the economic and distributional consequences of the santa ... · required to pay a very high...

Dr. Richard H. Sander, Dr. E. Douglass Williams, and Mr. Joseph Doherty

University of California Los Angeles, University of the South, and Empirical Research Group at UCLA October 2002

The Economic and DistributionalConsequences of the Santa Monica

Minimum Wage Ordinance

Recent Publications

Living Wage and Earned Income Tax Credit: AComparative Analysis By Dr. Mark D. Turner and Dr.Burt S. Barnow, Johns Hopkins University, October 2002

Helping Working Poor Families, Advantages ofWage-Based Tax Credits Over the EITC AndMinimum Wages By Dr. Thomas MaCurdy & FrankMcIntyre, Stanford University, October 2002

The Employment Impact of a Comprehensive LivingWage Law, Evidence from Florida by David A.Macpherson, Florida State University, June 2002.

The Effects of the Proposed California MinimumWage Increase by David A. Macpherson, Florida StateUniversity, June 2002.

Measuring Poverty in America, by the EmploymentPolicies Institute, April 2002.

The Economic Well- Being of Low-Income WorkingFamilies, by Dr John P. Formby, Mr Hoseong Kim,University of Alabama and Dr. John A. Bishop, EastCarolina University, March 2002

The Long-Term Effects of Youth Unemployment, byDr. Thomas A. Mroz and Dr. Timothy H. Savage,University of North Carolina, Chapel Hill and WelchConsulting Economists, October 2001.

National Good Times, Local Bad Times: The LocalArea Unemployment Crisis, by Employment PoliciesInstitute, August 2001.

Who Would Benefit from a $6.65 Minimum Wage?A State-by-State Profile: 2001 Edition, byEmployment Policies Institute, July 2001.

The Case for a Targeted Living Wage Subsidy, byEmployment Policies Institute, June 2001.

The Effect of Minimum Wages on the Labor ForceParticipation Rates of Teenagers, by Walter J.Wessels, North Carolina State University, June 2001.

Winners and Losers of Federal and State MinimumWages, by Thomas MaCurdy and Frank McIntyre,Stanford University, June 2001.

Does the Minimum Wage Reduce Poverty? byRichard K. Vedder and Lowell E. Gallaway, OhioUniversity, June 2001.

State Flexibility: The Minimum Wage and WelfareReform, by Employment Policies Institute, March 2001.

Evaluating the Effects of Medicaid on Welfare andWork: Evidence from the Past Decade, by Aaron S.Yelowitz, University of California at Los Angeles,December 2000.

Higher Minimum Wages Harm Minority and Inner-City Teens, by Mark Turner and Berna Demiralp,Johns Hopkins University, September 2000.

The Living Wage: Survey of Labor Economists, byThe Survey Center, University of New Hampshire,August 2000.

The Relative Compensation of Part-Time and Full-Time Workers, by Barry Hirsch, Trinity University,April 2000.

Living Wage Policy: The Basics, by EmploymentPolicies Institute, March 2000.

Rising Above the Minimum Wage, by William Even,Miami University of Ohio, and David Macpherson,Florida State University, January 2000.

Economic Analysis of a Living Wage Ordinance, byGeorge Tolley, University of Chicago, Peter Bernstein,DePaul University, and Michael Lesage, RCF Economic& Financial Consulting, July 1999.

Effective Marginal Tax Rates on Low-IncomeHouseholds, by Daniel N. Shaviro, New YorkUniversity School of Law, February 1999.

An Analysis of the Baltimore Living Wage Study, byEmployment Policies Institute, October 1998.

Targeted Jobs Tax Credits and Labor MarketExperience, by Frederick J. Tannery, University ofPittsburgh, June 1998.

Work Ethic and Family Background, by Casey B.Mulligan, University of Chicago, May 1997.

The Minimum Wage Debate: Questions andAnswers, Third Edition, by Employment PoliciesInstitute, May 1997.

From Welfare to Work: The Transition of anIlliterate Population, by Employment PoliciesInstitute, February 1997.

Who Are The “Low-Wage” Workers? by Derek Neal,University of Chicago, July 1996.

Jobs Taken by Mothers Moving from Welfare toWork: And the Effects of Minimum Wages on thisTransition, by Peter D. Brandon, Institute for Researchon Poverty, University of Wisconsin—Madison,February 1995.

Minimum Wage Laws and the Distribution ofEmployment, by Kevin Lang, Boston University,January 1995.

he Employment Policies Institute (EPI) is a nonprofit re-

search organization dedicated to studying public policy is-

sues surrounding employment growth. In particular, EPI

research focuses on issues that affect entry-level employment.

Among other issues, EPI research has quantified the impact of

new labor costs on job creation, explored the connection be-

tween entry-level employment and welfare reform, and ana-

lyzed the demographic distribution of mandated benefits. EPI

sponsors nonpartisan research that is conducted by indepen-

dent economists at major universities around the country.

T

Dr. Richard H. Sander is a professor of law at UCLA and the director of UCLA's Empirical Research Group.

He was educated at Harvard and Northwestern Universities, and holds a doctorate in economics (specializing

in labor economics) as well as a law degree. Sander's past work has studied community economic development,

housing segregation, anti-poverty policy, and class-based affirmative action. He is an adviser to the National

Science Foundation and the Department of Justice, and is founder and President of the Fair Housing Institute.

This report is the fourth major study Sander has published on living wage issues. His studies with Doug Williams

on the Los Angeles Living Wage Ordinance are widely considered the most authoritative research available on

the operation and implementation of living wage laws.

Dr. E. Douglass Williams is an Associate Professor of Economics at the University of the South. Williams has

a doctorate in economics from Northwestern University, where he specialized in labor economics. He coau-

thored a 1997 study of the Los Angeles proposed living wage ordinance with Sander and is currently evaluating

with Sander the effect of the Los Angeles ordinance on contracting costs and practices. In addition, Williams

has published studies on anti-poverty policy and the market for lawyers. From 1997 to 1999, Williams served

as the economist for the City of Milwaukee where he advised city officials on regional economic, tax, pension,

collective bargaining and other policy issues.

Mr. Joseph Doherty is Associate Director of the Empirical Research Group at UCLA. He is a long-time observ-

er of Santa Monica politics and clerked for three years at the Santa Monica City Attorney's office. He is cur-

rently completing a doctorate in political science at UCLA and he is project director for a $1.1 million nation-

al project, funded by the Pew Charitable Trusts, that aims to bring greater transparency to the nation's campaign

finance disclosure laws. For many years, Doherty has been a consultant for Fairbank, Maslin, Maullin, and

Associates, a Santa Monica-based public opinion and research firm.

Employment Policies Institute | www.EPIonline.org



Dr. Richard H. Sander,

Dr. E. Douglass Williams,

and Mr. Joseph Doherty

This study was a joint effort undertaken by the Employment Policies Institute and the UCLA Empirical Research

Group. The authors of the study received no direct compensation from the Employment Policies Institute.

"Our work has been aided by several outstanding research associates and professional economists. Of special note

are Professor Scott Bierman of Carleton College, who provided thoughtful and rapid feedback on early versions of

this report, and Andre Neveu of the Employment Policies Institute."


The Economic and Distributional Consequencesof the Santa Monica Minimum Wage OrdinanceDr. Richard H. Sander, Dr. E. Douglass Williams, and Mr. Joseph Doherty

Chapter One

Introduction and Summary2 Principal Findings

6 How $1 in Cost Under the Coastal Zone Minimum Wage

Translates to Less Than a Penny in Benefit for

Low-Income Santa Monica Workers

Chapter Two

The Origins and Structure

of the Coastal Zone Minimum Wage8 SMART and the Origins of the “Living Wage” Proposal

11 The Structure and Operation of the Coastal Zone

Minimum Wage

Chapter Three

The Scale of the Ordinance17 Economic Data on Businesses and Workers

18 Assumptions and Limitations of this Analysis

19 Calculations

21 Results

23 Ripple Effect

24 Discussion

Chapter Four

The Economics of a Minimum Wage25 General Effects of a Minimum Wage

29 The Economics of a Local Minimum Wage

Chapter Five

Sector Effects on Businesses in Santa Monica32 The Hotel Industry

36 Restaurant Industry

38 Major Retail

39 Medium-Sized Retail

Chapter Six

Aggregated Economic Estimates

for the Coastal Zone Minimum Wage42 Employment

45 Profits, Property Values, and Property Tax Revenues

Chapter Seven

Beneficiaries of the Higher Wage48 The Targeting Problems of the Coastal Zone Minimum Wage

50 The Household Incomes of Low- and Moderate-Wage Workers

51 The Family Role of Low-Wage Workers

52 Hotel Maids and the Coastal Zone Minimum Wage

53 The “Tipped Income” Effect

55 The Beneficiaries of the Ripple Effect

56 The Labor Substitution Effect on the Intended Beneficiaries

60 The Location of Affected Workers

60 Tax and Benefit Effects

61 Summing Up: The Short-Term Distributional Effects of the

Coastal Zone Minimum Wage

Chapter Eight

The EITC Alternative63 Introduction.

63 Wage Subsidies and the Earned Income Tax Credit

Chapter Nine

The Pollin Report

Chapter Ten:

Conclusion

References

Appendix A

Appendix Tables

Appendix B

Copy of the Santa Monica Minimum Wage

Ordinance

Appendix C

UCLA Study of the Santa Monica Minimum Wage

Survey of Potentially Affected Businesses

Table of Contents

1

8

17

25

31

41

48

63

68

73

76

78

81

88


Preface

In the fall of 2000, we published a study of what was then a proposal by Santa

Monicans Allied for Responsible Tourism (SMART) to create in Santa Monica

the most ambitious minimum wage policy in the nation. The City Council of

Santa Monica subsequently adopted (in July 2001) an ordinance similar to, but in

ways very different from, the original SMART proposal. The ordinance will be

voted on by Santa Monica voters in a November 2002 referendum.

The present study is, so far as we know, the only systematic examination of the

adopted Ordinance. Our report follows the same general format as our fall 2000

study, but nearly all of our analysis has been extensively revised. Chapters 1-3 and

7-10 have been completely rewritten, and all tables and numbers have been updat-

ed to reflect the new Ordinance and more recent data from the 2000 Census, the

Current Population Survey, and other sources we relied upon.

We are grateful to the Office of the Santa Monica City Manager and the many

people who work in Santa Monica for their availability and candor in discussing

the minimum wage ordinance and its likely effects.

Richard Sander

E. Douglass Williams

Joseph Doherty

Los Angeles, October 2002


1

Introduction and Summary

In July 2001, the Santa Monica City Council

adopted an Ordinance unlike any other eco-

nomic regulation ever enacted in the United

States. The Ordinance designates a Coastal

Zone—the most famous and most tourist-visit-

ed section of the City—within which business-

es with over $5 million in annual revenue are

required to pay a very high minimum wage.1

After a short phase-in period, the minimum

wage and associated mandated benefits will

reach $13.00 per hour, about 250% of the cur-

rent federal minimum wage and nearly double

California’s $6.75 minimum wage.2 The pro-

ponents of what we will call the Coastal Zone

Minimum Wage, or simply “the Ordinance,”3

maintain that the mandated wages and bene-

fits are a simple matter of economic justice,

which would share some of Santa Monica’s

remarkable prosperity with many of its lowest-

paid workers. Opponents fear the Ordinance

as an economic Armageddon, a radical inter-

vention in labor-management relations that

will drive business from the area, irreparably

damage Santa Monica’s business climate, and

throw many of its intended beneficiaries out

of work. Implementation of the ordinance has

been delayed pending a citywide referendum

on the measure in November 2002.

This study aims to bring economic and

demographic analysis to bear on the Coastal

Zone Ordinance. 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 sys-

tematic data gathering.

Unlike “living wage” laws, which require

government contractors to pay higher wages

to the workers on those contracts, the

Coastal Zone Minimum Wage is a minimum

wage law, applying to all medium-sized and

large employers in the Zone. As such, it

would be the only minimum wage applied to

such a small region anywhere in the United

States. In fact, with only two limited excep-

The Economic and Distributional Consequencesof the Santa Monica Minimum Wage OrdinanceDr. Richard H. Sander, Dr. E. Douglass Williams, and Mr. Joseph Doherty

1. The Santa Monica Minimum Wage Ordinance creates a minimum wage in two defined areas, a “Coastal Zone” and

an adjacent “Extended Downtown Core.” For simplicity, we refer to both areas as the Coastal Zone. For a complete definition

of the Coastal Zone, see Appendix B, which reproduces the Ordinance (Section 4.65.010 defines the area of coverage), or the

map in Chapter Two.

2. The Ordinance actually creates (perhaps unintentionally) two tiers of mandates, one at $12.25 per hour and one at

$13.00 per hour. This is discussed in detail in Chapter Two. Most of our estimates of the Ordinance’s effects consider both

tiers (see Chapter Three for details).

3. The Ordinance includes another provision applying the minimum wage requirements to the City and its contrac-

tors. These requirements, which closely resemble conventional “living wage” laws, are not the focus of this study, and we use

the term Coastal Zone Minimum Wage to help make clear that we are referring only to the provisions of the Ordinance that

regulate private firms not doing business with the City.

Chapter One


2

tions, no other city has ever enacted a

minimum wage law.4

A local minimum wage has the potential to

cause economic devastation. Firms that com-

pete directly with other firms unaffected by the

wage floor are at a disadvantage. If the compe-

tition is sufficiently head-to-head, and the mini-

mum wage substantially raises operating costs,

then firms affected by the new minimum must

either relocate or go out of business.

Many of the businesses in Santa Monica’s

Coastal Zone are not in this situation. For a

variety of reasons detailed in Chapter Five of

this study, many of these firms derive signifi-

cant benefits by being located along Santa

Monica’s beachfront or along the Third Street

Promenade. Others firms, such as law firms

and film production houses, have few low-

wage workers and will thus be only marginal-

ly affected by the Ordinance. None of the

regulated firms are manufacturing plants

engaged in head-to-head competition with

manufacturers just outside the Zone. On the

other hand, 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 oper-

ations or close down altogether. Overall, we

think that the Ordinance will damage, but will

not destroy, the economic viability of the

Coastal Zone.

Nonetheless, 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 direct benefits of the

Ordinance are more poorly targeted than in

any social welfare legislation we have ever

studied. And the few benefits that low-income

workers derive from the Ordinance are more

than offset by its probable costs. To make

matters worse, the Coastal Zone Minimum

Wage is drafted in ways that exacerbate many

of its most negative effects. We believe the

Coastal Zone Ordinance would be unwise,

imprudent, and ineffective in achieving its sup-

porters’ putative goals.

A. Principal Findings1) Scale of the Ordinance

The Coastal Zone Minimum Wage is a big

and expensive measure. It would initially

affect roughly 100 businesses in Santa

Monica. These firms currently employ about

8,300 workers; about 4,400 to 5,200 of whom

would receive mandated wage and/or benefit

increases as a result of the Ordinance. If the

firms did not make any changes in operating

practices, the Ordinance would produce wage

and benefit increases for workers totaling

about $33 to $38 million. Counting adminis-

trative costs and the indirect “ripple” effects

on wages from the mandated increases, the

total cost rises to $49 million. (See Chapter

Three.) If the ultimate out-of-pocket cost of

the Ordinance is less than this, it will only be

because of “flight” from the Ordinance—shut-

ting down enough of their operations to cut

revenues below the $5 million that triggers

4. The other chief example of a local minimum wage was the law adopted in New Orleans early in 2002 by referendum,

which created a citywide minimum wage of $6.15 per hour. The law was soon voided by the Louisiana Supreme Court, see Jane

Tanner, “The Living Wage Movement,” 12 The CQ Researcher 33, 27 September 2002, 771. The City of Berkeley, California, has

created a minimum wage zone near San Francisco Bay, but the affected businesses are lessees of the City (they operate on govern-

ment property) and this is, therefore, within the realm of traditional living wage laws. See Richard Sander, E. Douglass Williams and

Michael Blakley, “Living Wages and the Problem of Inequality in California,” in California Policy Options 2001, ed. Daniel J.B.

Mitchell and Patricia Nomura, (Los Angeles: School of Public Policy and Social Research, UCLA, 2001), 62-83.

coverage, or closing and leaving the Coastal

Zone altogether.

2) Targeting under the Ordinance

Out of the $49 million cost of the Ordinance,

the amount received by low-income workers

actually residing in Santa Monica will be less

than $400,000. This cost-benefit ratio of

130:1 seems incredible, but it follows directly

from very modest assumptions (see Chapter

One, Section B). The targeting efficiency for

low-income workers as a whole, including the

vast majority of low-income workers not resid-

ing in Santa Monica, looks better only by

comparison. We estimate that for every dollar

spent under the Ordinance, about 7 cents will

go to low-income workers for a targeting ratio

of roughly 100:7. Overwhelmingly, the benefi-

ciaries of the Ordinance come from middle-

income and upper-middle income households.

(See Chapter Seven.)

3) The “Tipped Income” Problem

The Coastal Zone Minimum Wage does not

count “tip income” as part of a worker’s wage.

Thus, if a waiter at a restaurant receives a base

pay of $6.75 per hour and averages $20.00 per

hour in tips, under the Ordinance the restaurant

must still raise the waiter’s base pay and bene-

fits to at least $12.25 per hour. Throughout the

Coastal Zone, between 31% and 36% of the

workers receiving mandated pay increases

under the Ordinance are tipped employees; the

average earnings of these tipped workers are

currently about $39,000 per year. Because these

tipped workers will almost always receive the

maximum possible wage increase under the

Ordinance, they will receive about 42% to 46%

of the total transfers mandated by the new law.

(See Chapters Two and Seven.)

4) Impact on Health Insurance Coverage of Affected Workers

In passing the Coastal Zone Minimum Wage,

the City Council clearly intended to encour-

age affected employers to provide health ben-

efits to workers. But because of two serious

flaws in drafting the Ordinance, we believe it

will probably lead to a net reduction in the

provision of health insurance to Coastal Zone

workers. The first problem is that employers

who do not provide health benefits are able to

“lock in” a lower total compensation package

than employers who do provide health bene-

fits. The second problem is that, by not per-

mitting employers to average the value of

health benefits across employees, the

Ordinance makes it less expensive for employ-

ers to eliminate their current health care

plans. (See Chapter Two.)

5) Impact on Employment

The Coastal Zone Minimum Wage will pre-

cipitate fairly large-scale job losses—most prob-

ably between 1,140 and 1,210 jobs, or about

14% of all the workers covered by the

Ordinance. This is a conservative estimate,

based not on the more pessimistic predictions

of businesses but on our own detailed analy-

sis of the major affected economic sectors. It

is likely that two of the three department

stores at or near Santa Monica Place will

close. This will produce a direct job loss of

about 600 jobs, and may be fatal to the over-

all 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 10 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.


3


4

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. These var-

ied effects are detailed in Chapter Six.

6) Impact on Poverty

Because of its exceptionally poor targeting,

the Ordinance will not have any perceptible

effect on poverty in Santa Monica. The more

than 8,000 Santa Monica residents below the

poverty line may be hurt some by job losses,

but for the most part, they will simply be unaf-

fected by the Ordinance.5 (See Chapters Seven

and Eight.)

7) Fiscal Impact on the City

Internal estimates by the City of Santa

Monica suggest the cost of implementing the

entire Minimum Wage Ordinance (including

its “living wage” components), will be

between $2.5 and $3 million. The Coastal

Zone Minimum Wage will have further, indi-

rect fiscal effects. Property tax revenues will

decline by $5 to $6 million; since about 36%

of property tax revenues come back to the

City, School District, and Community

College District, the local fiscal impact from

property tax losses will be around $2 million

per year. Sales tax revenues received by local

governments will fall as well, though we have

not derived specific estimates. The most con-

servative estimate of the local governmental

fiscal impact from the Ordinance is thus $4.5

million. (See Chapter Six.)

8) Impact on Unionization Efforts.

