 will be covered. These distinctions and the obviously unfair results to which they lead demonstrate the unfairness of the entire concept. Furthermore, the structure of the proposal discourages smaller businesses from expanding because the 50th employee is extremely expensive as he or she puts the business over the threshold and encourages employers which are close to the threshold to reduce the number of employees.

       

    5. The proposal will inevitably lead to a decline in jobs and job opportunities for relatively unskilled workers. This result demonstrates the fundamental question: How many jobs and job opportunities for the low-skilled worker is SMART willing to sacrifice in order to provide greater job opportunities for higher-skilled workers?
    6.  

      As pointed out in Section 1 above, a restaurant faced with a 35% increase in labor costs cannot and will not simply absorb those costs; such an employer will be forced to adapt through some change in business operations. The first consideration will logically be to determine how she can reduce costs, particularly labor costs. If the hypothetical restaurant is to reduce costs back to where they were originally, the employer will need to eliminate approximately 20 of the 25 $7 per hour workers. While she may be unable to terminate this many employees and continue to satisfactorily operate her business, she will certainly eliminate as many positions as possible, starting with the workers with the fewest skills.

      One response to this concern is always that businesses generally operate with the fewest number of employees possible and, therefore, our restaurant will be unable to terminate any employees at all. This response overlooks the fundamental supply/demand relationship which drives our economy.

      As the mandated price for labor rises, the demand for employees inevitably declines and those which are hurt first will be those with the fewest skills. Employers will take several courses of action in an effort to adapt to the new wage scale by retaining and hiring only the most productive workers and altering their manner of doing business in order to operate successfully with fewer employees, such as by increasing automation (remember the days when someone would pump your gas for you?)

      Also, as the wage increases, the size of the labor pool expands as more people become interested in the jobs now paying an artificially high wage. As a result employers will be unwilling to hire those with entry-level skills, such as young people with English language deficiencies, and will employ only those with more experience and more education. The inevitable consequence will be a gentrification of the work force and increasing displacement of low-skilled workers in the coastal zone, thereby creating the same, or new, social problems.

      Because this proposal is a dramatic minimum wage increase, the effect of increases in the minimum wage generally is instructive. Economists agree that minimum wage increases which raise the mandated wage above the market wage do not accomplish their stated goals.

      For example, Professor David Neumark of Michigan State University and economist William Wascher of the Federal Reserve Board, frequent writers on the effects of minimum wage laws, recently found that an 18.8 percent increase in New Jersey’s minimum wage resulted in a 4.6 percent decrease in employment in the New Jersey fast-food industry compared with neighboring Pennsylvania which did not increase its minimum wage. If we were to apply the same ratio to the proposed 86% increase in the minimum wage contained in SMART’s proposal, we would see a 21% decrease in employment. While dramatic, this number is about one-half the number of low-wage employees our hypothetical restaurant owner would be required to terminate to maintain labor costs at the same level.

      Employers will not pay more for low-skill workers than they can profitably employ. What will certainly happen if the proposal were adopted will be an immediate loss of several entry-level jobs and a gradual replacement of low-skilled workers with those having greater education, language skills, experience and maturity and the coastal zone employees will more closely resemble Orange County than our current diverse labor force.

      As Professor Simon Rottenberg of the University of Massachusetts put it:

      Thus, minimum wage laws can be perverse in their effects. On the surface, they will appear to many to raise the wages of the working poor. Scratch the surface, and it can be seen that such laws can have opposite consequences. They can move low-wage workers to unemployment and to less desirable employments; they can . . . regressively redistribute income from poorer workers to those who are better off . . .

       

       

      And Professor Ragan of Kansas State University:

      Some workers unquestionably benefit from a minimum wage through the receipt of higher income. Their gains, however, come at the expense of other workers. The gains and losses are not shared equally by all segments of the population. . . [T]hose experiencing the greatest losses tend to be those in greatest need.. . . An increase in the minimum wage is found to raise relative costs of employing young workers, causing employers to cut back on teenage employment. . .

      If forced to pay higher wages for low-productivity workers, employers will reduce employment of such workers. The contributions of some workers to a company’s revenues will, at the higher wage, no longer be substantial enough to allow the company to profitably employ hem. Although some of these workers will find employment in companies exempt from the legal minimum wage, others will not. Some of those denied jobs in the covered sector will, now unemployed, continue to search for jobs there. Others, discouraged by reduced job prospects in the covered sector and possibly lower wages in the uncovered sector, will withdraw from the labor force. Thus, total employment of low-productivity workers will decline, the magnitude of decline being greater the more pervasive is the coverage of [the minimum wage]. Given their limited skills, experience, and maturity, the productivity of teenagers is, on average, low vis-à-vis the productivity of adults. As a consequence, the decline in employment induced by the minimum wage will fall heavily on teenagers.

