Santa Monica’s Bad Math

By Dr. Richard H. Sander, UCLA

Voters in Santa Monica, California, will decide November 5th whether the City will institute a $12.25 per-hour minimum wage on all medium-size and large businesses in the city's commercial core. It's an extravagant idea, in the grand Santa Monica tradition. Nearly doubling the minimum wage in one small part of one big metropolitan area is a lot like doubling the sales tax -- by driving up costs sharply, one runs the risk of driving away consumers and, on their heels, businesses.

The law is billed as a “living wage” measure. But the eighty-odd living wage laws adopted around the country only apply to workers working indirectly for local governments through private contractors. The Santa Monica law is a radical departure. It mandates that all businesses meeting a $5 million revenue threshold double their base wage and benefits. The firms must cover the costs themselves -- by raising prices, laying off workers, or moving out of Santa Monica.

Before taking a dramatic step like this, a City ought to be very sure of two things: first, that one doesn't wreck the local economy, and second, that one is going to accomplish something noble enough to justify taking the risk. With academic colleagues at UCLA and elsewhere, I just completed a study of the City's proposal. Our most important finding is that the Santa Monica Minimum Wage doesn't come close to doing something noble. It actually undercuts its own proclaimed goals.

A $12.25 per-hour minimum wage is supposed to help low-wage workers --especially hotel maids and other tourist-industry workers at the bottom of the wage heap -- support their families and escape poverty. But it turns out that under the best-case scenarios, the 200 to 250 hotel maids in Santa Monica hotels (who currently make an average of $9.75 an hour) get less than 2 percent of the wage increases mandated by the ordinance. Who gets the rest?

• The Ordinance does not exempt tipped workers, but it does exempt their tips. Over 1,600 waiters, banquet servers, and parking valets will be treated as though they earn only the minimum wage ($6.75 per hour), even though this group has median earnings of $18.75 per hour when tips are included. These tipped workers will get the maximum possible increases -- $5.50 per hour, and together they will get nearly half of the increases mandated by the Ordinance. Very few of these workers are poor.
  
  
• When firms are required to bring a large group of workers up to a specific minimum, they need to give smaller pay increases to middle-tier workers to preserve some differences based on experience, skill and responsibility. It turns out that at the covered Santa Monica businesses are thousands of employees caught up by this "ripple effect." A third of the costs of the Ordinance go to this "ripple effect;" essentially none of these workers are poor.
  
  
• When employers have to pay much higher wages for low-skill work, they tend to upgrade jobs to require higher skills. At a minimum, they look for workers who are fluent in English, high school graduates, and experienced. The low-wage workers in the affected Santa Monica businesses are, therefore, going to be gradually replaced over time with higher-skill workers. These new workers are much less likely to be immigrants, and much less likely to be poor.
  
  
• Even when the ordinance helps a genuine low-wage worker, it is usually not helping a low-income worker. That's because less than a fifth of the low wage workers in Los Angeles are the primary wage earner for a family. Less than a sixth of low-wage workers live in households below the poverty line.

All told, only about 7 cents on a dollar of spending under the Santa Monica minimum wage, under the best-case scenario, would go to help people within 150 percent of the poverty line (under $27,500 for a family of four). About two-thirds of the benefits go to people who make more than the median household in Los Angeles County ($42,000 per year). Santa Monica would do a much better job of targeting the poor if it simply shoveled money out of a helicopter.

Then there are those business effects. The fourteen hotels that are the main targets of the ordinance have options that will help them deal with the impact. But another 80 businesses are caught up in ordinance's targeted area -- including department stores, restaurants, and medium-sized retailers -- and many of them will clearly be forced out of business. We estimate a job loss of 1,140 jobs -- about one-seventh of all the jobs at the covered firms. Property tax collections will fall $5 million to 6 million per year.

It is impossible to introduce a $49 million cost into an economy the size of Santa Monica’s and not feel some negative effects. In the end, Santa Monica's tourist industry will probably survive -- but the workers losing their jobs in the middle of a recession may have a tougher time.

Santa Monica can do a lot better. We have proposed a City-based Earned Income Tax Credit program. It's smaller, but so much better targeted (more than 80 percent of the benefits go to low-income households) that it would have more than ten times the impact on local poverty. Progressives, heal thyselves!