Every Santa Monica “insider” to whom we

have spoken, including some of the Coastal

Zone Minimum Wage’s proponents, agrees

that the impetus behind the Ordinance, and

perhaps its primary purpose, is to push the

hotels covered by the wage mandate to union-

ize. The advocacy group behind the

Ordinance, Santa Monicans Allied for

Responsible Tourism (SMART), emerged

from a protracted and bitter campaign to

unionize some of the City’s beachfront hotels

led by the Hotel Employees and Restaurant

Employees International Union (HERE). The

rhetoric of the original SMART minimum

wage proposal, and most of its advocacy since

that time, has focused on these hotels and has

implied that most of the costs will fall on

them. (We estimate that between a quarter and

a third of the Ordinance’s costs will fall on the

hotels, primarily because of the costs of raises

to tipped employees). Collective bargaining

agreements supercede the wage mandate, and

since, in particular, the Ordinance’s health

insurance provisions are not in the interest of

either employers or workers, both groups can

benefit by avoiding the Ordinance’s coverage.

We think it is likely that at least a few of the

hotels will in fact unionize—so here, at least,

the key supporters of the Ordinance will

achieve some of their original goals. The

unionization dimension of the Ordinance

debate is important to keep in mind, we think,

because many aspects of the Coastal Zone

Minimum Wage that seem irrational, become

logical—even inspired—when seen as part of a

unionization strategy. (See Chapter Two.)

9) Impact on Business Climate and Profitability.

Some businesses in the Coastal Zone will

raise prices to cover the costs of the man-

5. According to the Bureau of the Census, the poverty rate in Santa Monica was 10.4% in 2000. See Bureau of the

Census, 2000 Decennial Census, Summary File 3 (California), (Washington, D.C.: Bureau of the Census, 2002).

dated wage and benefit increases, but their

capacity to do so is limited. Most of the

affected retail and department stores have

chains throughout Los Angeles and cannot

have a “Santa Monica” price that is incon-

sistent with prices at other stores. Many

other businesses, such as the hotels and

restaurants, directly compete with similar

businesses outside the Zone, so price

increases will be largely offset by reductions

in demand. The profitability of businesses in

the Coastal Zone will therefore fall sharply—

for many businesses, by more than 50%.

(See Chapter Six.) And these declines are

coming on top of the substantial drop in

profits most Coastal Zone businesses expe-

rienced in the wake of the current recession

and the post September 11th drop in

tourism. There is another factor at work,

however, whose effects may be as important

as the direct costs of the Minimum Wage—

the perception that the City of Santa

Monica has fundamentally changed from

one that has been savvy and supportive in its

approach to business development to one

that is profoundly hostile to it. These factors

together are producing substantial drops in

property values and an accompanying

decline in interest among outside firms in

investing in the Coastal Zone and Santa

Monica more generally.

10) The “Hardship” Exemption.

The Coastal Zone Minimum Wage Ordinance

contains an exemption for firms that can

demonstrate “severe economic hardship.” In

considering firms for the exemption, the City

will consider whether the Coastal Zone

Minimum Wage “would render the employer’s

business nonviable”, whether the firm relies

heavily on young, seasonal workers, and

“whether granting a waiver would otherwise

advance the policies underlying” the

Ordinance. The City has not yet indicated

officially what businesses, if any, will receive

the exemption. But 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 sum-

mer on a city-owned franchise. 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. We have therefore

assumed the exemption will only apply to the

amusement park. (See Chapter Two.)

11) The EITC Alternative.

There are dramatically more effective ways to

help low-income workers. In Chapter Eight of

this report, we lay out a detailed alternative,

making use of model programs adopted by

the cities of Denver and Los Angeles. Both

cities have taken advantage of the federal

Earned Income Tax Credit (EITC), a widely

praised program that has lifted millions of

Americans out of poverty. If Santa Monica

adopted a city-based EITC (modeled on the

Denver program) and an outreach effort to

increase utilization (modeled on the Los

Angeles program), it could lift more than

1,000 Santa Monica residents out of poverty

at a cost of $2.35 million. The ratio of pro-

gram costs compared to benefits for low-

income households would be about 100:86,

compared to a 100:7 to 130:1 cost-benefit


5


ratio from the Coastal Zone Minimum Wage.

If the proposed Ordinance is defeated in the

November 2002 referendum, we hope the

City Council will implement such an EITC

program, financed primarily through an

increase in the City’s hotel occupancy tax.

(See Chapter Eight.)

B. How $1 in Cost Under theCoastal Zone Minimum WageTranslates to Less Than a Pennyin Benefit for Low-Income SantaMonica Workers

Probably the single most surprising claim we

advance in this report is our contention that

out of a total public and private cost of

roughly $49 million, only about $370,000 in

increased wages and benefits will reach the

prototypical beneficiaries: low-wage, low-

income workers living in Santa Monica. In

this brief section, we summarize the chain of

reasoning and empirical findings behind this

conclusion.

1. Like any complex regulatory mechanism,

the Coastal Zone Minimum Wage will involve

administrative cost—some spending by the

City to monitor and enforce the Ordinance,

and some spending by businesses to maintain

appropriate records, possibly maintain special

health plans for affected workers, and demon-

strate compliance to the City. The City has

estimated its own administrative costs for this

portion of the Ordinance at $350,000. We

think it is reasonable to assume that the

record-keeping and compliance costs for the

100 firms affected will be, in the aggregate,

twice the City’s cost. This produces a total

cost of $1.05 million, or about two percent of

total costs. Thus, out of the Ordinance’s $49

million cost, only $48 million is left after

administrative costs for actual wage and bene-

fit increases (about 98 cents on a dollar).

2. Increases in the minimum wage always trig-

ger something called the “ripple effect”—

increases beyond the mandate that preserve

some wage differentials. With all lower-wage

workers raised to a minimum of $12.25 or $13

per hour (including benefits), it is unlikely that

an employer will be able to maintain morale

with a large number of employees paid the

same amount. Workers with greater experi-

ence, more responsibility, or more skill will

expect and receive some pay differential (and

workers whose pay is slightly above the $13

threshold will have to be raised still higher).

This is known as the “ripple effect”, and it is

particularly large in cases where a wage

increase is large. Using the methodology we

outline in Chapters Three and Four, we esti-

mate the ripple effect at around $15 million—

nearly one-third the total program cost.

Workers receiving the “ripple effect” increases

are rarely “low-wage” workers and are almost

never “low-income” workers. Thus, out of $48

million spent on wage and benefit increases,

only $33 million is left after accounting for the

ripple effect (about 67 cents on the dollar).

3. As noted in our summary (Principal

Finding 3), from 42% to 46% of the mandat-

ed wages paid under the Coastal Zone

Minimum Wage will go to tipped employees.

The median total earnings of these employees

is about $39,000 per year; only about one in

sixteen of these workers can be considered

low-wage. Taking another 40% of the poten-

tial benefits off the $33 million left after the

6

ripple effect leaves no more than $20 million

left in potential benefits for low-wage workers

(about 41 cents on the dollar).

4. The vast majority of employers in the

Coastal Zone, when required to pay much

higher wages, will change hiring practices in

ways predicted by economic theory and con-

firmed by empirical studies (see Chapters

Four and Seven). While we think few employ-

ers 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 attri-

tion. The average worker in the Coastal Zone

will be more likely to be fluent in English, a

high school or college graduate, and in

“prime” earning years. Among low-wage

employees covered by the Ordinance, the

change in workforce makeup is likely to be at

least 40% (see Section 7-G). The “new” work-

ers will tend not be low-wage workers from

low-income backgrounds, but middle-class

workers from mostly middle-class back-

grounds. Adding in this effect means that our

$20 million in potential pay and benefit

increases for low-wage workers falls another

38%, to $12.4 million (cumulatively, we are

down to about 25 cents on the dollar).

5. One of the great myths about minimum

wage legislation is that the minimum-wage

workers are equivalent to “low-income” work-

ers. They are not. Eighty-five percent of low-

wage workers in Los Angeles County (defined

here as workers making less than $10.50 per

hour) are not the primary breadwinner for a

family of three or more. (See Chapter Seven)

Only 16% of these low-wage workers live in

households below the poverty line, and no

more than 30% live in households that could

be considered “low-income” (up to 150% of

the poverty line, or $27,500 for a family of

four). This means that 70% of the wage and

benefit increases that actually find their way to

low-wage workers will be going to low-wage

workers who don’t live in low-income fami-

lies. Out of the $12.4 million going to low-

wage workers, only $3.7 million goes to low-

wage, low-income workers. Now we are down

to about 7 cents on a dollar.

6. Much of the rhetoric surrounding the

SMART campaign has blurred the distinction

between “low-income workers employed in

Santa Monica” and “low-income workers liv-

ing in Santa Monica.” The minimum wage

Ordinance itself blurs this distinction; its pre-

amble holds that “many Santa Monica work-

ers cannot participate in civic life…because

they must work such long hours to meet their

households basic needs” but that “increasing

the wages of low-wage workers will help

achieve Santa Monica’s sustainable city goals

by helping low-wage workers live closer to

work.” A number of employers in the Coastal

Zone have provided us with zip code data on

the home location of their workers. This data,

and other sources we have examined, show

that relatively few of the Coastal Zone work-

ers—regardless of wage level—live in Santa

Monica. Certainly less than 10% of low-wage,

low-income workers live in the City, and we

do not think it is realistic to expect this per-

centage to rise above 10% with the higher

mandated wages. Consequently, if we are

interested in how much of the spending man-

dated under the Ordinance will reach low-

wage, low-income families living in Santa

Monica, the answer is no more than

$370,000. Our program return is now seven-

tenths of a penny for each dollar spent.


7


8

The Origins and Structure of theCoastal Zone Minimum Wage

In this chapter, we look closely at the Coastal

Zone Minimum Wage: its origins, its assump-

tions, and most particularly, its legal structure.

Our goal in this chapter is to make clear how

the Ordinance works, and to shed light on

why it is designed the way it is.

A. SMART and the Origins of the“Living Wage” ProposalA generation ago, Santa Monica veered sharply

from its sleepy, suburban past and embarked on

a new politics of what one sympathetic observ-

er has called “middle-class radicalism.”6 Like

Berkeley, its sister city to the north, and

Madison, Wisconsin, Santa Monica has repeat-

edly achieved fame and notoriety far beyond its

borders for innovative and sometimes aggres-

sive social policies. In 1979, the City gained

national attention for its dramatic rent-control

measures, a policy reminiscent of the current

minimum wage debate in its capacity to divide

the community into warring factions and shape

local politics. In the 1980s, the City pursued

innovative, altruistic measures to help the home-

less and encourage good environmental house-

keeping, and expanded social services. Through

the late 1980s and early 1990s, the City either

undertook directly, or helped to midwife, a

series of initiatives aimed at fostering local busi-

ness development and revitalizing downtown.

The strategies, aided by a booming economy

and the decline of nearby Westwood, were

immensely successful. Santa Monica today pro-

vides jobs for some 68,000 workers and, in the

midst of a national economic recession, much

of its economy is thriving.

Unions have long played a prominent role

in Santa Monica politics. Most of the City’s

workforce is unionized, and union volun-

teers and contributions have figured heavily

in city elections. In the mid-1990s, the Hotel

Employees and Restaurant Employees

International Union (HERE) undertook

organizing campaigns in Santa Monica’s

hotel industry, focusing particularly on the

Miramar-Sheraton, a large beachfront hotel.7

Though the Miramar campaign was ulti-

mately successful, union leaders realized that

making inroads into other hotels would be a

slow and difficult process. At the same time,

HERE had developed alliances with com-

munity groups and residents under an

umbrella group called Santa Monicans Allied

for Responsible Tourism (SMART). SMART

gave the union effort a broader focus on the

problem of inequality.

During these same years, the “living wage”

movement was becoming something of a

national phenomenon. From modest begin-

nings in a couple of cities in the mid-1990s,

unions and other progressive allies successful-

ly launched savvy campaigns for living wage

laws, often with grassroots support, in dozens

of cities.8 The idea behind “living wage” laws

Chapter Two

6. See Mark E. Kann, Middle-Class Radicalism in Santa Monica (Philadelphia: Temple University Press, 1976), a fasci-

nating account of the movement’s origins and early history.

7. The Miramar changed hands after the union wars, and is now the Fairmont Miramar.

8. For background, see Sander, Williams, and Blakley 2001, 62-83.


9

was simple: local governments, in carrying out

their own operations, should not take advan-

tage of historically low minimum wage levels;

they should set a higher, “living wage” stan-

dard for their own operations, and should

make sure that when they contract out for pri-

vate services, the workers on these contracts

are paid the living wage as well. Virtually all

living wage laws have as their centerpiece one

narrow requirement: that the City insure that

all contractors who do work for the City pay

employees engaged in this work no less than

some specified minimum (generally between

$2 and $5 above the prevailing minimum

wage). In some cases, the laws also apply to

businesses that operate on City property or

businesses that accept local economic assis-

tance in exchange for paying higher wages; in

several cases, cities have applied the minimum

to their own employees as well.

Many living wage advocates have been

stunned by the success of these campaigns.

The concept of a “living wage”, though loose-

ly defined, has tremendous popular and polit-

ical appeal. City unions strongly support the

measures because they reduce the threat of

cities privatizing city services. City councils in

large, heavily Democratic cities support the

measures as a tangible way to address the

problem of income inequality, in an era when

political deadlock at the national level has lim-

ited Congressional initiatives in social policy.

In Santa Monica, SMART and HERE lead-

ers in 1998 and 1999 saw an opportunity to

take the living wage movement to an entirely

new level and at the same time provide a crit-

ical impetus to their unionization efforts. The

beachfront hotels were not, of course, city

contractors, and they were not direct benefi-

ciaries of city economic development assis-

tance, so they did not fall within the usual

scope of living wage laws. But they had bene-

fited greatly from the economic renaissance

of Santa Monica’s Third Street Promenade,

and, arguably, from a limitation on future

hotel development (Proposition S) passed by

Santa Monica voters in the early 1990s.9 (This

constrained the hotel owners, but also limited

future local competition.) Since the city gov-

ernment and city policies had played a role in

bringing about these economic benefits, why

not apply a living wage mandate to the

hotels?10 Specifically, why not set an extreme-

ly high living wage level for the hotels and pro-

vide an exemption for any unionized firm

whose collective bargaining agreement opts

9. Liberals led by Tom Hayden also challenged efforts by the RAND Corporation (a large think-tank headquar-

tered just south of downtown) to expand its physical plant in the 1990s. The City Council sided with RAND, and voters

defeated an anti-development referendum aimed at RAND in 1994. See Richard Abel, “The Santa Monica Living Wage,”

unpublished manuscript, 22-23.

10. A central claim of SMART has been that the City poured millions into development activities that favored the

hotels, creating in effect a debt the hotels should repay. Santa Monica’s City Manager contends that the City’s development

activities have not been tilted towards any sector or geographic area of the City, and data from the City (and an analysis of that

data by the Pollin group) support that view. The City’s role seems to have been more that of catalyst—securing state and coun-

ty support for beachfront improvements, for example, and supporting efforts by the Third Street merchants to organize a spe-

cial district that financed the Third Street Promenade through taxes levied on the merchants. See Tom Larmore, Interview by

Richard Sander, 19 August 2002; Susan McCarthy, Interview by Richard Sander 27 March 2001; and Susan McCarthy, Report

of City Manager to Santa Monica City Council, 27 March 2001.


10

out of the minimum wage?11 In most cities,

this would have been a political non-starter.

But Santa Monica had a City Council majori-

ty with strong union sympathies and a host of

progressive civic groups concerned about eco-

nomic justice, and the “living wage” label gave

the idea both cachet and the apparent legiti-

macy of a national movement.

Of course, the analogy between a conven-

tional living wage law and the contemplated

regulation of Santa Monica hotels broke

down completely on legal grounds. Typical

living wage laws usually pose no legal prob-

lems because they simply set the terms on

which local governments make contracts

with private businesses. If the business wants

to do work for the government, or wants to

receive a package of subsidies, it must agree

to certain compensation levels for the

affected workers. In contrast, singling out a

set of hotels for involuntary compliance with

a set of wage mandates—particularly if part

of the motive was to foster unionization—

would raise a host of legal issues (e.g., viola-

tion of the 14th Amendment’s equal protec-

tion clause and violation of the Wagner Act),

not to mention issues of fairness. A broader

measure, aimed at a wider range of the

Santa Monica economy, would blunt these

legal weaknesses; it could also broaden the

political alliance supporting the measure

beyond a predominantly union base.

Thus was born the SMART Living Wage ini-

tiative, a proposed ordinance that the City

Council formally took under consideration in

the fall of 1999. The proposal outlined a

“Coastal Zone” that embraced not only the

beachfront hotels but also an entire strip of

the City fronting on the Pacific Ocean and

reaching back to the middle of Fourth Street

(four blocks from the coast).12 SMART pro-

posed that all businesses in this zone with

more than 50 employees should be required

to pay employees $10.69 per hour and provide

unspecified health benefits. Employers under

collective bargaining agreements would be

exempt. SMART was heavily financed by

unions, but its membership and participatory

base was far broader, including church lead-

ers, non-profit groups, academics, and politi-

cal progressives.

In January 2000 the City retained the lead-

ing academic proponent of living wage laws,

Dr. Robert Pollin of the University of

Massachusetts at Amherst, to study the pro-

posed ordinance. The resulting Pollin study

was an odd mix of questionable social sci-

ence, serious inquiry, and political advocacy.

The Pollin report grossly understated the

costs of the SMART proposal and as grossly

overestimated its benefits (see Chapter Nine),

but his analysis, like the first edition of our

own study, pinpointed a significant strategic

flaw in the SMART proposal. By tying cover-

11. Why would a collective bargaining agreement (“CBA”) “escape clause” cause unionization if an ordinance

already sets high wage and benefit levels? In the case of the Coastal Zone Minimum Wage, the answer is fairly obvious:

provisions like the coverage of tipped employees, and the “all-or-nothing” mandate on health benefits, are disliked by both

employers and employees; a CBA can give employers more flexibility to fit wages and benefits to the actual needs of employ-

ees. Of course, since the “escape” is optional, not mandatory, the provision would also give any union in the Coastal Zone

considerable bargaining power.

12. South of Pico Boulevard, the proposed zone stretched further inland, to the middle of Lincoln Boulevard, picking up

another major hotel along the way.


11

age to the number of employees at a firm, the

proposal gave firms an incentive to cut jobs in

order to avoid coverage—an incentive that

would be significant for as many as one-fifth

of the fifty-odd firms covered by the propos-

al. Pollin suggested the City use firm revenue

as the criterion for demarcating covered from

non-covered firms.

The opponents of the Coastal Zone pro-

posal, meanwhile, attempted to rally opposi-

tion in the business community. On the one

hand, they lobbied the City to appoint a

broadly representative task force which

would develop a compromise measure; at

the same time, however, they introduced a

ballot measure, Proposition KK, which

would both incorporate a conventional liv-

ing wage law (covering city contractors) into

the City Charter and bar the City Council

from imposing minimum wage regulations

on purely private businesses. Torn between

cooperative and combative strategies, many

businesses withdrew their support of

Proposition KK before its sound defeat in

November 2000. The City Council majority,

in any case, showed no particular interest in

feedback or participation from critics of the

SMART proposal, and instead worked close-

ly with a private Living Wage Task Force

organized and led by SMART.

In July 2001, the City Council adopted a

revised version of the SMART proposal that

was narrowed in some ways but broadened

in others; we discuss the Ordinance’s provi-

sions in detail in the next section. The oppo-

nents, better organized this time, forced the

Council to put the measure up to a popular

vote. The citywide referendum on what we

call the Coastal Zone Minimum Wage will

be voted on in November 2002.

B. The Structure and Operation ofthe Coastal Zone Minimum Wage

The “Living Wage” Component

The most straightforward part of the City’s

Ordinance is a section that emulates typical

living wage laws. The City mandates that its

own employees, and employees of City service

contractors performing work for the City,

shall be paid no less than the same minimum

wage and health benefits that apply to the

Coastal Zone. It is unusual, though not

unprecedented, for a City to explicitly include

its own workers in a living wage mandate. It is

also unusual for a “contractor” provision to

include all contracts, however small, and to

not exempt non-profits. City Manager Susan

McCarthy has estimated that the “in-house”

provisions of the Ordinance may cost in the

neighborhood of $1.5 million; she estimates

administrative costs of the private minimum

wage at another $350,000.13 The costs of the

private contractor mandate are completely

unknown, but it seems unlikely this will cost

less than an additional $1 million. An estimate

of the short-term implementation costs for

the City, therefore, is $2.85 million.