      Ronald Krumm, a research fellow at the University of Chicago, explains the negative impact of an above-market minimum wage as follows:

      The supply of labor services depends on both the number of laborers and the skill level of each laborer. Skill differences among workers lead to wage differences in the absence of a minimum wage because workers of different skills provide different levels of labor services in production. Because workers can flow between industries, the price of a unit of skill is determined by total industry demand and the economywide supply of labor skills.

      Introduction of a minimum wage that applies to employment in some industries leads to flows of workers among covered and uncovered sectors. The minimum wage means that workers previously earning less in the covered sector either must have increased wages or must not be employed there. Employers have little incentive to increase the wages of these lower-skill workers because they can replace the services of the low-skill workers with higher-skill workers previously employed in uncovered industries. The result is that the low-skill workers flow to the uncovered sector, their labor services replaced by high-skill workers who flow into the covered sector from the uncovered sector. While artificially segmenting employment of workers possessing different skills, a minimum wage applied only to a sector of the economy that is small enough has no net impact on employment on compensation of either high- or low-skill workers. . . .

      In a fully covered economy, or when replacement flows of workers are not possible, the imposition of a minimum wage unambiguously worsens the conditions of low-skill workers, while those who gain are high-skill workers. Low-skill workers are disemployed (in the case of almost full coverage, some remain employed, but at lower wages), while higher-skill workers receive higher wages. The minimum wage reduces the supply of skills that are employable in the economy and hence increases the value of those workers with skill levels high enough to be employed. The magnitudes of employment loss (low-skill workers) and compensation gains to those remaining employed (high-skill workers) are directly related to the increase in the price per unit of skill induced by the minimum wage, which is commonly referred to as the "ripple effect." Increased labor-force participation of higher-skill workers induced by increased labor market compensation results in greater disemployment of lower-skill workers and smaller increases in labor costs.

      The columnist Robert Scheer argues that minimum wage increases clearly have none of these negative effects since we still have a booming economy and low unemployment even after the recent rise in the federal and state minimum wage levels. The reason for this phenomenon, however, is that the mandated minimum wage levels are largely irrelevant because the economy and the labor shortage result in market wages generally in excess of the mandated wage levels. However, the SMART proposal would establish levels far in excess of market leading to the negative impacts described above.

      In a recent study of the impacts of minimum wage increases on family incomes, as opposed to individual incomes, Professor Neumark and Mr. Wascher concluded:

      The results [of their study] indicate that over a one-to-two year period, minimum wages increase both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty. The estimated increase in the number of non-poor families that fall into poverty is larger than the estimated increase in the number of poor families that escape poverty, although this difference is not statistically significant.

    7. Increasing prices, to the extent feasible, in the coastal zone will negatively affect Santa Monica residents.
    8. Our hypothetical restaurant operator will also consider whether her prices can be raised in order to cover whatever portion of the increased costs cannot be reduced through cutbacks in employment or other costs. This will be a last resort because she will be competing with restaurants, both inside and outside of the coastal zone, which are not covered by the ordinance. However, because those restaurants will also be affected by the new ordinance (because they are competing for employees in the same market and, therefore, must either accept employees with few skills or pay the same as the covered restaurants for higher skilled employees), our owner, along with most of the others, may be able to increase prices to some extent. Of course, this result is directly counter to the Council’s professed intent to avoid the Promenade becoming limited to stores and restaurants which cater exclusively to tourists and more affluent customers.

    9. To the extent that businesses cannot compete and are forced to close, the City will lose the tax and other benefits which flow from their operation.

All existing businesses will, of course, attempt to survive. And they will do so through a reduction in employment, replacement of low-skill workers with higher-skill workers who are attracted to the new higher-wage jobs, increases in prices, to the extent competitively feasible, and other means which may be available.

Obviously, with each business that cannot survive, the City will be the potential loser. One response to this argument is that the property will not stay vacant--another business will move in because of the attraction of being in Santa Monica. While this may be true in good times, once the next recession occurs, employers will not be looking to expand to new locations and entrepreneurs will be less likely to be interested in commencing new businesses.

Even if we assume that new businesses will fill the void, those businesses are more likely to be ones employing very few low-skilled individuals and are more likely to be high-end retail than restaurants, just the opposite result from what the Council has said it desires. Furthermore, given the City’s attitude toward business, as reflected in this proposal, an employer is more likely than not to shun the City fearing what might come next even if this body blow could be handled.


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