Living Wage Misses Mark, Damaging to Coastal Businesses, Report Finds

By Jorge Casuso

Oct. 14 -- The living wage law on the November ballot is a "big and expensive measure" that amounts to a "cruel hoax" on the working poor and could have a devastating effect on Santa Monica's economy, according to a report released Tuesday co-authored by a leading critic.

The unprecedented law -- "unlike any other economic regulation ever enacted in the United States" -- would hike wages by a total of between $33 million and $38 million for between 4,400 and 5,200 employees of roughly 100 businesses in the Coastal Zone, the report found. Of the businesses covered, 14 are hotels, the purported target of the ordinance.

The law -- which requires businesses in the zone that gross $5 million or more annually to pay workers at least $10.50 an hour if benefits are not included -- would "overwhelmingly" benefit workers from "middle-income and upper-middle income households," the report found.

The law, which would cost the City $3 million to implement, also would discourage employers from providing health care, eventually replace low-skill workers and lead to the loss of at least 1,140 jobs, according to the report.

"If the goal of the Coastal Zone Minimum Wage is to help low-income workers in Santa Monica, the Ordinance is worse than useless," the report said. "The direct benefits of the ordinance are more poorly targeted than in any social welfare legislation we have ever studied."

The Santa Monica Coalition to Protect the Living Wage, which backs the measure on the November 5 ballot, issued a statement Tuesday calling Sander's report "an alarming example of partisan research.

"Sander's study," the coalition said, "is a transparently partisan effort that contributes little to the critical debate about working poverty in our community." ("Initial Statement by Santa Monica Coalition to Protect the Living Wage on Sander Study," Oct. 16)

A joint project of UCLA Law School's Empirical Research Group and the Employment Policies Institute, a conservative national think tank, the 100-page report outlines the projected impacts of the nation's first municipal wage law to cover private businesses with no direct financial ties to the city.

"This study aims to bring economic and demographic analysis to bear on the Coastal Zone Ordinance," said the report, co-authored by UCLA Law Professor Rick Sander, who has a Ph.D. in economics from Northwestern University. "We believe that it is possible to understand and predict many of the effects of the Ordinance through a combination of careful use of past economic research and systematic data gathering."

The study -- titled "The Economic and Distributional Consequences of the Santa Monica Minimum Wage Ordinance" -- predicts limited and immediate impacts, as well as the law's "potential to cause economic devastation."

"Some of the large retailers and restaurants covered by the Ordinance will see their profits entirely wiped out by the Ordinance, and several of these will cut operations or close down altogether," the report said. "Overall, we think that the Ordinance will damage, but will not destroy, the economic viability of the Coastal Zone."

Based on a "conservative estimate," the report predicts that the law "will precipitate fairly large-scale job losses -- most probably between 1,140 and 1,210 jobs, or about 14 percent of all the workers covered by the Ordinance." Many of the jobs lost -- about 600 -- would be in department stores and another 300 jobs would be lost in restaurants, the report said.

"It is likely that two of the three department stores at or near Santa Monica Place will close," the report said. "This will produce a direct job loss of about 600 jobs, and may be fatal to the overall viability of Santa Monica Place (we did not count this possible secondary job loss of an additional 1,000 jobs in our total).

"Most of the ten restaurants covered by the Ordinance have strong incentives to either scale back operations or reduce staffs, and we estimate a job loss of approximately 300 in this sector. The remaining closures are likely to result from the migration of some firms out of the Coastal Zone, scattered layoffs, and efforts by firms to substitute capital for labor."

The law's "incredibly bad targeting" will boost the salaries of middle class employees, the report predicts. One of the main drawbacks of the law is that it covers "tipped workers" who average $39,000 a year and who make up between 31 and 36 percent of the workers who would receive mandated pay increases, the report said.

In addition, $15 million in wage increases would go to workers who are not "low-income" but whose salaries would be boosted as the result of "the ripple effect" because their jobs demand "greater experience, more responsibility, or more skill" than low-skill workers at the bottom of the pay scale.

Less than 10 percent of the low-wage workers who would benefit from the law -- which was approved by the City Council a year ago -- live in Santa Monica, according to zip code data provided by employers for the report.

"If we are interested in how much of the spending mandated under the Ordinance will reach low-wage, low-income families living in Santa Monica, the answer is no more than $370,000," the report said.

In fact, the report predicts, the law would eventually put many of the low-wage workers it purports to help out of a job.

"While we think few employers will engage in large-scale replacements of staff, many will make significant replacements and nearly all will change the character and skill level of their workforces through attrition," the report said. "The 'new' workers will tend not to be low-wage workers from low-income backgrounds, but middle-class workers from mostly middle-class backgrounds."

In addition, "two serious flaws " in the law will likely discourage employers from paying health benefits. Employers who do not provide health benefits can "lock in" at a lower salary, $12.25 an hour, than employers who do, who would pay a total of $13 including benefits, Sander said.

"There's a 75-cent an hour reason not to give health benefits," Sander said.

A "hardship clause" that living wage supporters predict will exempt businesses jeopardized by the law, would likely cover only Pacific Park, the fun zone on the pier, since one of the three requirements is that the firm rely heavily on young, seasonal workers, the report said.

"It seems obvious to us that the exemption is tailor-made for the Santa Monica Pier amusement park, which employs over 200 mostly teenage workers every summer on a city-owned franchise," the report said.

"Conceivably (as some defenders of the Ordinance have suggested), the exemption could be applied much more broadly -- possibly to all businesses except the oceanfront hotels. But given the restrictive language of the Ordinance itself, and the constitutional limitations of the equal protection clause, we think such flexibility will be very hard to achieve."

Perhaps the main beneficiary of the law, according to the report, will be the Hotel Employees and Restaurant Employees Union, which championed the measure. Under the law, unionized hotels could opt out. As a result, they can pay workers less than the mandated wage, provide "more reasonable benefit provisions" and free themselves from the City's "cumbersome" and "harsh" administrative machinery."

The report, which was co-authored by Doug Williams, a economics professor at Sewanee University, a leading liberal arts college in Tennessee, and UCLA doctoral student Joseph Doherty, was sponsored by UCLA and by the Employment Policies Institute, which paid $14,000, Sander said.