The Minimum Wage: Who is Covered?

The focus of our report is the Ordinance’s

creation of a minimum wage zone. It is this

provision that we refer to throughout the

report as the “Coastal Zone Minimum Wage.”

Actually, as we noted in Chapter One, the City

Council slightly expanded the Coastal Zone

13. See Susan McCarthy, Report to the Santa Monica City Council, 22 May 2001.


12

to include an “Expanded Downtown Core”

stretching to include all of Fourth Street in the

downtown area, and both sides of Fifth Street

(see map); for purposes of simplicity, we refer

to the entire covered area as the Coastal

Zone. Overall, the Coastal Zone includes less

than 20% of the City, but it covers nearly all

of its larger hotels and motels, all of the Third

Street Promenade and the adjacent shopping

center (Santa Monica Place), and about one-

half of its downtown. Within this Zone, any

business that has over $5 million in annual rev-

enues is subject to the minimum wage and

benefit provisions; as we discuss in Chapter

Three, this includes roughly 100 firms.

The minimum wage is set at $10.50 per

hour and is indexed to inflation starting in

2003. This level is somewhat lower than the

original SMART proposal (which stipulated a

$10.69 per hour minimum), particularly given

the increase in price levels since 1999 and the

increase in the California minimum wage to

$6.75 per hour. However, firms that do not

provide a stipulated level of health benefits to

employees are subject to a higher, $12.25 per

hour minimum.

The Peculiar Health Benefits Mandate

The Santa Monica City Council plainly sought

in this Ordinance to increase the availability of

health benefits for workers.14 The law’s bene-

fit provisions, however, provide strong incen-

tives for employers to not provide health

insurance at all. As in many living wage laws,

the Coastal Zone Minimum Wage provides an

opt-out provision: employers who choose not

to provide health insurance can avoid the ben-

efits mandate by paying a higher wage.15 If the

stipulated cost is roughly equivalent, many

employers prefer to pay health insurance since

it involves fewer taxes, is good for workers,

and reduces turnover.

The Coastal Zone Minimum Wage, how-

ever, makes it cheaper for employers to opt-

out of health benefits than to provide them.

The Ordinance provides that in its first year

of operation, employers can either pay

employees $10.50 per hour plus health ben-

efits worth $1.75 per hour, or they can pay

a wage of $12.25 per hour. This is internally

consistent. But in the second year and

beyond, employers paying health benefits

must pay $10.50 per hour (indexed to infla-

tion) plus $2.50 per hour for health benefits

(a total of $13.00 per hour) or they can pay

a wage of $12.25 per hour (indexed to infla-

tion) without benefits. Any covered employ-

er can thus save 75 cents per hour by elimi-

nating health benefits.

This problem is intensified by the apparent

operation of the health care provision. First,

the Ordinance does not give employers any

credit for providing health benefits less than

the full required amount. The Ordinance

could have stipulated, for example, that (in

Year Two and beyond) an employer providing

$2.00 per hour in health insurance benefits

would only have to provide an extra 50 cents

14. For example, the Ordinance’s preamble observes that “workers who do not receive health care benefits may be

unable to maintain their own health or the health of their children, may be forced to utilize publicly-funded health and emer-

gency care services, and may unintentionally imperil the health of others.”

15. For example, the Los Angeles Living Wage provides that employers must pay $8.27 per hour to workers with health

benefits, or $9.52 per hour to workers without benefits. See City of Los Angeles, Current and Prior Living Wage Rates,

Available from http://www.ci.la.ca.us/cao/Contractor_Enforcement/Wage_Rates.PDF, accessed 11 October 2002.


13

per hour in compensation above the basic

minimum wage. By not giving any partial cred-

it, the Ordinance requires employers to

choose between providing deluxe health insur-

ance policies or none at all.

Even worse, the Ordinance measures com-

pliance with the health benefit mandate in

terms of each hour worked by each employee.

Under most health benefit plans purchased by

employers, the cost of benefits varies with the

characteristics of each worker—the cost for

single workers is less, the cost for workers

with families is greater. Suppose that an

employer has a health plan for 90 full-time

workers in which the cost is $3,000 for a sin-

gle worker, $4,800 for a worker with spouse,

and $7,200 for a worker, spouse, and children,

and suppose that one-third of the employees

fall into each of these categories. Even though

the employer pays an average of $5,000 per

year, and $2.50 per hour, for the employees

as a whole, the employer is only meeting the

requirements of the Ordinance for one-third

of its staff. Once again, the Ordinance would

seem to provide an incentive to simply get rid

of health insurance, pay $12.25 per hour, and

let employees self-insure if they choose.

The City Council majority seems to have

made these poor decisions in drafting the

Ordinance partly because it has fallen under

the spell of its own rhetoric. The Ordinance

preamble repeatedly talks about the plight of

workers in the Coastal Zone struggling to sup-

port their families. In fact, only 20% to 25%

of workers in the Coastal Zone are the pri-

mary wage earners for families with children

(and fewer than 5% are primary wage earn-

ers for a low-income family with children—see

Chapter Seven). For the other 75% to 80% of

the workers, the notion that $2.50 per hour is

necessary to procure decent health benefits is

simply unrealistic.

The Problem of Tipped Employees

Early in the debate on the SMART propos-

al, all sides recognized a difficulty posed by

the wide presence of workers in the target-

ed firms—especially the hotels and restau-

rants—that made most of their income from

tips. What sense did it make to require a

firm to pay $12.25 per hour to a waiter who

was already earning $20.00 an hour or more

in tips? SMART’s director, Stephanie

Monroe, observed in August 2000, “We are

really sure that we want to do something

about tipped workers at restaurants.”16 The

obvious way to do this was through a “tip

credit”, which would average tips on an

hourly basis and count them as part of a

tipped employee’s wage. The Pollin report

also noted the problem and urged that some

similar provision be made.17 In our own

models of the SMART proposal for the first

edition of the report, the notion that tipped

employees would be fully subject to the min-

imum wage seemed so unlikely that we built

a tip credit into our models.

Yet the Coastal Zone Minimum Wage, as

enacted by the Santa Monica City Council, pro-

vides no exemption of any kind for tipped

16. See Kelly Wilkinson, “Proposal Will Exempt Tipped Workers,” Our Times, 27 August 2000. The obvious way to do

this was through a “tip credit”, which would average tips on an hourly basis and count them as part of a tipped employee’s wage.

17. The analysis in the Pollin report assumed workers earning at least half their income from tips would be

exempt. See Robert Pollin, et al., Economic Analysis of Santa Monica Living Wage Proposal, (Amherst, MA: Political

Economy Research Institute, 2000) 9.


14

employees. The City Attorney contended that a

tip credit would violate state labor law. This

view is probably derived from the 1988

California Supreme Court holding in Henning

v. Industrial Welfare Commission, which held

the IWC could not establish a lower-tier mini-

mum wage for tipped workers statewide. The

root problem is an old provision of the state

labor code that prohibits employers from gar-

nishing tips from their workers. We think a

good case can be made that these restrictions

would not apply to a local government creating

a supra-minimum wage, but that is now beside

the point. The Coastal Zone Minimum Wage

treats all tipped employees as though they

receive no tips at all, with enormous conse-

quences for the cost and distributional impact

of the law. (See Chapters Three and Seven.)

The Hardship Exemption

The Ordinance contains an exemption for

firms that can show a “severe economic hard-

ship” from application of the minimum wage,

as follows:

“An employer who contends that com-

pliance with this Chapter would consti-

tute a severe economic hardship may

apply to the City Manager for a waiver

applicable to all or part of the employ-

er’s work force. Criteria for determining

hardship shall include whether: (a) com-

pliance with the requirements of this

Chapter would render the employer’s

business nonviable; (b) the employer’s

business depends for its viability upon

young people and other first-time work-

ers who are employed on a seasonal

basis; and (c) whether granting a waiver

would otherwise advance the policies

underlying this Chapter. The City

Manager shall promulgate an

Administrative Instruction establishing

specific criteria applicable to and proce-

dures for processing hardship applica-

tions. Said Administrative Instruction

shall set forth information to be includ-

ed on the hardship application, proce-

dures for filing and processing applica-

tions, and procedures for administrative

review by a City hearing examiner

whose final decision shall be subject to

judicial review.”

This provision seems to have been written

with the Santa Monica Pier amusement park

(known as Pacific Park) in mind. The park

meets all three criteria. It has a small year-

round staff and hires hundreds of Santa

Monica teenagers and college students each

summer during its peak season at or close to

the state minimum wage. During the 2000

debate, the Park made a convincing case that

it would close down if it were subject to the

SMART proposal—a prospect particularly

unappealing to the City since the Park sits on

City property. We have therefore assumed

throughout our analysis that Pacific Park will

be granted a hardship exemption.

Advocates of the Ordinance have suggest-

ed that most of its unintended or harmful

consequences can be avoided through a gen-

erous application of the hardship exemption

to other businesses (e.g., exempting all of

the restaurants). We see two serious legal

barriers to doing this. First, the Ordinance

links the three requirements for a hardship

exemption with the word “and”, which

means that all three requirements must be

met, along with unspecified other require-


15

ments, to receive a hardship exemption.

Second, any interpretation of the hardship

exemption that is not narrowly and tightly

drawn will raise the same equal protection

issues that SMART faced when it first con-

templated limiting its proposal to the

hotels.18 Since none of the administrative

procedures for implementing the Ordinance

have yet been promulgated, we cannot be

certain how narrowly, or how broadly, this

exemption will ultimately be drawn and

applied. But the legal practicalities suggest a

narrow interpretation will ultimately prevail.

The Union Exemption

The Ordinance provides both civil and crimi-

nal penalties for noncompliance, emphasizing

both the seriousness of the Ordinance’s man-

dates and the regard with which the affected

employers are held by the City Council.

However, an employer and a union represent-

ing its employees may waive any or all of the

Ordinance’s provisions by clearly so providing

in a collective bargaining agreement. The

Preamble to the Ordinance, which justifies at

length the rationale for the wage and benefit

mandates in the Ordinance, is silent on the

rationale for this exemption. But given our

earlier discussion of the Ordinance’s history

and the origins of SMART, the rationale is

clear. Moreover, there are at least three

reasons to think the exemption will be widely

used—that is, that the Ordinance will bring

about more unionization. First, the contradic-

tions in the Ordinance—particularly in its

health benefits mandate—mean that employers

and workers can reach “win-win” agreements

by opting out of the Ordinance and designing

more reasonable benefit provisions. Second,

there is some evidence that workers at hotels

currently covered by collective bargaining

agreements have wages and benefits some-

what lower than comparable hotels that are

not unionized. This implies that unions have

important non-wage goals, and that they will

trade lower wage levels to achieve these other

goals. Third, employers do not know how

cumbersome or harsh the City’s administrative

machinery will be (though the availability of

criminal penalties is a strong hint). The ability

to free oneself entirely from this machinery

will be a powerful incentive for unionization.

It therefore seems likely to us that some of the

affected businesses will accept unions and

secure exemptions. Since such outcomes are

impossible to predict specifically, however, we

have not factored the exemption into our

analysis of the Ordinance’s reach and impact.

18. Local business owners reacted with horror during our conversations with them at the prospect of a wide-ranging,

discretionary hardship exemption. They fear that the political influence and correctness of individual applicants will be as impor-

tant as actual hardship in determining City decisions.


16

Livi

ng W

age

Ordi

nanc

e M

ap


17

The Scale of the Ordinance

In this chapter, we estimate the scale of the

Coastal Zone Minimum Wage by using every

data source available to us to measure the

number of businesses and workers affected,

the total potential cost, and the size of these

costs relative to the businesses incurring them.

A. Economic Data on Businesses and Workers

We used five different sets of data to estimate

the potential effects of the Coastal Zone

Minimum Wage. The information in these

data generally fell into two categories: indus-

try and labor. There is some overlap between

the data sets, which allows some measure of

cross-validation among the estimates. The

major source we did not use was data collect-

ed by the City of Santa Monica on business

revenues, which is not available in either indi-

vidual or aggregated form.19

We obtained industry profiles from two

sources: InfoUSA, a commercial database ven-

dor that uses state payroll data; and the 1997

Economic Census, a federal government sur-

vey containing aggregate data on industries at

the city level. The InfoUSA data, updated to

2001, permitted us to identify, by name and

address, the individual Santa Monica busi-

nesses that are likely to be affected by the

Coastal Zone Ordinance, with concomitant

industry classification, workforce size and

annual sales. The Economic Census, which

provides aggregate information on sales,20 pay-

roll, workforce size, and revenues for busi-

nesses at the seven-digit NAICS code level,21

allowed us to validate some of the informa-

tion in the InfoUSA database. It also allowed

for cross-city comparisons of industries within

Los Angeles County. When combined, these

two sources of data provide a robust image of

the industries likely to be covered by the

Coastal Zone Minimum Wage.

Countywide data on workers were obtained

from two sources: the 1990 Public Use

Microdata Sample (PUMS) Census data for

Los Angeles County (generated by the Census

once every 10 years); and the Current

Population Survey (or CPS, an annual survey

conducted by the Census for the Bureau of

Labor Statistics) for the years 1996 through

2001. The CPS conducts interviews with ran-

domized samples of Los Angeles residents,

collecting data on each respondent’s occupa-

19. The City is naturally careful about releasing confidential information on individual businesses (though the Pollin

team, as city contractors, were given access to the data in 2000). The City has not yet released any official determination of

which, or how many, businesses will be covered.

20. The InfoUSA database is extensive, covering thousands of businesses in Santa Monica. In checking InfoUSA data

against other sources, we are generally impressed by its accuracy and completeness. However, the data does not generally

include non-profit organizations (such as the RAND Corporation), and we added a number of firms to the covered list when

our own surveys indicated higher revenues than that reported by InfoUSA.

21. The NAICS code is a re-codification of the SIC codes, and allows for analysis of industries with a high degree of

specificity. In Santa Monica, for example, aggregate data on the three department stores within the Coastal Zone are available

(NAICS code 452110).

Chapter Three


tion and industry sector, hours, wages, other

sources of income, and source of health ben-

efits. We used these data to estimate the aver-

age wage received by industry and job classifi-

cation, the distribution of hours worked, and

the proportion of workers in the industry

receiving employer-paid health insurance.

PUMS data is based on a 5% sample of the

entire population surveyed by the 1990

Decennial Census. Although it is older and

more limited data, its larger sample size, and

greater geographic detail, make it useful for

checking CPS estimates, examining specific

occupations, and focusing analysis on the

Santa Monica area.

Besides these existing datasets, we did sub-

stantial field research on businesses in Santa

Monica, surveying and interviewing 45 busi-

ness owners and managers. They provided us

with data on payrolls, wage distributions,

health benefits, lease costs, revenues, and net

profits, all of which helped us to refine our

estimates. We compared data from different

sources to identify inconsistencies, understand

patterns, and ultimately, determine the most

reasonable ways to combine the data into

overall estimates on the costs and impact of

the new Ordinance.

B. Assumptions and Limitations of this Analysis

Our analyses of the total impact of the

Coastal Zone Minimum Wage make a num-

ber of assumptions. Some of these are driven

by limitations in the data, others by uncer-

tainties about how the Ordinance will be

implemented. Our principal goal is not to

come up with a precise estimate of the over-

all size of the Ordinance’s impact, but to

measure the impact accurately enough that

we can see how the various parts of the new

law add up to the whole. In other words, by

working through the exercise of developing

an exact estimate, we can better understand

such questions as the relative importance of

the department stores within the Coastal

Zone economy, what proportion of the total

employment effect is accounted for by tipped

employees, and how much the Ordinance is

likely to extend health care coverage.

Moreover, as we discuss further in Chapter

Six, there is no doubt that these initial esti-

mated costs will change as firms react to the

new Ordinance—the aggregate wage increases

will decrease, for example, as some covered

firms shut down or layoff workers. We con-

clude that the full cost of the implemented

Ordinance is close to $50 million; this might

fall to the neighborhood of $40 million as

some firms close and others make operating

adjustments. Again, any specific aggregate

can only be an approximate estimate.

Our principal assumptions and restrictions are

as follows:

1. We measure here only the impact of the

Coastal Zone Minimum Wage, not the similar

provisions that apply to City workers and City

service contractors.

2. We assume that the “hardship exemp-

tion” in the Ordinance will, at least initially,

only be extended to the Santa Monica Pier

amusement park.

3. We assume that, at least initially, none of

the unionized firms in the Coastal Zone will

exempt themselves from coverage under the

Ordinance.

18


19

4. We assume that the wage distributions

(and benefit packages) of workers in each

Coastal Zone industry are comparable to

those same industries in Los Angeles County

as a whole. This almost certainly underesti-

mates the actual wages of Coastal Zone work-

ers, because the Zone has more high-end

hotels, restaurants, and retailers than is typical

of Los Angeles as a whole. However, when we

compared Santa Monica data from the 1997

economic census with data for the County as

a whole, Santa Monica wage levels were fairly

close. It therefore seemed to us more reason-

able to leave the County estimates alone than

to adjust them on an ad hoc basis.

5. The InfoUSA data on firms provided

“ranges” of employment rather than exact

numbers of workers. We therefore estimated

averages based on the geometric mean of

each given range.22 When we had actual

employment data from a firm (which we often

had), we used an exact figure.

6. We assumed that a typical worker cov-

ered by the Ordinance worked 36 hours a

week—a reasonable average of full-time and

part-time employees. We did not attempt to

estimate the effects of overtime.

7. Under the Ordinance, contractors of

firms are covered to the extent that employees

of the contractor work in the Coastal Zone at

least half-time. Thus, for example, if a law

firm hires a janitorial service to clean its

offices, any janitors who are on duty at the

law firm office more than half-time are cov-

ered by the Ordinance, even if the janitorial

service is based outside of Santa Monica. We

did not include these sorts of off-site contrac-

tors in our estimates because our data on sub-

contracting was too spotty.

8. The most difficult assumption for our

analysis concerned how firms would respond

to the conflicting incentives created by the

Ordinance for providing, or eliminating,

health care benefits. We ended by doing the

analysis in two ways, both simplistic but

together effectively illustrating the range of

possible outcomes. Under Scenario One, all

firms opt out of health insurance benefits and

pay all covered workers who currently earn

less, the minimum a wage of $12.25 per hour.

Under Scenario Two, all firms opt into health

insurance, paying a minimum wage of $10.50

per hour and health benefits of $2.50 per

hour. Note that we are estimating the costs as

of July 2003, when the Ordinance is fully

implemented, rather than the short-term pro-

vision that only requires $1.75 per hour in

health benefits.

C. Calculations

With cleaned data and clear assumptions, we

set to the task of estimating the cost and

reach Coastal Zone Minimum Wage. This sec-

tion outlines our steps for estimating Scenario

One (under assumption 8, above), in which

covered employers do not provide health ben-

efits and establish a firm-wide minimum wage

of $12.25 per hour. The steps parallel the

sequence of tables in data in Appendix A. In

22. That is, the square root of the product of the high and low end of that range (e.g., the square root of 50*99 is

about 70). Empirically, this estimate tends to be more accurate than the midpoint of the range, since businesses cluster more

in the lower reaches of most ranges.


20

our first step, we estimated the distribution of

job classifications in each industry. We used

the CPS survey data to capture countywide

patterns and, in general, there are no surpris-

es. Most retail store personnel are in “sales,”

most restaurant workers are in “food prepara-

tion and service,” and so on.

In the second step we estimated the per-

centage of employees within each industry and

job classification who earned less than $12.25

per hour (in 2001 dollars). (See Table A.1.) The

proportions are very high in for some groups

(e.g., 87% for food preparation and service) in

part because the data tend to greatly under-

state tipped income, thus moving virtually all

tipped workers into the under-$12.25 range. In

Table A.2, we show how the employees who

make less than $12.25 per hour are distributed

within wage categories. The high proportion of

workers in the lowest wage category reflects

further anomalies in the data. We calculated

hourly wages by dividing each respondent’s

total wage compensation by total hours

worked. For reasons we have not determined,

this calculation produced a significant number

of workers making less than the minimum

wage (and sometimes much less). Rather than

throw these cases out, we standardized their

earnings at the minimum wage of $6.75 per

hour. This method thus probably overstates the

proportion of workers in the lowest wage cate-

gory—some of those cases are data errors.

Note, too, that these percentages in A.2 are

based only on the universe of employees mak-

ing under $12.25 per hour—thus, for example,

43% of the under $12.25 per hour workers in

administrative support make under $8.00 per

hour, but those same workers represent only

22% of all those employed in administrative

support occupations.

The next two tables present similar analyses,

this time broken down by industry. For the

eleven major industry sectors represented in the

Coastal Zone, we show (Table A.3) the pro-

portion of workers earning less than $12.25 per

hour, and (Table A.4) the distribution of those

workers by wage category. Note, again, that the

figures in Table A.4 are percentages of only

those workers below $12.25 per hour.

Our next step was to measure health ben-

efits. Since the provision of health benefits

varies more by industry than by occupation,

we examined the proportion of low-wage

employees in the relevant industries who

receive health benefits through their

employer. In this scenario, we considered

only employees making under $12.25 per

hour in wages, for the reasons described in

assumption 8. The results (Table A.5)

showed that the provision of health benefits

to low-wage workers in Los Angeles varies

widely but is generally low (an average of

29%). This number is misleading in the

sense that it includes a large number of part-

time workers (who rarely get health insur-

ance at any wage level). We also believe,

based on our surveys of employers, that

health insurance is more frequently provided

in the Coastal Zone than in comparable

industries countywide. Nonetheless, in keep-

ing with our general reliance on the CPS as

the best available systematic data, we used

the figures in Table A.5 in our calculations.

Based on data from the Bureau of Labor

Statistics, we assumed that the average

amount paid by employers who provided

health care coverage was $185 per month

per covered employee.

Accounting for tipped employees was so

important under the revised Ordinance that


21

we undertook field research to complement

the CPS data. We collected payroll data from

representative employers in each sector of the

hotel and restaurant industry to determine the

number of tipped employees, their base pay,

and their pay including tips. We determined

that there were a total of 900 tipped workers

at the hotels (including subcontractors) out of

nearly 2,200 total workers, and 700 tipped

workers at the restaurants (out of nearly 1,200

total workers). Ninety percent of these work-

ers had base pay rates pegged to the

California minimum wage, making them eligi-

ble for the maximum pay increases. (We fur-

ther discuss our findings on tipped workers in

Chapter Seven.)

From this point, calculating the cost of our

first scenario—covered employers providing a

minimum wage of $12.25 per hour with no

health benefits—was relatively straightfor-

ward arithmetic. We multiplied the total

number of employees in each covered sector

by the CPS proportion earning less than

$12.25 per hour to determine how many

workers would get raises. We calculated rais-

es based on the proportion of CPS workers

at specific current wage levels. We subtracted

from these totals the estimated amount

employers currently pay for health insur-

ance—$185 per month per employee current-

ly covered by health insurance.

D. Results

Within the area described by the Coastal

Zone Ordinance there are roughly 100 firms

with revenues in excess of $5 million annu-

ally (Table 3.1). There are 14 hotels, 3 major

department stores, 10 restaurants, 9 clothing

and shoe stores, a grocery store, a bank, a

retirement home, a variety of retailers, and

several dozen offices that range from law

firms to financial consultants to movie pro-

duction houses. All told, we estimate that

these firms employ nearly 8,300 people,

about 26% of them working at the hotels,

14% at restaurants, 27% at various retailers,

and the remaining third at offices and serv-

ice companies.

Number of Businesses in the Coastal Zone with 50 or More

Employees and Estimated Number of Employees by Industry SectorTable 3.1


22

Under Scenario One (Table 3.2), in which

employers raise the minimum wage to $12.25

per hour and do not provide health insurance,

nearly 5,200 workers receive wage increases

totaling $37 million, if we ignore the ripple

effect. Eliminating current health insurance

for these workers saves the employers around

$4 million, for a net total cost of about $33

million. Roughly 32% of the workers receiving

wage increases are tipped employees, and

since nearly all of these tipped employees will

receive the maximum raise, they account for

42% of wage increases—about 80% of the

wage increases paid by hotels and restaurants.

Our Scenario Two assumes that all employ-

ers opt to provide health insurance benefits.

That is, we assumed that employers would

raise workers to a $10.50 per hour minimum

wage, and then provide health benefits to all

of these workers equal to $2.50 per hour. The

calculation process is similar to that followed

in the first ($12.25 per hour) scenario, except

that the current cost of health insurance pro-

vided to these workers was credited to the

employer’s new health insurance costs. The

results of this analysis are shown in Table 3.3.

Under Scenario Two, somewhat fewer

workers are affected by the Ordinance (4,404

rather than 5,164) because workers with

wages between $10.50 and $12.25 receive no

increases. However, the total cost of this sce-

nario is substantially higher ($38 rather than

$33 million) because of the higher cost of pro-

viding health insurance benefits (an effective

rate of $13 per hour) rather than just a

straight wage. Although the distribution of

costs across the two scenarios is similar,

tipped employees take on an even bigger role

in Scenario Two—since most tipped workers

are clustered at the minimum wage, they make

up a higher proportion of the minimum wage

workers. In Scenario Two tipped employees

account for 36% of the workers getting raises

and 46% of the wage increases.

Note that although Scenarios One and

Two each have extreme assumptions about

Estimated Cost of the Coastal Zone Minimum Wage Under Scenario One:

Assumes Firm-Wide Minimum Wages of $12.25 Per Hour and No Health BenefitsTable 3.2


23

how employers will handle the health bene-

fits provision (complete non-coverage vs.

universal coverage), the estimates are in a

similar range ($33 vs. $38 million). The actu-

al outcome is likely to lie between these two

extremes, so our two scenarios provide a

good working range.

E. Ripple EffectAs we discuss in Chapter Four, any minimum

wage mandate produces a ripple effect among

higher-paid workers. If a $7 per hour worker

and a $10 -per hour worker at the same estab-

lishment both receive mandated wage increas-

es to $12.25 per hour, the formerly higher

paid worker will almost certainly receive some

premium to preserve part of the prior wage

differential (which in turn will make it neces-

sary for the business manager to raise wages

paid to $12.50 per hour workers).

To estimate this ripple effect, we assumed

that wage differentials over the range affected

by the increase will afterwards average half

their former size, and will “ripple” up the pay

scale until the increase plays out.23 For

Scenario One, we estimated the effect by set-

ting the minimum wage at $12.25 per hour. If

we let “W” stand for each worker’s pre-

Ordinance wage, our assumed “new wage” for

each worker making less than $12.25 per hour

was $6.75 per hour (the California minimum

wage) + $5.50 per hour (the increase for min-

imum wage workers to bring them to $12.25

per hour) + 1/2 * [W - $6.75 per hour] (the

amount needed to preserve one-half of the

old wage differentials). Thus, a worker making

Estimated Cost of the Coastal Zone Minimum Wage Under Scenario Two: Assumes

Firm-Wide Minimum Wages of $10.50 Per Hour and Health Benefits of $2.50 Per HourTable 3.3

23. We used this same type of assumption in our 1997 Los Angeles report, and our research since has suggested that

this is a good estimator. See David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum

Wage (Princeton, NJ: Princeton University Press, 1995), where they report that in the 1990-1991 increase in the minimum wage

from $3.25 per hour to $3.80 per hour, workers in the 5th percentile of hourly wage workers (essentially, those at or very near

the minimum) experienced a rise in wages averaging 18% (roughly the amount of the increase) while workers at the 10th per-

centile (just above the minimum) experienced a 7% increase in wages.


24

$6.75 per hour before would now make

$12.25 per hour; a worker making $8.75 per

hour before would now make $13.25 per

hour. For each worker making more than

$12.25 per hour but less than $12.75 per

hour, the assumed new wage was W+1/2

[$17.75-W]. Workers making more than $17.75

per hour were assumed to not benefit from

the ripple effect.

The ripple effect is not small. Under

Scenario One, a total of 82% of workers in

the Costal Zone now receive some wage

increase, either from the Ordinance itself or

from the ripple effect. Wage increases rise

from $37 million from the Ordinance alone to

$54 million for the Ordinance plus ripple

effect. The net cost, after subtracting the cur-

rent costs of health benefits, is $33 million

without the ripple effect and $48 million

when it is included—nearly a 50% increase.

One can argue that our analysis overstates the

ripple effect—that the ripple will be smaller

because the Ordinance affects such a small slice

of the West side economy. In other words, it

might be easier to keep a store manager’s wages

at, say, $13.00 per hour even if her workers have

gotten raises from, say, $8.00 per hour to $12.25

per hour, if store managers outside the Coastal

Zone are still getting $13.00 per hour. This is a

reasonable argument, and it serves as a reminder

that here, as in other respects, it is hard to proj-

ect the consequences of the Coastal Zone

Minimum Wage because it is so unprecedented.

However, in another sense our assumptions

about the ripple effect are too conservative. At

least some employers will certainly retain health

benefits for workers and, if they do, they will

encounter two big additional costs. One of

these is the cost of paying higher family health

benefits when the “core” benefit for single

workers must be at least $2.50 per hour—a prob-

lem we discussed in detail in Chapter Two. But,

second, employers are likely to find it impracti-

cal to have one very generous health plan for

workers earning the minimum wage, and a

lower-cost health plan for the higher-paid

employees. Here the ripple effect will almost

certainly drive up health benefit costs substan-

tially across the board. If health benefits are

eliminated, higher-wage employees will have to

be compensated to enable them to buy their

own insurance. When these effects play them-

selves out, we believe our estimate for the rip-

ple effect will not be far off.

F. Discussion

Although a number of assumptions are built

into our estimates, we nonetheless believe

that they represent good ballpark figures. Our

assumptions are not skewed in any systematic

way, so that a too generous estimate on one

count is offset by a too conservative estimate

on another. The data sources overlap, and

crosschecking showed that the estimates were

consistent across different sources. As we

noted earlier, the specific numbers are less

important for our purposes than having a

complete model in which we can understand

how different aspects of the new Ordinance

shape the total impact.

Our estimate of the total cost of the Coastal

Zone Minimum Wage—between $33 million

and $38 million without the ripple effect, and

close to $50 million including those effects—

are estimates of immediate, short-term effects.

Dynamic reactions to the Ordinance will of

course change those costs, as businesses react

to the very changed incentives created by the

wage and benefit mandates.


25

The Economics of a Minimum WageHaving measured the scale of the Ordinance

in Chapter Three, our mission in the next four

chapters is to understand and measure its

effects. Chapters Five and Six measure the

impact on business behavior, job loss, proper-

ty values and city revenues; Chapter Seven

measures the distributional effects on work-

ers. In this chapter, we lay out some back-

ground theory—the framework and methods

that economists use to understand minimum

wages. Most of our discussion draws from the

literature on national and state minimum

wage increases, but our final section looks at

the special consequences of a local minimum

wage like Santa Monica’s. Throughout, it is

helpful to keep in mind that the Coastal Zone

Minimum Wage is unique both in the narrow-

ness of its geographic coverage and the size of

the increases it mandates.

A. General Effects of a Minimum WageEconomists have widely debated the effects

of minimum wages. Most of this debate has

focused on one issue: whether increases in

the minimum wage cause unemployment.

This is an important issue, but there are

other effects of minimum wages on which

economists share much broader agreement,

and we begin with those.

The Productivity Effect

Economic theory suggests that increasing the

hourly wage through a higher minimum wage

could increase productivity in at least three

ways to existing employees:

a. Higher pay and better benefits could

cause workers to increase work effort and

become more productive employees;24

b. Pay and benefit increases could reduce

worker turnover, thereby increasing the

average level of worker experience;25 and

c. In return for a wage higher than workers

can achieve elsewhere, employers could

demand more effort from employees.

There is some empirical support for each of

these effects; in particular, it is well estab-

lished that increasing wages reduces turnover.

What has never been clearly established is the

size of the resulting productivity effects—in

other words, just how much more do workers

produce when they have greater experience

and higher morale? On this critical question,

reliable research is almost nonexistent.

Moreover, economists tend to take it for

granted that employers are intelligent enough

to find the optimal mix between wages and

productivity in their own businesses—in other

words, if higher wages can pay for themselves

with higher productivity, then the employers

will implement those higher rates. At different

Chapter Four

24. This increased effort might be either because workers are more motivated when they perceive they are being treat-

ed fairly or because workers have incentives to take measures to keep a job that pays better than alternatives. Both of these

hypotheses are part of the efficiency wage literature.

25. See Card and Krueger, Myth and Measurement, 174, for a review of the empirical evidence.


26

businesses in the Coastal Zone, for example,

janitors are paid widely varying rates, as are

cooks, salespersons, and even lawyers. The

differences always correlate with easily

observed differences in employer goals about

the level of service and the type of productiv-

ity they are seeking in the performance of a

particular job at a particular place. Thus, while

we do not discount the possibility of produc-

tivity improvements among current workers

altogether, we think they will be small.

It is also important to note, in passing, that

if the Coastal Zone Minimum Wage does pro-

duce large productivity improvements, then

total employment will fall, since fewer work-

ers will be needed to do the same work. Dr.

Pollin argued in his 2000 report that some

Santa Monica businesses could become more

efficient as a result of the wage and benefit

mandates. He provided no credible support

for this claim; but if, hypothetically, it were

true, it would imply a reduction in jobs at

those businesses as well.

The Labor-Labor Substitution Effect

When wages increase for a particular variety

of labor, firms have an incentive to substitute

away from labor toward other inputs like cap-

ital. This is an important reason for the unem-

ployment effect of an increase in the mini-

mum wage discussed below. But in addition to

a substitution toward capital, firms also have

an incentive to substitute toward other kinds

of labor. When economists theorize about

these effects, they usually envision a story like

the following: suppose a manufacturing firm

can choose between two ways of producing a

product—Process A or Process B. Process A

makes intensive use of unskilled labor and

very little use of capital or skilled labor trained

to use the capital. Process B makes intensive

use of capital and the skilled labor trained to

use the capital and very little use of unskilled

labor. For purposes of illustration, assume

that unskilled labor makes the old California

minimum wage rate of $5.75 per hour and a

skilled labor rate of $12.00 per hour. If the

wage of unskilled labor is increased sufficient-

ly by, say, a minimum wage law (from $5.75

per hour to $6.75 per hour, for example, as

has happened in California over the past two

years), then firms will have incentives to

change over from process A to process B and

effectively substitute skilled labor for unskilled

labor. There are many anecdotal examples of

this process, and some economists have tried

to develop systematic measures of the process

throughout an economy. While there is a

strong consensus that this effect occurs and is

important, labor economists believe the exact

magnitude of the effect is uncertain.26

The changes occurring under the Coastal

Zone minimum wage, and the relevant ques-

tions to be asked, are quite different. The

issue in Santa Monica is not whether a mod-

est change in the relative cost of unskilled vs.

skilled labor will lead to a relative shift

towards skilled labor; the question is, what

happens if one completely eliminates the

price difference between unskilled and

skilled labor? Will employers shift their hir-

ing away from unskilled workers towards

skilled workers? The answer is obvious, the

reasoning almost tautological. Of course they

will. The only question is how quickly this

process will occur, and how completely it

will change the composition of the Coastal

Zone’s low-wage workforce. Because a near

26. See Daniel S. Hamermesh, Labor Demand (Princeton: Princeton University Press, 1993), Chapter 3.

doubling of minimum wages is essentially

unprecedented and therefore unmeasured, it

is hard to quantify the full speed and effect

of the labor-labor substitution process. In

Chapter Seven, however, we present some

empirical estimates of the effect.

The “Ripple” Effect of a

Minimum Wage Increase

It is also fairly uncontroversial among econo-

mists that raising the minimum wage has a

“ripple” effect on workers at higher pay levels.

To see how the ripple effect operates, consid-

er a hypothetical retail store with the follow-

ing wage rates:

Stock clerk $ 6.75 per hour

Sales clerk $ 8.75 per hour

Shift supervisor $10.75 per hour

Store bookkeeper $12.75 per hour

Store manager $14.75 per hour

If the minimum wage rises from $6.75 per

hour to $12.25 per hour, then the first three

groups of workers will receive pay increases.

But at the end of the day, it is unlikely that all

of these workers will be earning $12.25 per

hour. The sales clerk will expect to be paid

more than the stock clerk, even if the stock

clerk is very well paid; the shift supervisor will

expect some added pay differential to reflect

her greater responsibilities. The employer will

consequently find it necessary to continue

some kind of salary differential corresponding

to the demands and responsibility of different

jobs. And with these differentials, still more

workers (the store bookkeeper and even the

store manager) will be caught up in the ripple

effect. Certainly the owners of the store won’t

be able to raise the shift supervisor’s pay rate

significantly above the minimum wage of

$12.25 per hour without providing some

added compensation to the store manager.

Thus, the biggest wage increase resulting from

the minimum wage—the $5.50 per hour

increase to the stock clerk—has a “ripple”

effect throughout the firm’s wage structure,

ultimately touching even the store manager.

The available research on the size of this “rip-

ple” effect suggests that wage differentials are

compressed to about half of their earlier size

when minimum wages rise. In our retail sce-

nario, this would produce the following wage

rates after the new minimum goes into effect:

Stock clerk $12.25 per hour

Sales clerk $13.25 per hour

Shift supervisor $14.25 per hour

Store bookkeeper $15.25 per hour

Store manager $16.25 per hour

Over time, as businesses adapt to the new

minimum wage, the ripple effect tends to get

bigger, because the competition for the high-

er-skill workers getting the higher wages push-

es those wages up. But we doubt that will hap-

pen in Santa Monica. If a minimum wage law

applies to only 100 businesses in a small eco-

nomic zone, as the Coastal Zone Minimum

Wage does, the ripple effect is muted by the

fact that other shift supervisors, other store

bookkeepers, and other store managers at

businesses unaffected by the minimum wage

are not getting wage increases. This holds the

size of the ripple effect in check.

Nonetheless, even if the ripple effect

remains permanently at the 50% compression

rate illustrated above, it will add very signifi-

cantly to the general cost of the minimum

wage law. Our specific estimate of the ripple


27


28

effect from the Coastal Zone Ordinance,

explained in Chapter Three, is about $15 mil-

lion in our principal simulation—nearly a third

of the total cost impact.27

Employment Effects of a

Minimum Wage

Not long ago, economists almost universally

agreed that increases in the minimum wage

increase unemployment among low-wage

workers. The reasoning is simple: if wages

roughly represent the marginal product of

workers, then a higher minimum wage forces

employers to pay workers more than this

marginal product. Employers would therefore

respond by laying off the least productive of

their low-wage workers.

This tenet became controversial in the 1990s,

largely through the publication of several stud-

ies and a book by David Card and Alan Krueger

of Princeton, which presented a wide range of

empirical studies suggesting that employment

rates were fairly stable in the face of small

increases in minimum wages.28 Card and

Krueger argued employers in low-wage labor

markets have much more power than in other

markets, enabling individual employers to act

like monopsonists and keep wages artificially

low. Card and Krueger have also argued that

employment losses are mitigated by the “shock”

effect of the increase in the minimum wage.

According to this idea, firms that face a sudden

increase in costs react by looking harder at ways

to become more efficient. The problem with

the shock theory is that it would also seem to

predict a decline in employment, since more

efficient firms can do more with fewer

resources, including labor.

Card and Krueger’s work has been contro-

versial, but in throwing doubt on the harmful

employment effects of a minimum wage, it

had a powerful influence in national policy

circles and helped pave the way for Congress’s

decision in 1996 to increase the minimum

wage to its current $5.15 per hour.29 The

remarkably low levels of unemployment pre-

vailing during the late 1990s were initially seen

as further evidence that the effects of a high-

er minimum wage on unemployment were

modest indeed.30

The influence of Card and Krueger’s work

has waned in recent years. A number of more

recent, highly sophisticated studies have consis-

tently shown negative employment effects from

an increase in the minimum wage. The consen-

sus of these studies is that a 10% increase in a

minimum wage produces a 1% to 2% decrease

in employment among low-skill workers.31

This debate has almost entirely focused on

small increases in the minimum wage. The

27. In Robert Pollin, et al., Economic Analysis of the Los Angeles Living Wage Ordinance (Princeton, NJ: Princeton

University Press, 1996), Dr. Pollin contended that the ripple effect (what he called the “wage contour effect”) would cost $32.9

million, just over a third of his total estimated cost for the ordinance. This was a very high estimate for an ordinance with a

much lower wage threshold than we face in Santa Monica ($7.50 per hour in L.A. vs. at least $10.50 per hour in Santa Monica).

In Robert Pollin, et al., Economic Analysis of Santa Monica Living Wage Proposal, however, the authors assume essentially no

ripple effect on workers making over $10.50—a bizarre inconsistency.

28. See Card and Krueger, Myth and Measurement.

29. California has a higher, $6.75 minimum wage.

30. Of course, the aggregate unemployment effect is a poor measure of what impact a higher minimum wage might

be having on the much smaller, low-wage market. Available evidence suggests, however, that even here the unemployment effects

of the recent increase have been small.

31. See David Neumark, How Living Wage Laws Affect Low-Wage Workers and Low-Income Families (San Francisco:

Public Policy Institute of California, 2002), Chapter 3, for a good survey of the recent research.


29

question Card and Krueger pose is whether a

10% or even a 20% increase in the minimum

wage need necessarily increase unemploy-

ment. The Coastal Zone Minimum Wage, in

contrast, nearly doubles the minimum wage

for affected businesses. Mainstream labor

economists, including Card and Krueger,

agree that very large increases do increase

unemployment substantially. The question is

only “how much?”32

In our view, the most sensible way to

answer this question is to look at the specific

businesses affected by the wage increase. How

much a given business will reduce employ-

ment depends on its profit margins, its oppor-

tunities to substitute capital for newly expen-

sive labor, and its ability to eliminate labor-

intensive functions, and whether it will con-

sider closing down operations entirely. When,

as in Santa Monica, a firm can avoid the min-

imum wage altogether by reducing revenues

below the $5 million threshold, there is an

added incentive to reduce employment.

Chapter Five works through these and related

issues for the principal economic sectors

affected by the Coastal Zone Minimum Wage.

B. The Economics of a LocalMinimum Wage

The discussion up to this point, and indeed

nearly all of the economic literature on the sub-

ject, assumes a minimum wage that operates

across an entire nation or at least a state. The

Coastal Zone Minimum Wage, of course, is

quite different: it would regulate only a portion

of a medium-sized city in a very large metropol-

itan region. What difference does this make?

In principle, a local minimum wage that is

much higher than the surrounding market

should have a dramatic effect on the economy

of the regulated area. Low-and-moderate-wage

workers throughout the market will compete

vigorously for the jobs in the regulated zone,

making it particularly appealing and easy for

employers to replace existing workers with

higher-skill workers. Despite these opportuni-

ties for a stronger labor force, however, each

business in the regulated zone is likely to cal-

culate how the costs of remaining in the

Zone, and paying higher wages, compare to

the opportunities for relocation.

The calculus of business relocation involves

three principal factors:

First, each business will measure by how

much the higher minimum wage will increase

its operating costs. A law firm or movie pro-

duction company may find that costs are only

trivially affected by the mandated wage, either

because they employ few low-wage workers or

because their costs come predominantly from

capital and supplies rather than labor. A fast-

food restaurant or a garment factory, in con-

trast, may find that a doubling of the mini-

mum wage increases their operating costs by

40% or 50%.

Second, each business will consider how

much it competes with businesses outside the

regulated zone. For almost any manufacturing

enterprise (like the garment factory), or a

non-retail service firm (like a firm that pro-

32. David Neumark’s recent econometric study of living wage laws across the United States, How Living Wage Laws Affect

Low-Wage Workers and Low-Income Families, is relevant here, because these laws mandate much bigger wage increases than those

typical in minimum wage laws. Neumark found increases in unemployment among low-wage workers that were twice as large as the

percentage increases in those workers incomes. There are many reasons to be cautious in using this result, but this evidence certainly

supports the view that big increases in minimum wages produce proportionally larger increases in unemployment.


30

vides services for the film industry), the busi-

ness product is intended for a general market.

The firm competes directly with firms outside

the regulated zone. A firm with significantly

higher labor costs will lose this contest.

In contrast, some firms have highly local-

ized markets. A gas station at a busy intersec-

tion, a roller blade rental shop on the beach,

or a taxi stand outside a hotel—all these busi-

nesses depend on the geographic convenience

they provide their customers. Such firms are

much more likely to have some ability to pass

costs on to customers, since for many of their

customers alternate locations outside the reg-

ulated zone are also poor substitutes.

Third, each business will consider whether

it gains some monopolistic rents from its loca-

tion. A chic restaurant with a well-established

clientele has, in effect, built up an investment

in its existing location. Some portion of the

restaurant’s customers come there because it

is close by, and many come because past good

experiences at the restaurant give them loyal-

ty to it. This restaurant derives from this loy-

alty some protection against competition,

which can, to some extent, allow it to increase

prices. The hotels in Santa Monica provide

another obvious example; anti-development

laws limiting the building of new hotels pro-

vide existing hotels with some monopoly

power, and decrease the likelihood that they

will relocate outside the regulated zone

because wages go up.

This discussion should make it clear that

these multiple effects will vary from one

industry to another, and even within industry

sectors. The key, then, is to understand indi-

vidual business sectors well enough to com-

prehend and predict specific effects on each

sector. Again, these sector analyses underlie

Chapter Five, producing the results summa-

rized in Chapter Six.

Despite sector variations, however, the

underlying pattern is clear: a local minimum

wage increase will tend to have far larger

employment effects than a statewide or

national minimum wage. Research like Card

and Krueger’s thus has limited applicability,

unless it is applied with a keen awareness of

its limitations in this context.

In one important sense, the employment

effects of a high minimum wage are more

benign than those of a national wage increase;

workers displaced by a local increase can

always seek jobs outside the regulated area.

Thus, under the Coastal Zone Ordinance, a

large unemployment effect (which we do, in

fact, foresee) does not mean that all displaced

workers would remain unemployed. Most of

them (not all) would eventually be able to find

new jobs in the rest of the Los Angeles econ-

omy, though most of these new jobs will be

even lower paying and otherwise less attrac-

tive than the jobs lost in Santa Monica. We

return to this effect in Chapter Six.


31

Sector Effects on Businesses in Santa Monica

In Chapter Four, we discussed the general

economic principles that guide an evaluation

of minimum wage laws. In this chapter, we

look in depth at the specific context of Santa

Monica. The Santa Monica Coastal Zone is,

of course, no ordinary place. It exotically

combines great natural beauty with dense

trappings of civilization in the heart of the

affluent, heavily populated Los Angeles

Westside. Understanding the impact of the

Coastal Zone Minimum Wage requires us,

therefore, to understand how the specific

businesses in the Zone operate, and the choic-

es they face under the new wage mandates.

We have thus devoted much of our research

effort to studying these businesses. We sur-

veyed 30 businesses, and did in depth case

studies of another 21, representing the major

sectors most affected by the minimum wage.

In the following sections, we analyze how con-

ditions in each sector will shape the options

available to business owners and mangers, and

what decisions they are likely to make. In

Chapter Six, we estimate these magnitudes

and summarize estimates for the entire Zone.

Three important themes run through this

chapter. First, it is incorrect to assume that

businesses will react passively to the Coastal

Zone Minimum Wage, even if they are rela-

tively profitable. These firms are profitable

because they are good at providing a very mar-

ketable product while minimizing costs. They

will seek to minimize costs aggressively and

creatively even while taking into account the

regulatory regime under which they operate.

With a major change like the minimum wage

Ordinance, we can expect major shifts in busi-

ness operations, behavior, and strategy.

Second, it is unlikely that firms can raise

prices sufficiently to pass along most, or even

a large part, of the increased costs to con-

sumers. This would only be possible if con-

sumers had no ability to substitute to a cheap-

er alternative. In other words, consumer

demand for Santa Monica goods and services

would have to be relatively inelastic.33 This is

not even remotely the case for any of the busi-

ness sectors in Santa Monica, so that any

price increases will be accompanied by a

decline in business volume and a consequent

decline in revenue (and, usually, in employ-

ment). In the discussion below, we refer to a

drop in employment brought about by price

increases as ‘scale’ effects. For any given firm

in the Coastal Zone today, a price increase

implies a large enough ‘scale’ effect to reduce

its profits. Many Coastal Zone firms are con-

strained in their ability to raise prices for

another reason: they are part of metropolitan-

wide chains whose prices are fixed (for adver-

tising and other purposes) at the metropolitan

level. Local department stores and chain

retailers thus have little or no price flexibility.

These two points imply a third: the costs

of the Coastal Zone Minimum Wage will be

Chapter Five

33. A product with inelastic demand is defined as a good or service where demand does not fall a large amount

when price increases. A product with elastic demand is one where demand for a good changes dramatically when price

increases only slightly.


borne by multiple parties—in general, by those

who are least able, in a given situation, to

avoid the cost. Consumers will bear only a lit-

tle of the cost because they have good alter-

natives for buying goods and services else-

where. Businesses will bear costs if they can-

not readily relocate, substitute capital for

labor, substitute high-skill labor for low-skill

labor, restructure to escape the law’s grasp, or

reduce other benefits. Poor, low-skill workers

as a subgroup will bear costs to the extent

firms can substitute higher skill workers. All

workers will bear costs if firms shut down,

curtail operations, or relocate. Landowners

will bear the costs if businesses shut down or

relocate outside the Zone, or if average prof-

its in the Zone decline sharply.

A. The Hotel Industry

General Description of Market for

Hotel Services in Santa Monica

The hotel market in Santa Monica is com-

prised of no fewer than three market seg-

ments: the “luxury” tier, the “first-class” tier,

and the “mid” tier. These tiers are differenti-

ated by the luxuriousness of the accommoda-

tions and the capacity to host corporate meet-

ings and conferences. Not surprisingly, prices

are highest for the luxury tier and lowest for

the mid tier. The average daily room rate is

$350.00 for the luxury tier, $250.00 for the

first-class tier and $150.00 for the mid tier.

The three tiers vary somewhat in the customer

base they serve. Both the luxury tier and the

first-class tier serve high-income tourists and

high-budget corporate clients, while the mid

tier serves relatively more medium-income

tourists and lower-budget business clients.

The luxury tier dominates the corporate meet-

ing/conference customer base.

Locally, Santa Monica hotels compete pri-

marily with other hotels in their tier. For some

customer groups, however, competition is

across tiers. Luxury tier hotels compete

among themselves for the corporate confer-

ence clientele, but they also compete with

first-class hotels for high-income tourists and

high-budget corporate clients. Mid tier hotels,

in contrast, compete among themselves for

middle-income tourists. Thus, the markets for

luxury tier hotels and first-class hotels overlap

slightly, though neither market intersects

much with mid tier hotels.

Our discussions with owners and man-

agers of Santa Monica hotels make it very

clear that these hotels compete more widely

on a Los Angeles metro level; all three tiers

compete especially closely with the dozens

of other hotels on the Westside. The Santa

Monica hotels differentiate themselves from

the other Los Angeles hotels primarily by

their proximity to the beach and Santa

Monica’s cachet. Santa Monica also offers a

unique shopping experience at the Third

Street Promenade, fine dining, and an active

nightlife. This ‘product differentiation’ gives

Santa Monica hotels some pricing latitude,

but the area-wide market they compete in

severely restricts this latitude. In other

words, any significant increase in hotel

prices will lead to significant defections by

consumers and a decline in hotel occupancy.

Current Business Climate

In 2000, when we prepared the first edition of

this report, the Coastal Zone hotels were gen-

erally enjoying booming business. A general

rule-of-thumb is that hotels break even (includ-

ing a normal rate of return) at about 70%

32

occupancy. In 2000, some of the Coastal

Zone hotels had occupancy rates as high as

85%, and correspondingly high profits. Not

long after we issued that report, the 2001-

2002 recession began to hurt hotel business,

and the attacks of September 11th had an

even more dramatic effect. Occupancy rates at

many hotels fell to 50%, and have only gradu-

ally recovered to levels in the 65% to 75%

range. Although most of the hotels are still

profitable, we see no evidence that any of

them are enjoying “supra-normal” profits.

Scale Effects From Price Increases

As we discussed in the last chapter, some

firms may respond to the Ordinance by rais-

ing prices, effectively passing some but not all

of the price increase along to customers. Any

price increase will also be associated with a

decrease in demand and a consequent reduc-

tion in employment.

Would Santa Monica hotels respond to the

Ordinance by increasing prices? We think not

for two reasons. First, as we have already dis-

cussed, Santa Monica hotels are part of the

broader Los Angeles metro market. Any

attempt to increase prices is likely to lead to a

significant defection of customers to Los

Angeles metro hotels that are unaffected by

the Ordinance. Second, because hotel capaci-

ty is fixed, hotels have powerful incentives to

rent out all of their capacity to pay for it, and

increasing prices would create excess capacity.

When hotels first enter a market and begin

building capacity, they consider the trade-off

between the additional revenues generated by

greater capacity and the additional costs of

building and operating greater capacity.

However, once the capacity is built, opera-

tional costs are the only additional costs

incurred in renting more rooms. The building

costs are fixed once capacity is built and

incurred by the hotel regardless of whether

available capacity is rented or not. Because the

operating costs are small relative to fixed costs

compared to other industries, hotels gain less

in cost savings than other industries when

they raise prices. To understand these incen-

tives, consider a room that rents for $250.00

per night. To service one more daily room

rental, the extra labor needed is primarily

housekeeping services. If renting an addition-

al room requires an hour of housekeeping at

$14.00 per hour (a $10.00 per hour wage and

$4.00 per hour of benefits), then very little is

saved by laying off housekeepers, and proba-

bly too little is saved to make up for a revenue

loss due to the decline in the number of

rooms demanded induced by a price increase.

Technically, this argument above, along

with the numerical example, essentially

assumes that hotels always operate at a point

where short-run (or variable) marginal cost is

below marginal revenue. This is always true

when a hotel is operating at full capacity. If a

hotel is operating below full capacity (as in the

current business climate), then it is theoreti-

cally possible that hotels will raise prices in

response to the Ordinance. We think it unlike-

ly that hotel room prices will increase by

much in response for two reasons. First, as

already discussed, the broader Los Angeles

hotel market will severely constrain any

attempt by Santa Monica hotels to raise

prices. Second, because of the costs of mov-

ing prices up and down, we doubt that the

hotels have fully adjusted prices downward in

a manner that would be justified if the change

in the business climate were perceived as per-

manent. And, if that is the case, the hotels will


33


34

not respond to a cost increase by raising

prices in the current weak climate of soft

demand for hotel rooms.34 Therefore, we

conclude that in the short term the Ordinance

will lead to no price increase and no price

induced scale effect in the hotel industry.

Because the overall cost of additional capac-

ity has increased, we would expect hotel

capacity to decline in the long run as capacity

depreciates and is not replaced or is convert-

ed to other uses. However, the long run in

this case could be 20 to 40 years because of

the durable nature of hotel structures.

Labor-Capital Substitution

In our discussion with hotel management,

we saw very little leeway for capital-labor

substitution (i.e., machines have yet to be

invented that can make beds). None of the

owners or managers we spoke with suggest-

ed ways to us that capital-labor substitution

might be accomplished.

Exit Effects

A characteristic of the hotel industry that lim-

its the ability of hotels to avoid the costs of

the Ordinance is the immobility of the hotel’s

capital investment. Hotels cannot move. In

the short term, this means that it is unlikely

that hotels will shut down since any excess

over operating costs will provide some return

on the hotel’s capital investment. In the long

term, the hotel will remain open if ongoing

required investments provide a normal return

(i.e., as good or a higher return than is avail-

able elsewhere). If the return on ongoing

required investments is less than available else-

where, then the hotel will eventually close in

the long term.

In the case of the Santa Monica hotel indus-

try, evidence from our case studies in the sum-

mer of 2000 suggested that Santa Monica

hotels were making above normal profits, and

no hotel owner or manager we spoke with at

that time suggested that the proposed mini-

mum wage Ordinance would reduce profits

below a normal return. It is important to keep

in mind that profits of Santa Monica hotels

are not nearly so healthy now and that the

Ordinance could cause some hotels to run

economic losses if the slowdown continues.

Even so, we would predict that the Santa

Monica Living Wage Ordinance would result

in no closings in the short-run and probably

none in the long-run as the economy recovers.

Labor-Labor Substitution

For the hotels, labor-labor substitution may be

the most important effect of the Ordinance.

Most managers we spoke to said that they

would definitely upgrade the skills of their

labor force. They felt that at $12.25 per hour,

they could hire the most experienced workers

in the Los Angeles metro area. The least edu-

cated, least experienced workers—the ones

most likely to be poor and the targets of the

Coastal Zone Ordinance—are the likely losers

of this labor-labor substitution.

Appropriation of Tip Income

As we discuss in Chapters Three and Seven,

the effects of the Coastal Zone Minimum

Wage on hotels tend to be perverse because

most of the wage increases will be paid to

34. Technically, we are arguing that hotels are not maximizing short-run profit because of long-run profit considerations.

If it is the case that hotel room prices are currently higher than those called for by short-run profit maximizing considerations, then

it is still the case that MR > MC. It follows that an increase in short-run costs will have no effect on pricing behavior.

tipped employees whose total income is

already well over $12.25 per hour. The degree

to which the benefits are skewed towards

tipped employees depends on hotel tier, since

the wage structure of the hotels varies across

tiers. At all the hotels, tipped employees

(including the employees of subcontractors

working at the hotels) make up about 40% of

all employees and about 50% of hourly work-

ers. At the non-unionized luxury hotels, near-

ly all non-tipped employees are currently paid

over $10.50 per hour and most are paid over

$12.25 per hour. (Wages at the unionized

Fairmont Miramar are significantly lower.)

Virtually all workers at these hotels are also

covered by health insurance policies that cost

in the neighborhood of $1.75 per hour to

$2.00 per hour. Tipped employees, in con-

trast, are paid hourly wages that range from

$6.75 per hour to $11 per hour, clustering

near the bottom of that range. The hotels do

not know exactly how much workers earn in

tips, but reported tip income is nearly always

enough to raise workers above the $12.25 per

hour level, and the median tipped employee at

these luxury hotels earns around $50,000 per

year. Since tips do not count as part of hourly

wages under the Ordinance, however, about

85% to 90% of the cost of new mandates goes

to increasing wages and/or benefits for tipped

employees. These total costs account for

about 2% to 3% of hotel revenues, but any-

where from 10% to 30% of hotel profits.

Wage rates at Coastal Zone hotels generally

correlate with hotel prestige. One of the chief

commodities the luxury hotels are selling is

extraordinarily good service, and they pay

very high wages to insure strong service and

high morale. The first-class hotels have some-

what lower pay schedules, and the mid tier

hotels have lower pay schedules still.

Nonetheless, the same pattern we describe

above applies, in modified form. Tipped

employees have lower hourly wages, but high-

er total incomes, than non-tipped employees,

but under the Ordinance the tipped employ-

ees account for nearly all of the increased

cost. At the first-class hotels, we estimate that

about 75% to 80% of the costs of the new

Ordinance will go to tipped employees; at the

mid tier hotels, about 65% to 70% of the

costs will go to tipped employees. The new

mandates represent a higher percentage of

revenues and a higher percentage of profits at

these hotels.

Because the hotels are only constrained by

the market to pay an amount of compensation

equal to current wages and tip income in

order to retain their current workforce, we

might expect hotels to respond to the increase

in wage costs imposed by the Ordinance by

replacing tips with a service fee that would be

billed directly to hotel customers. This, how-

ever, will be viewed by customers as a sub-

stantial price increase, and thus would be

approached by hotels with great caution.

Unionization

Of course, the hotels may be able to reduce the

costs imposed by the Ordinance by encouraging

their work force to unionize and this appears to

be a primary motivation of the Ordinance as

discussed in Chapter Two. According to the lan-

guage of the Ordinance, collective bargaining

agreements supercede the provisions of the

Ordinance provided the union agrees to waive

those provisions. Clearly, the Ordinance

strengthens the bargaining position of unions

since the default wage in the absence of any

agreement would be $12.25 per hour. Still, a


35


hotel might be able to obtain some cost-reduc-

ing concessions in return for consenting to a

unionized workplace.

Whether hotel owners would choose this

course depends on the perceived costs of a

unionized workplace. Many firms believe that

a unionized workplace increases costs because

of reduced flexibility in hiring, firing, and

managing workers. For example, union con-

tracts often restrict workers to specific job

classifications so that hotel managers have less

discretion in moving workers temporarily

between jobs to fill vacant positions caused by

absenteeism or a shortage of workers in a par-

ticular job.

Reprise

To summarize, we believe that in the case of the

hotel sector, which is characterized by large,

immobile investments, the hotel owners will

bear most of the costs of the Ordinance. In

addition, taxpayers, because of a consequent

reduction in property values, will also bear the

costs of the Ordinance in making up for any

shortfall in property tax revenues. We also

believe that the hotels will act to avoid these

costs by reducing employment and by substitut-

ing away from poor, low-skill workers to non-

poor, high-skill workers.

B. Restaurant Industry


Restaurant Services in Santa Monica

The Market for restaurant services in Santa

Monica is composed of at least two segments:

“upscale” restaurants and “casual” restaurants.

Upscale restaurants offer fine cuisine and,

often, an elegant ambiance. Casual restaurants

offer more informal dining, and, often, an

ambiance that is either “fun” or family oriented.

The customer base for both restaurant seg-

ments is made up of tourists, corporate visi-

tors, local business people, and Los Angeles

metro residents. One owner of an upscale

restaurant thought that half of his customers

were local business people and half were peo-

ple who lived outside Santa Monica.

Compared to casual restaurants, the customer

base of upscale restaurants is more likely to be

composed of high-income Los Angeles metro

residents, high-income tourists, and high-budg-

et business people—locals and visitors.

Because upscale dining and casual dining

are two very different products in the eyes

of consumers, these segments probably do

not compete much with each other.

Restaurants within each segment, however,

compete with each other and also with

other restaurants in the Los Angeles metro

area from the same milieu. This cross-town

competition is likely more important in the

upscale segment for several reasons. First,

the upscale market is smaller overall in the

Los Angeles metro area, so that fewer good

substitutes are available. Second, upscale

restaurants are more highly differentiated so

that good substitute restaurants are less like-

ly to be available locally. And finally, travel

costs from across town are a smaller amount

of the total dinner check compared to more

moderately priced restaurants so that travel

costs play a smaller role in choosing to trav-

el across town to an upscale restaurant.


The restaurant industry in Santa Monica is sit-

uated similarly to the medium-sized retail

industry in that tourists and business travelers

comprise a substantial part of its customer

36

base. These are, in fact, trapped customers,

since dining at other restaurants in the Los

Angeles metro costs them additional time and

travel expense. Like the hotels, restaurants

have fixed capacities that have been built to

accommodate peak dining periods (i.e.,

evenings and weekends). When restaurants fix

capacity by either building it or leasing it, they

take into account the building (or leasing)

cost of acquiring additional capacity with the

additional revenue to be derived from that

additional capacity. Like the hotels, once the

capacity is fixed, short-term pricing decisions

are driven by the additional operating costs of

serving more meals and not the building

costs. Unlike the hotels, operating costs for

restaurants make up a much larger fraction of

total costs, perhaps 60% to 70%, so that it

may be worthwhile for some restaurants to

increase prices in the short-run in response to

the Coastal Zone Ordinance. Higher prices

will mean fewer customers and lower rev-

enues but the cost savings related to serving

fewer customers may well help mitigate the

impact of the Ordinance. The price increases

will be more important for the upscale seg-

ments because their demand is less elastic.

(Fewer good substitutes are available.) Thus,

price increases lower their revenue less. Fewer

customers require fewer workers to serve

them, so some layoffs are likely. These scale

effects will be larger in the long-run (5 to 10

years) as restaurant leases expire and owners

adjust capacity downward to reflect the high-

er operating costs.

The magnitude of this price-induced scale

effect and employment reduction will depend

on both the increase in operating costs and

the elasticity of demand for Santa Monica

restaurant services overall.


As with the other industries, we see little lee-

way for labor-capital substitution in the restau-

rant industry.

Exit Effects

Santa Monica restaurants vary a great deal in

their profitability. Some, who own their own

property and have successfully established rep-

utations, are able to earn above normal prof-

its when the economy is good. Many others,

who lease their properties (earning, thus, no

economic rents on the land) and have not yet

established a brand identity, have normal, if

not marginal, profits. Because many restau-

rants have leases, they are relatively mobile,

and we would expect those restaurants that

are experiencing either normal or below nor-

mal returns to leave the industry over time as

their leases expire. These are more likely to be

the casual restaurants, since they face greater

competition and usually derive fewer benefits

from a brand identity.


Like the other industries, a mandated wage of

$12.25 per hour would provide restaurants

with an opportunity to upgrade their labor

force. Again, the population of workers

harmed by this labor-labor substitution—poor,

low-skill workers—is exactly the group that the

Ordinance aims to help.

Other Cost Avoidance Behavior

As with some of the other sectors, several

restaurants are just over the $5 million thresh-

old and would likely find ways to reduce their

revenues to avoid the Ordinance’s mandate.

For example, restaurants could close during

certain hours of the day. Like hotels, restau-


37


rants may also attempt to avoid the costs of

the Ordinance by keeping a portion of the

tips. At many restaurants in Santa Monica,

owners and managers report that wait staffs

make in excess of $20.00 per hour, with near-

ly three-fourths of the hourly wage coming

from tip income. If restaurants keep one-third

of tip income, then most of the costs of the

Ordinance would be recouped and the wait

staff would benefit little from the Ordinance.

Tax Revenue Effects

Like the hotels, the asset value of restaurants

will decline if the Ordinance is passed because

of lower future economic profits due to higher

labor costs. The decline in the asset values of

restaurants will, in turn, lower property lease

rates as restaurants (because of reduced profits)

decrease their demand for Santa Monica prop-

erties. Because land owners have little opportu-

nity to substitute businesses that are unaffected

by the Ordinance (i.e., businesses out of the

Zone), land owners may in the long-run bear

much of the brunt of the Ordinance through

lower rents for properties. To the extent that

lower lease rates appear, the exit effects

described above will be moderated.

In any case, because property tax assess-

ment of properties occupied by restaurants

depend on lease rates or imputed lease rates

in the case where a restaurant owns its land,

the Ordinance will result in lower tax revenues

from properties occupied by restaurants.

Reprise

To summarize, we believe that the most

important effects of the Coastal Zone

Ordinance on restaurants will be (1) a reduc-

tion in employment from restaurants reducing

the scale of their operations; (2) a reduction

in employment from some restaurants leaving

the Santa Monica market; (3) a reduction in

employment by those 2 or 3 restaurants near

the $5 million revenue threshold; (4) a signif-

icant amount of substitution from poor, low-

skill workers to non-poor, high-skill workers;

and (5) a reduction in property tax revenue

due to lower lease rates, actual and imputed,

for restaurants. Any reduction in lease rates,

while lowering property tax revenue, will help

reduce the number of restaurants that leave

Santa Monica.

C. Major Retail


Major Retail in Santa Monica

Major retail in Santa Monica is composed of

three large department stores—Macy’s,

Robinsons-May, and Sears. These stores

serve both local residents and tourists, and

their strategic location near the interstate

draws residents from the entire Los Angeles

metro area to shop.


Because major retail stores in Santa Monica

compete for customers in the entire Los

Angeles metro market, they likely have little

leeway for raising prices, lest they lose a sub-

stantial number of consumers to other major

retail stores in the metro area. The policy of

at least one of these stores to match adver-

tised prices of competitors in the Los

Angeles area affirms the view that major

retail stores in Santa Monica are part of the

larger Los Angeles major retail market. We

conclude that the volume of major retail

trade and employment would change very

38

little from price increases, assuming there is

not a significant exodus of major retail

stores from Santa Monica.


There is little leeway for labor-capital substitu-

tion in major retail stores.

Exit Effects

The labor costs of the Ordinance will equal or

exceed the profit margin of the Coastal Zone

department stores. We believe that the com-

petitive nature of the major retail market in

Santa Monica already keeps profits near, if

not below, normal levels. We believe that the

absence of a financial cushion increases the

likelihood that one or more of the major retail

stores will leave in the wake of the

Ordinance’s implementation.


We would expect those stores that remain open

to upgrade their labor force, hiring the best-edu-

cated, most experienced workers. Again, the

least educated, least experienced workers—the

ones most likely to be poor—are the likely losers

of this labor-labor substitution.

Tax Revenue Effects

As with the other sectors, large retail firms’

asset value will decline in response to the

lower profits that higher labor costs guaran-

tee. The decline in the asset values of these

large retailers will, in turn, lower property

lease rates as large retailers (because of

reduced profits) decrease their demand for

Santa Monica properties. Because property

tax assessment of properties occupied by large

retailers depends on lease rates or imputed

lease rates in the case where a large retailer

owns its land, the Ordinance will result in

lower tax revenues from properties occupied

by large retailers.

Reprise

To sum up, we believe that the most impor-

tant effects of the Coastal Zone Ordinance on

major retailers will be: (1) a reduction in

employment from one or more retailers leav-

ing the Santa Monica market; (2) a significant

amount of substitution from poor, low-skill

workers to non-poor, high-skill workers; and

(3) a reduction in property tax revenue due to

lower lease rates, actual and imputed, for

major retailers.

D. Medium-Sized Retail


Medium-Sized Retail in Santa Monica

The market for medium-sized retail is concen-

trated on the Third Street Promenade, an out-

door mall in Santa Monica that has become a

popular destination for shopping and dining.

Medium-sized retail stores that will be affect-

ed by the Ordinance include bookstores,

clothing stores, and stores that sell household

goods. These stores serve both tourists and

Los Angeles metro area residents.

Scale Effects from Price Increases

Compared to large retailers, medium-sized

retail stores have more leeway to raise prices

because a larger share of their business is

made up of tourists, who are to some extent

‘captured’ customers. However, because many

of their customers are from the metro area

and they compete for these customers with

other Los Angeles metro retailers, Santa

Monica retailers risk losing these customers if


39


40

they raise prices too much. In addition, many

of the medium-sized retail firms operate

under ‘national’ prices—prices that are codi-

fied on a web site or in a mail order catalog.

Because many of these stores use national

pricing policies, we would expect very small

price effects.


There is little leeway for labor-capital substitu-

tion in medium-sized retail stores.

Exit Effects

Because the medium-sized retail stores benefit

from the high traffic volume on Third Street

Promenade, we suspect that these stores make

above normal returns during good economic

times. In our interviews during the summer of

2000, managers affirmed this conjecture by

indicating to us that their stores exceeded

usual corporate expectations. One could won-

der why Third Street Promenade property

owners, who control the access to this unique

property, are unable to capture these above

normal profits by increasing lease rates. It may

be that the medium retailers, dominated by

giants such as Gap and Abercrombie and

Fitch, have sufficient bargaining leverage to

split these economic rents (i.e., the above nor-

mal profits) with the property owners. What

the effect of the Ordinance will be on what

appears to be above normal profits of the

medium-sized retailers is unclear, but remains

crucial to determining whether some medium-

sized stores will leave as a result of the

Ordinance.


As with major retail establishments, we

would expect those stores that remain open

to upgrade their labor force, hiring the best

educated, most experienced workers. Again,

the working poor are the likely losers of this

labor-labor substitution, because they are the

least skilled.

Other Cost Avoidance Behavior

As is the case with all of the affected busi-

nesses, stores may reduce other benefits to

help pay for the higher wage costs (e.g., cloth-

ing discounts, retirement benefits, etc.).

Tax Revenue Effects

As with the other sectors, the asset value of

medium-sized retail stores will decline if the

Ordinance is passed because of lower future

economic profits due to higher labor costs.

The decline in the asset values of these medi-

um-sized retailers will in turn lower property

lease rates as medium-sized retailers (because

of reduced profits) decrease their demand for

Third Street Promenade properties. Because

property tax assessment of properties occu-

pied by medium-sized retailers depend on

lease rates, the Ordinance will result in lower

tax revenues from properties occupied by

medium-sized retailers.

Reprise

To sum up, we believe that the most impor-

tant effects of the Coastal Zone Ordinance on

medium-sized retailers will be: (1) substitution

from poor, low-skill workers to non-poor,

high-skill workers; and (2) a reduction in prop-

erty tax revenue due to lower lease rates, actu-

al and imputed, for medium-sized retailers.


41

Aggregated Economic Estimates forthe Coastal Zone Minimum Wage

To predict the effects of the Coastal Zone

Minimum Wage, one would ideally have

detailed financial information for each busi-

ness, as well as information about each busi-

ness’ elasticity of demand (i.e., each firm’s

sensitivity of product demand to price). As is

often the case in real world policy analysis,

ideal data are not available. Still, we believe

that the economic effects described in

Chapter Five stand on a solid theoretical basis

and that understanding the magnitude of

these effects is crucial to passing judgment on

the Ordinance. In this chapter, we attempt to

translate the theoretical and conceptual analy-

ses of Chapter Five into concrete estimates of

economic, financial, and social effects.

To estimate the concrete effects of the

Ordinance, we conducted eleven in-depth,

face-to-face interviews with businesses from

the different sectors in the summer of 2000,

which we supplemented with ten additional

interviews this year. We also mailed a survey

(see Appendix C) to all the businesses we

identified in 2000 as likely to be affected by

the Ordinance, receiving 30 detailed respons-

es by mail and through follow-up phone inter-

views. In the key sectors where we believe the

Coastal Zone Ordinance will have a real

impact on businesses (hotels, restaurants, and

retailers), we gathered information from over

half of the affected businesses. We asked

these businesses directly how they would

respond to the Ordinance. If someone

claimed they would respond a certain way

(e.g., close down), we then pressed for more

information about current profits, wage costs,

and estimates of Ordinance’s impact, to sub-

stantiate the claim. We evaluated these

responses, the available information, and

information about similar businesses to make

a judgment about the plausibility of the claim.

An obvious criticism of the empirical

methodology we employ is that each business

Chapter Six

Percent of Firms in Major Sectors Responding That the Following Steps were “Very

Likely” or “Somewhat Likely” in Response to the Original Coastal Zone ProposalTable 6.1


42

has an incentive to exaggerate their reaction to

the Ordinance. We do not doubt that such a

bias exists and that firm claims should be dis-

counted to some degree. We felt that face-to-

face interviews, and the independent informa-

tion we gathered, would be important in distin-

guishing realistic estimates from exaggerated

claims. What surprised us, however, was the

consistency of the responses within sectors. For

example, no hotel claimed it would shut down

because of the Ordinance but several restau-

rants claimed that they would shut down.

Similarly, hotel respondents usually did not

claim that they would increase prices in

response to the Ordinance but all of the restau-

rants claimed they would increase prices. What

came out of our interviews corresponded very

closely to what economic theory, as discussed

in Chapter Five, would predict. The interviews

and surveys, along with the economic theory,

enabled us to flesh out these predictions into

the estimates reported in this chapter.

A. Employment

Direct Effects

As we have discussed earlier, there are four

different ways that the proposed minimum

wage could affect employment levels in the

Coastal Zone:

It can cause firms to shut down, producing

layoffs of all current workers;

It can cause firms to raise prices to pay part

of the cost of higher wages, leading to a

decline in sales and partial layoffs;

It can cause firms to redesign or limit their

operations, so as to get their revenues below

the $5 million threshold; and

It can cause firms to economize on work

force size by shifting some functions from

lower-skill to higher-skill labor, or substituting

machines for labor.

Predicting whether any specific firm

would adopt some or all of these methods

to adapt to the higher minimum wage is, of

course, speculative. But our research on the

various sectors of the Coastal Zone econo-

my shows clear patterns in how businesses

think they will respond, and those patterns

are generally corroborated by other research

and economic theory. Table 6.2 summarizes

the patterns of response we think are most

likely within each sector. While any given

prediction might prove incorrect, the esti-

mates in the aggregate are more powerful

and reliable. Below, we summarize our pre-

Significance of Likely Job LossTable 6.2

dictions for each sector and then summarize

the aggregate predictions.

Hotels

Because we do not expect hotels to increase

prices or relocate, we think the employment

losses in the hotel sector will be small. We do

however believe that there will be some

employment losses as hotels reduce staff by

requiring more of existing workers (86% of

surveyed hotels claimed they would require

more effort from workers) and by hiring

workers that are more productive. We esti-

mate conservatively that employment in the

hotel sector will decline by 2% to 5%. This

estimate is admittedly speculative but seems

safe to us, given that the new work force

composition after the effects of labor-labor

substitution should be significantly more pro-

ductive. Assuming a 2% to 5% decline in

employment implies a loss in the hotel sector

of 40 to 110 jobs. We also note that the hotels

we interviewed self-reported they would lay

off in excess of 130 workers, so that our esti-

mate considerably discounts the claims of

hotels we interviewed.

Department Stores

Based on our interviews, we believe that it is

very likely that two of the three department

stores in and around Santa Monica Place will

close as a result of the Ordinance. This judg-

ment is based on a discussion with store man-

agers of their operating numbers and the

impact of the Ordinance on wage costs and

operating profits. Given the competitive envi-

ronment in which these stores operate, and

the fact that the chains of which they are a

part set prices on a metropolitan or national

scale, not locally, we do not believe that the

department stores can raise prices. These

stores are also quite concerned about the

effect of having much higher wages at their

Santa Monica operations than in other Los

Angeles stores. These closures may not occur

immediately, but they are very likely to occur

within a few years of the Ordinance’s imple-

mentation, at a loss of approximately 600

jobs. The closure of these stores could, of

course, have a domino effect on the rest of

Santa Monica Place. The shopping center has

been more marginal than its Westside com-

petitors for years, and anchors are probably

indispensable for its viability. Whether new

anchors might be lured to the stores, or rents

reduced enough to keep the existing tenants,

is hard to assess.

Restaurants

Our interviews with restaurant owners indi-

cated that the restaurant sector would be one

of the hardest hit sectors because a large pro-

portion of their serving staffs are at the cur-

rent minimum wage, so that the wage costs

for these employees would double. Based on

our discussion with restaurant owners of their

current financial situation and the financial

impact of the Ordinance, we believe that sev-

eral partial or complete closures are likely.

Several other restaurants plan to engage in

labor-labor substitution—specifically, increas-

ing the number of high-skill workers (e.g.,

waiters) to replace a larger number of low-skill

workers (e.g., busboys). Overall, we expect

that somewhat more than 25% of the jobs at

the regulated restaurants—a total of about 300

jobs—will disappear, and we consider this esti-

mate conservative. Note that 73% of the

restaurants in our surveys reported that they

would move or shut down if the Ordinance


43


44

were passed. So again, our estimate substan-

tially discounts what restaurants actually

reported they would do.

We are conservative in estimating restaurant

losses for two specific reasons. First, we think

that a number of restaurants will deal with the

increased costs of the Ordinance in part by

establishing a 15% or 18% service charge and

eliminating tipping. Second, restaurant losses

will be lower if the general economic hit in the

Coastal Zone substantially lowers prevailing

lease rates—a real possibility.35 Reduction in

restaurant operating income is absorbed by

lower lease rates, which, as we discussed earlier,

is a real possibility.

Medium-Sized Retail

As we discussed earlier, our judgment is that

medium-sized retail firms are quite healthy

overall. Still, most of their work forces would

be affected by the Coastal Zone Minimum

Wage, and we expect that several stores now

making at least normal profits will start losing

money under the Ordinance. Because these

stores generally have little leeway to increase

prices, we predict that several of the medium-

size retailers will either leave because of the

Ordinance, or curtail operations enough to

fall under the $5 million revenue limit. The

smaller stores within this group are particular-

ly vulnerable because these stores probably

have less bargaining power in negotiating

lease rates. We predict that perhaps one or

two of these stores might leave if the

Ordinance were to pass, reducing employ-

ment by roughly 15%, or about 200 jobs.

We should note, however, a weakness in our

analysis. The makeup of covered retail firms

changed some between the Coastal Zone pro-

posal and the Ordinance actually enacted.

While we have studied in detail the conse-

quences of the other changes that occurred in

revising the Ordinance, we have not conduct-

ed case studies of several of the new medium-

sized retail brought under the revised

Ordinance, including Santa Monica Bank,

movie theatres in the Promenade, the Whole

Foods Market, and Toys ‘R Us. We think the

impact on these businesses will be similar, and

in some cases more severe than the impact on

the retail firms we have studied (such as

Barnes & Noble and Gap). But we have

assumed that the overall effects on this sector

will be essentially the same as those we meas-

ured for our 2000 edition.

Overall Employment Effect

We predict that overall the Coastal Zone

Minimum Wage would bring the loss of at

least 1,140 jobs in the Coastal Zone—most of

them formerly low-wage jobs affected by the

new minimum wage. Some job losses might

be avoided if property values (and thus the

fixed costs of businesses) fall sharply. But as

we discuss in the next section, a fall in prop-

erty values large enough to reduce these

employment effects is wrought with problems

of its own—namely, a decline in property tax

revenue over time. But even ignoring the pos-

sible offsetting effects of a decline in lease

rates, the loss of 1,100 jobs is a more modest

impact than one might predict for such a dra-

matic regulation; in many other contexts, a

local minimum wage that nearly doubles the

minimum wage prevailing in surrounding

communities could lead to a virtual wipeout

35. Of course, if lease rates fall, so will property taxes, thus shifting more of the cost of the Ordinance to the public

at large. We return to this later in the chapter.


45

of local business. The Coastal Zone is

buffered by the fact that most of its economy

is built around the unique and very attractive

environment of Santa Monica. Nonetheless,

the loss of 1,100 or more jobs is enormously

important to the holders of those jobs, and,

by itself, arguably negates the likely benefits of

the Ordinance.

Indirect Effects

Workers who lose their jobs in the Coastal

Zone would, in most cases, seek new employ-

ment elsewhere in Los Angeles. We will call

this non-Coastal Zone labor market the “sec-

ondary” market. Even in a period of relatively

low unemployment, the supply of jobs in the

secondary market is, of course, limited. The

former Coastal Zone employees compete

with current job holders, and other job seek-

ers, for these limited jobs. The predicted eco-

nomic effect of this competition is twofold.

Wages in the secondary market will fall, as

employers find it easier to fill positions and

replace lost workers. At the lower available

wages, some job seekers will not accept posi-

tions in the secondary market, preferring to

rely on other family members for support,

seeking further training, or waiting for new

job opportunities.

The wage decline from 1,100 or more new

entrants into the secondary market can be sig-

nificant, within the specific workplaces the

job-hunters seek out. Given the vastness of the

Los Angeles labor market, however, these

wage effects would not be detectable in gen-

eral economic statistics for the region. More

concrete are the long-term job losses of those

who are unable to find new jobs in the sec-

ondary market, or who withdraw from the

labor market because of the lower wages.

Based on a similar economic analysis we con-

ducted for the City of Los Angeles,36 we can

roughly estimate that a one-third of the job

losses in the Coastal Zone (that is, nearly 400

jobs) will remain as long-term job losses, after

all secondary market searches have played

themselves out.

B. Profits, Property Values, andProperty Tax Revenues

As we have seen, the massive transfer effects

of the Coastal Zone Minimum Wage will

cause some businesses to shut down, some to

raise prices, some to reduce employment, and

others to make other adjustments, all aimed at

minimizing disruptions to their business. If a

business cannot do any of these things, or to

the (very large) extent that adjustments do not

offset the costs of the Ordinance, firms will

end up absorbing the costs—that is, their prof-

its will go down.

As we discussed in Chapter Five, the impact

on profitability is fairly clear in three of the

four sectors we studied. For hotels, profits

will tend to fall by one-fourth to one-third. For

restaurants, the costs of the Ordinance equal

from 70% to 120% of current profits—mean-

ing that the restaurants will take more drastic

actions (partial closures, complete closures, or

other avoidance strategies) to cope. For the

department stores, Ordinance costs are about

equal to or greater than operating profits,

which is why two of the three have indicated

36. E. Douglass Williams and Richard Sander, An Empirical Analysis of the Proposed Los Angeles Living Wage

Ordinance (Los Angeles: City of Los Angeles, 1997), 34-40. In this analysis, we assume that the elasticity of labor demand in

the “uncovered” market is 0.5, and the elasticity of labor supply is 0.2.


46

they will close down relatively soon. In the

fourth sector—medium-sized retail—the effects

are substantial, but too varied to generalize.

One effect of falling profits would be some

damage to the image of the Coastal Zone as

an appealing place to do business—the so-

called “Business Climate” effect. (More on

this in a moment.) A much larger effect of

falling profits, however, is upon property val-

ues. Consider a hotel that sits on its own land,

and has net operating profits of $6 million per

year. The value of the hotel is essentially the

capitalized value of its expected profit stream.

Put simply, investors will judge what they are

willing to pay for such a hotel based on how

much they think the hotel will earn in the

future. In a stable or growing business cli-

mate, a $6 million annual profit would trans-

late into something like an $84 million value.

If the Coastal Zone ends up (after adjust-

ments are made) costing the hotel an addi-

tional $2 million per year, then profits fall to

$4 million and the hotel’s market value falls to

$56 million.

The story varies slightly if a business leas-

es the land on which it operates. Suppose

that a restaurant with a five-year lease sees

its profits fall from $700,000 to $200,000.

The restaurant may decide that this profit is

not sufficient recompense for its investment,

and it may move, or cut operations, or rene-

gotiate its lease. Regardless of the choice

made, the demand for the property on

which the restaurant sits will fall, unless

other businesses that will not face similar

losses are waiting to jump onto the space.37

To the extent that businesses in the Coastal

Zone end up bearing the costs of the

Ordinance through lower profits, property val-

ues will fall. The effect is not trivial. We esti-

mated in Chapter Two that the wage, benefit,

and ripple effects costs of the Coastal Zone

Ordinance would be, in the short-term, in the

neighborhood of $49 million. To estimate

roughly, perhaps one-third of this might be

offset through employment losses, business

closures, and higher prices. This would leave

a $33 million effect on the operating incomes

of businesses in the Zone. Capitalized, this

implies a $400 to $500 million hit to proper-

ty values in the Zone.38

A $400 to $500 million drop in property

values has two dramatic effects on Santa

Monica. First, it mitigates the Business

Climate effect. New businesses that might

have avoided the Coastal Zone’s high wages

are nonetheless attracted by much lower real

estate prices in the Zone. If a business can

operate in the Zone without falling under its

minimum wage and benefit provisions, and if

the Coastal Zone retains much of its current

cachet as a fashionable, exciting, and busy

place, then that business will consider the

Zone seriously. One would expect to see, over

time, businesses that are not covered by the

Ordinance replace those businesses that are.

The second dramatic effect is upon prop-

erty tax collections. A $400 to $500 million

drop in property values will affect some

assessed valuations immediately. For many

37. This might happen to some extent in the Coastal Zone, since the Third Street Promenade has experienced rising inter-

est from high-end retailers. But it seems unlikely to offset these very large effects on the operating profits of existing businesses.

38. In our discussions with business operators, senior assessors with the County of Los Angeles, and hotel industry

analysts, there was general agreement that the ratio of business value to annual net operating income, but for businesses in the

Coastal Zone, was in a range of 10 to 14, with the higher figure applying to businesses with lower risk.


47

others, reassessment will occur only after

the business changes hands (due to

Proposition 13).39 But the long-term out-

come seems clear. Property tax revenues will

fall $5 to $6 million below the levels that

would otherwise exist. Since 36.5% of every

property tax dollar comes back to the City

of Santa Monica, the Santa Monica/Malibu

Unified School District, and the Santa

Monica Community College District, this

translates to a roughly $2 million hit each

year in local government income. The rest of

the property tax loss affects the County of

Los Angeles, its services (and service recipi-

ents), and taxpayers throughout the county.

It should not surprise us very much that

much of the ultimate cost of the Coastal Zone

Ordinance falls on landowners. Since the

Ordinance ties increased burdens to business-

es on the land, and the land is (of course)

completely immobile, landowners would

absorb the greatest hit. But since landowners

are a major source of revenue for Santa

Monica through the property tax, the effects

are ultimately felt more widely.

The other large tax effect on local govern-

ments comes through the loss of sales tax rev-

enues. Though some firms will increase

prices, thus raising sales tax revenues, this will

be much more than offset by partial and total

business closures. Total sales at Coastal Zone

businesses are likely to fall by more than $100

million, net, with a sales tax revenue loss thus

exceeding $8 million. At this writing, our data

on this point is not solid enough to make spe-

cific findings, but the impact on local govern-

ment revenues from the sales tax impact is

probably in the same neighborhood as the

impact from falling property taxes. Setting this

sales tax impact aside, the combined effect of

direct City costs to implement the Ordinance

(including its “living wage” costs) and local

revenue losses from falling property taxes, will

be close to $5 million.

39. Proposition 13 limits local property tax rates to 1% of assessed values (except for specially approved assessments)

and limits the appreciation of assessed values to 2% per year. Land that is under the same ownership for a long period of time

in a period of inflation tends to tax at a rate much less than 1% of its current market value. See Joel Fox, “Proposition 13: A

Look Back,” available from http://www.hjta.org/content/arc000024b_prop13.htm, (accessed 11 October 2002); and Kirk Stark

and Jonathan Zasloff, Tiebout and Tax Revolts: Re-examining the Role of School Finance Reform (Presented at the ALEA

Conference, May 2001).


48

Beneficiaries of the Higher Wage

Supporters of the Coastal Zone Minimum

Wage believe it will effectively reduce poverty in

Santa Monica and elsewhere by redistributing

income and targeting many of the poorest

workers in Los Angeles. We contend, in con-

trast, that the wage and benefit mandates of the

City’s Ordinance are very poorly targeted and

will have little or no effect on poverty. Although

the harmful effects of the Ordinance, in terms

of job losses and lower economic output, will

be felt across the board, most of the beneficiar-

ies will be middle-income workers from middle-

income families.

A. The Targeting Problems of theCoastal Zone Minimum Wage

It has long been recognized that a minimum

wage is a blunt instrument for attacking pover-

ty. Millions of workers in the United States have

jobs at or close to the minimum wage, but many

of them are teenagers and most are not their

family’s primary wage earner. In 1996, when

Congress last increased the national minimum

wage, over 40% of workers who made less than

$7.50 per hour lived in households or families

with incomes above the national median, and

only about 20% lived in poor households.40

Thus, most of the higher income that comes

from the periodic national increases in the min-

imum wage does not go to the families below

the poverty line, or even to families in the bot-

tom fifth of the income distribution.

This poor correlation between low-wage

workers and low-income households is the rea-

son why economists generally regard minimum

wage increases as a poor strategy for reducing

poverty. In a recent survey of labor economists,

69% of the respondents described a living wage

policy as “not at all efficient” as a strategy for

reducing poverty; 7% described the living wage

as “very efficient.” 41

Even the distributive weaknesses of a con-

ventional minimum wage, however, pale in

comparison with the distributive flaws in the

Coastal Zone Minimum Wage. With an

increase in the minimum wage, as we noted

above, 20% of the beneficiaries might belong

to poor households, assuming that unemploy-

ment effects are small. For the Coastal Zone

Minimum Wage, however, the proportion of

benefits going to poor households is much

smaller—less than 5% (see Table 7.7 and

accompanying text). It is literally the case that,

despite a cost in the neighborhood of $49 mil-

lion, the Coastal Zone Minimum Wage trans-

fers money to the poor less effectively—actual-

ly, much, much less effectively—than would a

random drop of $49 million per year over the

Los Angeles metropolitan area from helicop-

ters. The Coastal Zone Minimum Wage is

mostly a mechanism for transferring money to

the middle and upper-middle class.

There are a number of reasons for this per-

Chapter Seven

40. Williams and Sander, An Empirical Analysis of the Proposed Los Angeles Living Wage Ordinance, 44, based on

1996 CPS data.

41. The Survey Center, University of New Hampshire, The Living Wage: A Survey of Economists (Washington, D.C.:

Employment Policies Institute, 2000).


49

verse effect. First, many low-wage workers are

teenagers and secondary workers and do not

belong to poor households. Second, the wage

and benefit threshold for the Coastal Zone

Minimum Wage is nearly twice as high as for

the California minimum wage, and therefore

all workers with wages between the $6.75 per

hour minimum and the $12.25 per hour

Coastal Zone threshold will get wage and/or

benefit increases. If only a fifth of employees

earning $6.75 per hour are poor, the propor-

tion is much lower still for workers earning

$9.00, $10.00, or $11.00 per hour.

Third, the Coastal Zone Minimum Wage

makes no special provision for employees who

earn most of their income from tips.

Throughout the Coastal Zone, there are about

1,600 workers who are covered by the

Ordinance but who earn most of their income

from tips: waiters, busboys, hotel servers,

parking lot attendants, and others. (See

Sections 7-B and 7-C.) Nearly all of these

workers are paid the California minimum

wage as a “base” by their employers (and then

earn anywhere from $5.00 per hour to $35.00

per hour in tips); nearly all of these workers

will receive the maximum wage increase under

the Coastal Zone Minimum Wage. Our analy-

sis in Chapter Three shows that between 42%

and 46% of the wage increases mandated by

the Ordinance will go to these tipped employ-

ees. Although there are many waiters and wait-

resses in America who have low incomes,42

the makeup of tipped employees in the

Coastal Zone is far more affluent. We esti-

mate their median income to be approximate-

ly $39,000 per year. (See Section 7-E.)

Fourth, there is a very large “ripple” effect

on higher-wage workers. We pointed out in

Chapter Four that even workers making more

than $13 per hour today are likely to require

significant raises once all lower-wage workers

are brought very close to the high-wage work-

ers’ level of compensation. We estimated in

Chapter Three that this cost will amount to

roughly one-third of the wage and benefit

increases resulting from the new law.

Effectively none of these “ripple effect” bene-

ficiaries are poor. (See Section 7-F.)

Fifth, the truly low-wage jobs in the Coastal

Zone—those held by workers earning $6.75

per hour to $8.50 per hour, without tips—are

those for which employers will have the

strongest incentives to hire new, higher-skill

employees, once the employers are required

to pay $13.00 per hour for wages and benefits

to those jobholders. This “labor-labor substi-

tution” effect means the actual composition

of workers will steadily change, and shift to

workers with more experience, more educa-

tion, better English skills…and more middle-

class backgrounds. (See Section 7-G.)

Finally, there are intrinsic inefficiencies in

any redistribution program; if we increase the

income of low-income workers, their taxes go

up and income-based benefits they receive

may go down. From a societal perspective,

this is not a very cogent argument against the

Coastal Zone Minimum Wage, because the

nation benefits if low-income workers experi-

ence enough of an increase in wages to pay

higher taxes and receive fewer government

transfers. But from the perspective of Santa

Monica’s citizens, the replacement of federal

transfers like the EITC with local transfers is

self-defeating. Moreover, these effects are rel-

42. See, for example, Barbara Ehrenreich, Nickel and Dimed: On (Not) Getting By in America (New York:

Metropolitan Books, 2000).


50

evant to understanding how much low-income

workers will ultimately benefit from the

Ordinance’s mandates. If there is a silver lin-

ing in the Coastal Zone Minimum Wage, this

is it: few government benefits will be lost

since so few of the beneficiaries are poor. (See

Section 7-I.)

In this chapter we analyze these distribu-

tional effects, and explain the basis for our

quantitative conclusions.

B. The Household Incomes of Low-and Moderate-Wage Workers

It seems intuitive that low- and moderate-

wage workers would tend to have lower

household incomes than the population as a

whole, but the intuition is wrong. In Table

7.1, we compare the distribution of house-

hold incomes for Los Angeles County as a

whole with a random sample of workers

earning between $6.75 per hour and $10.50

per hour in Los Angeles County.43 If the dis-

tribution of income for low- and moderate-

wage LA workers were exactly the same as

the population of Los Angeles workers as a

whole, each of the cells in the third column

of Table 7.1 would read ‘10%’. In examining

the third column, we can see that the match

isn’t perfect. Low-income workers are under-

represented at the bottom of the income dis-

tribution (which is mostly comprised of non-

workers, including retirees) and the top.

Nonetheless, the match is surprisingly close.

Distribution of Low-Wage Workers by Household Income Decile, Los AngelesTable 7.1

43. It would be justifiable to use $12.25 per hour as the wage cutoff, since it seems likely to us that most employers

will end up at this threshold (see Chapter Two), but throughout this chapter we will use conservative assumptions.


51

Fifty-one percent of the low-wage workers

are in the top half of the income distribu-

tion; 49% are in the bottom half.

The story is much the same if we consid-

er poverty rates rather than income levels.

The advantage of using “poverty status” as a

measure of need is that the CPS and the

Census take into account the size of a house-

hold—a single worker with an income of

$17,000 is not “poor”, but a family of four

is. The CPS data reveal that the proportion

of these low- and moderate-wage workers

below the poverty line is 16.5%, while the

poverty rate for the entire Los Angeles

County population was measured at 17.9%

by the 2000 Census. In other words, low-

and moderate-wage workers have a lower

poverty rate than the population in general.

Households below the poverty line are much

more often poor because they work sporad-

ically or not at all—due to unemployment,

advanced age, disability, or other problems.

This analysis, then, shows that even if the

Coastal Zone Minimum Wage gave wage

increases only to workers making less than

$10.50 per hour, if none of them would be

displaced or unemployed, if there was no rip-

ple effect problem, if no high-income tipped

employees were covered—even if all of these

conditions were satisfied, the Ordinance

would help the poor no better than a program

of randomly distributed benefits.

C. The Family Role of Low-Wage Workers

The most important reason why the catego-

ry of “low-wage workers” is not equivalent

to “low-income families” is because low-

wage workers are rarely the sole, or even the

principal, source of income for a family.

Proponents of the Coastal Zone Minimum

Wage (as well as the Santa Monica City

Council and more generally, advocates in

the living wage movement) portray a world

in which the typical low-wage worker is sup-

porting a family, usually a family of four that

includes children. The “living wage” itself

should be set, the advocates argue, at a high

enough level so that the wage-earner can

support a family of three or four (and this

level is variously set at $9.00 per hour,

$12.25 per hour, or $20.00 per hour).

The image is wildly at odds with the actual

demographic data on low-income workers.

Suppose we consider the universe of workers

making less than $10.50 per hour (in 2001 dol-

lars), and exclude workers who work part-time

or are under the age of 17. What proportion of

the remaining workers—that is, adults who work

full-time or close to full-time—are the sole source

of support for a family of three or more that

includes children? The answer is not 70%, not

50%, but 4.7%. If instead of counting just those

who are the sole breadwinners for their family,

and include all workers who are the primary

(more than 50%) income-producers for their

families, the proportion rises to 14.6%. If we

consider only those occupations that are heavily

represented in the Santa Monica Coastal Zone,

the proportion of low-wage workers who are the

sole source of support for a family of three or

more is 5.5%; the proportion who are the pri-

mary source of income for their family is 15.3%.

These figures, and greater detail for specific

occupations, are reported below in Table 7.2.

If one contemplates these numbers, it

should no longer be a mystery why low-wage

work and poverty are so poorly correlated.

Only one adult low-wage worker in seven (in

Los Angeles County) is the primary source of


52


support for a family that includes children. Six

out of seven such workers either live alone, or

live with at least one other person who earns

more, or live in households without children.

D. Hotel Maids and the CoastalZone Minimum Wage

The rhetoric of SMART and other advocates of

the Coastal Zone Minimum Wage has focused

heavily on hotel maids. The stories of individual

hotel maids at Santa Monica hotels, and the

hardships they face in their personal lives, are

cited by many advocates as perhaps the most

compelling single reason for supporting the

Ordinance. The stories are compelling, but the

emphasis seems misplaced, for two reasons.

First, hotel maids make up a tiny percentage

of the persons affected by the Ordinance. As

Table 3.1 shows, the staffs at hotels make up

about one-quarter of the 8,000 employees who

work at covered firms. At several hotels we

examined, maids and other cleaners consistent-

ly made up one-seventh of hourly employees at

these firms, and about one-tenth of all workers

(including salaried employees). In other words,

there are no more than 250 hotel maids and

janitors at the firms covered by the Ordinance

(and probably closer to 200)—about 3% of all

workers, and perhaps 5% or 6% of those who

would receive pay or benefit increases.

Second, hotel maids and other cleaners at the

hotels are already paid wages close to, and

sometimes in excess of, the Coastal Zone

Minimum Wage. Based on our own survey of

many of the hotels covered by the Ordinance,

hourly earnings of maids range from $8.75 per

hour at midrange hotels to $10.75 per hour at

several of the luxury hotels. It is possible that

some maids in the Coastal Zone make less than

we found in our surveys, but we are confident

that the median wage is at least $9.75 per hour.

The hotel cleaners are not, therefore, minimum

wage workers, and they stand to gain relatively

little from the new wage mandates.44

Economic and Household Role of Low-Wage Workers in Los Angeles County, 1990Table 7.2

44. Room maids also receive some tip income—typically from $1.00 to $2.50 per hour, in the hotels we examined. Because

this is such a small proportion of their income, we do not treat them as “tipped” employees, and we have not counted this income

as part of their hourly wage. This means, however, that the wages described in the text understate actual incomes.


53

Just how much of the higher wages man-

dated by the Ordinance would go to hotel

maids and janitors? Either of the cost scenar-

ios we developed in Chapter Three can be

used to calculate the transfer; to keep the cal-

culation simple, we will use Scenario Two

here, which assumes that all employers will

pay the $10.50 hourly wage and provide

health benefits. If we reasonably suppose that

the average maid’s and janitor’s wage is $9.75

per hour, and that all of these workers are full-

time, then the 200 to 250 hotel maids and jan-

itors covered by the Ordinance would receive

aggregate wage increases of from $300,000 to

$350,000 per year when the mandate goes

into effect. This represents 1.4% to 1.6% of

the roughly $22 million in mandated higher

wages that all covered employers would pay. If

we took into account health benefits and the

ripple effect, increases going to hotel maids

and janitors would make up around 1% of the

Ordinance’s total cost.

For all of these reasons, it seems to us high-

ly misleading to view hotel maids as represen-

tative of the Coastal Zone Minimum Wage’s

beneficiaries.45

E. The “Tipped Income” Effect

As we discussed in Chapter Three, between

32% and 36% of the workers covered by the

Ordinance receive a substantial proportion of

their income (that is, over 40%) from tips.46

This includes about 900 workers at hotels (such

as waiters, porters, valet parking, and banquet

staff) and about 700 workers at restaurants (pri-

marily waiters, servers, and bus staff). In the

United States as a whole, a very substantial pro-

portion of workers who live on tips just get by.

Tipped workers are often exempt from the min-

imum wage or covered by a lower wage, and

tips in many jobs are only a few dollars per

hour. In California, tipped employees generally

do better, since none are exempt from the

statewide minimum wage of $6.75 per hour and

are legally protected in retaining their own tip

income. In the Coastal Zone, there is a good

deal of variation in the income of tipped work-

ers, but most do very well. To determine the

income of tipped employees in firms covered by

the Ordinance, we gathered data on a variety of

hotels and restaurants that represent different

market tiers. Many of these firms keep detailed

data on tips for purposes of withholding taxes;

some of this data comes from credit card

receipts but much of it is self-reported by the

employees themselves and therefore tends to

underestimate actual income.

Note that all of the estimates below assume

an average workweek of 36 hours. There is in

fact a lot of variation in the workweeks of

tipped employees (especially waiters); many

are pursuing other jobs and careers while

working as a waiter or bartender.

• At the high-end hotels, which account for

60% of the covered hotel employees under

the Ordinance, tipped employees earn from

45. As we saw in the previous section, more than 80% of maids in general do not live in families for which they are

the principal breadwinners.

46. The percentage varies depending on which of the two scenarios from Chapter Three we use, which project dif-

ferent total numbers of covered employees (4,400 vs. 5,100). In both scenarios, all tipped employees are covered since all tips

are exempt from wage calculations.


54

$25,000 to $80,000 per year, depending on

position. The median income is approxi-

mately $45,000; the mean is over $50,000.

• At other covered hotels, which account

for 40% of the covered hotel employees

under the Ordinance, tipped employees

earn from $20,000 to $40,000 per year,

depending on position. The median

income is approximately $26,000 and the

mean is only slightly higher.

• At high-end restaurants, which make up

about half of the covered restaurants and

about half of the covered restaurant work-

ers, there are four important classes of

tipped employees: waiters, bartenders,

servers, and bussers. The first two sets of

jobs are highly coveted and very lucrative;

median earnings (including base wage) are

about $60,000 per year. Servers and bussers

generally receive a fixed slice of the service

tips left by customers; their median income

at these restaurants is about $28,000.

• At the mid-range restaurants, who make up

the other half of the covered pool of restau-

rants, tip income is substantially less. Full-

time waiters and bartenders have median

incomes around $35,000; servers and bussers

have median incomes around $17,000.

If we put these snapshots together into an

integrated picture of the covered tipped

employees, the overall wage distribution looks

like Table 7.3.

It should be clear from this table and from

the preceding discussion that there is not a “typ-

ical” income for the tipped workers in the

Coastal Zone. The income varies widely, from

bellboys and mid-tier restaurant bussers to ban-

quet captains and high-end restaurant waiters.

But most of these employees do very well. The

overall median hourly earnings of $18.75 are far

above the median hourly earnings of everybody

who works for a living in Los Angeles County.

Overall, about two-thirds of the tipped workers

earn more than the median hourly earnings of

all Los Angeles County workers.

Of course, as we have seen, worker earnings

are generally less than household incomes,

since workers usually live with other workers.

The household income of workers with earn-

ings equivalent to the typical Coastal Zone

Economic and Household Role of Low-Wage Workers in Los Angeles County, 1990Table 7.3


55

tipped employee is very high; we estimate a

median income of about $65,000.47 A majori-

ty of the tipped workers in the Coastal Zone

are very affluent.

The biggest irony in the “tipped worker”

problem, however, is not that tipped workers

outnumber hotel maids and janitors many-fold,

or that the tipped workers are generally afflu-

ent; it is that the tipped workers consistently get

the biggest wage increases under the

Ordinance. Since over 90% of the tipped work-

ers get a base wage that is pegged to the

California minimum wage, they will over-

whelmingly receive the maximum increase pos-

sible under the Ordinance (under Scenario

Two, with all workers receiving the mandated

health benefits, all tipped workers will receive

wage increases to $10.50 per hour.) We noted

in the last section that the typical hotel maid

covered by the Ordinance would receive an

increase of 75 cents per hour in hourly wages.

Tipped employees, in contrast, will receive an

hourly wage increase of $3.50 per hour.48 With

approximately 1,600 tipped positions, whose

hours average about 90% of a full-time position,

this adds up to an annual transfer of $10.1 mil-

lion in wage increases to the tipped workers—

over 45% of the total wage increases under

Scenario Two, or about 30 times the wage

increases going to hotel maids and janitors.

F. The Beneficiaries of the Ripple Effect

As we discussed in Chapter Three, just under

one-third of the total cost of the Ordinance

comes from the so-called ripple effect—that is,

the wage and benefit adjustments employers

must make after meeting the Ordinance man-

dates to preserve fairness and an incentive struc-

ture within their firms. Some of this effect ben-

efits employees who, before the Ordinance,

earn less than $10.50 per hour but more than

other co-workers who will be raised to the

$10.50 or $12.25 minimums. But under the

most plausible assumptions about how employ-

ers will adapt to the Ordinance, most of the rip-

ple effect will pay for wage and benefit increas-

es for about 1,600 workers who are not direct-

ly covered by the Ordinance at all—workers who

make between $12.25 and $17.75 per hour, and

whose pay and benefits go up because of the

large increases going to co-workers with less

experience or less responsibility.

The distributional consequences of the rip-

ple effect are harder to dramatize than the

effect on tipped workers, because the ripple

effect is more complicated and harder to pre-

dict in individual cases. But in general its

effects are similar to the tipped-worker prob-

lem. In the overall range of workers making

between the minimum wage ($6.75 per hour)

and the highest wage we think will be affect-

ed by the ripple effect ($17.75 per hour), the

effect is biggest on workers in the middle of

this range ($12.25 per hour), and it dribbles

out towards the low end and the high end.

While an employee earning $12.25 per hour is

slightly below the average hourly wage of all

Los Angeles workers, almost none of the

$12.25 per hour workers are poor or live in

households that are even close to the poverty

47. We estimated this by tabulating the income distribution of workers earning what tipped employees in the “mid-

dle” of Table 7.3 earn ($17.50 to $19.99 per hour). Only 1% of these workers had incomes in the bottom half of the Los Angeles

household income distribution.

48. This of course means that the median earnings of the covered, tipped workers, post-Ordinance, will climb from

$18.75 per hour to $22.25 per hour, or over $45,000 per year.


56

line. (See Table 7.4) Essentially none of the

enormous ripple effect cost, consequently,

will assist low-income families.

G. The Labor Substitution Effecton the Intended Beneficiaries

Up to this point, our consideration of who

would benefit from the Ordinance has

assumed that all of those currently holding

jobs covered by the Ordinance would contin-

ue to do so after the wage increases went into

effect. This is not likely to be the case. First,

as noted in Chapter Six, a substantial number

of the current jobs in the Zone would proba-

bly disappear. Though we believe that most of

these workers will find other employment, not

all would, and those who do are more likely

to move down rather than up in the income

distribution.

Second, and more importantly, a wage

increase of this magnitude would prompt

employers to change hiring practices substan-

tially. Workers who accept jobs for $6.25 per

hour to $7.00 per hour have very different skill

sets than workers who make $10.50 or $12.25

per hour. How these skills vary depends on

the type of labor one is considering, but

greater experience, greater skill, more educa-

tion, and stronger English language skills tend

to go up as wages go up. This effect, known

as the “labor-labor substitution effect”, means

that a big mandated increase in a minimum

wage will change the hiring and evaluation

practices of employers, more or less in direct

proportion to the size of the wage increase.

This is one of the key ways that a govern-

ment-mandated minimum wage increase has

very different effects from a wage increase

negotiated by a union and a business firm. In

the union context, strong protections exist to

insure that those who bargain for wage

increases are the actual beneficiaries of the

higher wages. With a mandated minimum

wage increase, no such protections exist.

How much would higher-skill employees

replace current workers? Nearly all of the

employers with whom we talked understood

very clearly that the pool of workers com-

peting for jobs at their businesses would

change substantially if the Coastal Zone

proposal were to become law. Employers

Household Income Distribution of Principal Beneficiaries of the Ripple EffectTable 7.4


57

told us consistently that however else their

operations might change, they would cer-

tainly take advantage of the new pool to hire

“better” workers.49 Most also indicated that

they would hold existing employees to high-

er standards, replacing those who did not

measure up.

It is very difficult to quantify the exact size

and speed with which the labor-labor substi-

tution effect occurs, chiefly because there

have been few instances where wage rates

have suddenly jumped more than 50%, and

no instances where such jumps have been

carefully studied by labor economists. Experts

in personnel development can testify to both

obvious and subtle differences in the pools of

applicants that will respond to ads for jobs

paying $7.00 per hour, $11.00 per hour, or

$15.00 per hour. Some differences can be

objectively measured, such as applicants’ level

of education, degree of English proficiency,

and years of experience; others cannot be eas-

ily measured, such as motivation, seriousness

of interest in a job, quickness, and “people

skills”. Economic theory predicts that if we

could accurately measure all of these charac-

teristics, there would be virtually no overlap

between the pools of labor available at differ-

ent wage rates, since higher-skill people will

move into higher wage rate pools. In practice,

however, there are many ways that the labor

market is sticky and does not give each work-

er their “market” wage. Some workers are geo-

graphically restricted and live in markets

where only a few types of jobs are available;

sometimes positive qualities of workers, such

as loyalty, lead them to stay at low-paying jobs

even when their skills and experience have

made them competitive for higher-paying jobs;

sometimes workers are steered into lower-pay-

ing jobs because of racial discrimination or

superficial characteristics (e.g., language

accent) that lead employers to underrate their

actual ability. Thus, one employer we spoke to

identified several workers making under $7.50

per hour who, “are good, hard workers and,

frankly, worth $10.50 per hour.” We suspect

the same is true in greater or lesser degree at

many Coastal Zone businesses—though not at

all; some managers emphasized to us that they

aggressively promote workers through the

ranks as they gain skills and experience

“because if you don’t, you risk losing them.”

One simple method for assessing the extent

of labor-labor substitution is to compare the

demographic characteristics of workers within

the same occupation who fall within different

wage ranges. Government surveys do not col-

lect data on job skills, but they do collect data

on such characteristics as educational levels,

age, and English fluency. If workers who make

over $10.50 or $12.25 per hour differ in these

objective ways from workers whose wages are

close to the minimum wage, then one might

expect to see similar changes in the Coastal

Zone work force after the Ordinance goes

into effect. High-wage workers of course dif-

fer in many other ways from low-wage work-

ers (e.g., in skill and effort levels that can’t be

measured by the government data), so this

method necessarily yields a considerable

underestimate, but the demographic differ-

ences at least suggest a floor on the extent of

labor-labor substitution.

49. As noted in the survey results reported in Chapter Five, 71% of the interviewed employers said it was “very like-

ly” or “somewhat likely” they would hire more skilled workers (this was the most widely planned response to the Zone). In our

case studies, the same theme emerged even more strongly.


58

Table 7.5 shows this demographic data for

six low-wage occupations found in the Coastal

Zone. In almost every occupation there are

substantial differences between high-wage and

low-wage workers, but there are also impor-

tant differences in degree. The category of

food preparation workers shows the most

extreme changes: 71% of the low-wage work-

ers, but none of the high-wage workers, are

high school dropouts; only 44% of the low-

wage workers, but 100% of the high-wage

workers, are fluent in English; 29% of the low-

wage workers, but only 14% of the high-wage

workers, are less than 25 years old. In con-

trast, a large proportion of maids and house-

men are not high school graduates or fluent in

English even among those with high wages, so

the demographic differences between high-

and low-wage workers is smaller.

To understand the combined effect of these

demographic differences, we need to know

how much overlap there is between them (we

can’t, for example, simply add the 46.7% dif-

ference between high- and low-wage waiters-

assistants’ English-speaking ability to the

33.7% difference between high- and low-wage

waiters-assistants’ high school dropout rate,

because the two characteristics are correlat-

ed—those fluent in English are also more like-

ly to have finished high school. To measure

the combined effect, we cross-tabulated the

three demographic factors in Table 7.4 and

determined how much aggregated overlap

there was between low-wage and high-wage

Distribution of Personal Characteristics Among Workers in

Selected Job Categories by Wage Band in Los Angeles CountyTable 7.5


59

workers. These results are shown in Table 7.6.

Probably the easiest way to understand

Table 7.6 is with the following thought exper-

iment: suppose one had a pool of 100 work-

ers in an occupation who are paid less than

$7.50 per hour, and a second pool of 100

workers in the same field who are paid

between $11.50 and $13.50 per hour. For

each person, all we know about them is (a)

whether they are over or under age 25, (b)

whether they are a high school graduate, and

(c) whether they are a native or fluent

English speaker. We start matching people

from the pools that are the same in these

three characteristics. The percents shown in

Table 7.6 are the proportion of the 100 work-

ers in each occupation who are “left over”

when the matching is done—the percents rep-

resent the proportion of worker pairs where

the high-wage worker has a “stronger” labor

market credential than his low-wage counter-

part. On average across these six occupa-

tions, 40% of the low-wage workers are “left

out” when this pairing is done.

This analysis is simplistic in a number of

ways. If we added more worker characteris-

tics, or even used more gradations in the three

variables measured here (e.g., comparing sev-

eral levels of education or English fluency

instead of just two), the percentage of low-

wage workers “left out” would increase. If we

could directly measure skill and job experi-

ence, we think the percentage would increase

a lot. Even this simple analysis, however, use-

fully illustrates the process of labor-labor sub-

stitution, and 40% seems to us a reasonable

floor on the size of this effect in the Coastal

Zone.50 In other words, we believe it is rea-

sonable to infer that the makeup of workers at

low-wage jobs in the Coastal Zone, based on

these demographic characteristics alone,

would change by 40% as existing workers are

replaced. Young people, immigrants, and

high-school dropouts will gradually diminish

from the employment ranks of covered firms

in the Coastal Zone. They will be replaced by

older, more educated, and more assimilated

workers. A similar change will presumably

Aggregate Difference in Three Demographic Characteristics Between

High-Wage and Low-Wage Workers in Los Angeles County, 1990Table 7.6

50. It might seem that we should exempt the Coastal Zone’s tipped workers from those to whom labor-labor substi-

tution applies, since most of them have earnings far above the minimum wage. However, the lower-tier tipped employees (e.g.,

busboys) make up a significant fraction of the total, and a number of employers have made clear their plans to “upgrade” these

positions (e.g., replace current workers). We therefore assume a 30% labor-labor substitution effect for tipped workers, yielding

an overall labor-labor effect of 37% for the total affected labor force. This is the figure we use in Chapter One.


60

occur in the skill levels of workers. We cannot

tell without further research how rapid the

change will be; but one cannot seriously ques-

tion that it will occur.51

H. The Location of Affected Workers

Advocates for the Coastal Zone Minimum

Wage seem divided on the question of

whether the Ordinance will primarily benefit

Santa Monica residents, or even whether it

should. The Preamble to the Ordinance sug-

gests a variety of “civic” benefits from improv-

ing the standard of living of low-income resi-

dents, while also suggesting that the

Ordinance’s wage increases will allow more

low-income Santa Monica workers to live clos-

er to their jobs (presumably by moving into

Santa Monica).

While the rhetoric is ambiguous, the facts

are clear: over 90% of the workers who will

receive wage increases under the Ordinance

do not live in Santa Monica. We determined

this by gathering data from a number of

Coastal Zone employers on the zip code dis-

tribution of their employees’ residences

(employers provided aggregated, not individ-

ual information). Although the proportion of

Santa Monica residents is a bit higher among

better-paid employees, it is always small, never

rising above 15%. The one instance where this

does not hold is the amusement park at Santa

Monica Pier, which works with local jobs

programs and otherwise takes as part of its

mission the hiring of local youth. The reasons

why so few Coastal Zone workers (even at

higher wages) live in Santa Monica are not

hard to deduce. The City only accounts for

1% of the housing units in Los Angeles

County; most of the City’s population are

long-time residents, while the work force in

the Coastal Zone tends to be more transient;

vacancy rates in the City are very low, with

many existing residents enjoying rent-stabi-

lized apartments and holding onto them; the

single-family housing stock in Santa Monica is

extraordinarily expensive, even for middle-

class workers.

For all these reasons, no one should

expect that more than 10% of the higher

wages and benefits mandated by the

Ordinance will be received by current, or

future, Santa Monica residents.

I. Tax and Benefit Effects

When wages go up, so do taxes; some of the

higher income a worker receives is passed on to

the government. If the worker is in a low-

income household, there is also a loss of some

government benefits, such as food stamps,

Medicaid, and subsidized school lunches for the

worker’s children. A redistribution program has

a built-in braking effect: some of the income

redistributed to low-income households will

result in those households losing some govern-

ment benefits and paying more taxes.

Here, at last, is an area where the Coastal

Zone Minimum Wage measures up very well.

Since the Ordinance redistributes almost no

income to poor people, the declines in gov-

ernment benefits to beneficiaries will be fair-

ly modest. The income and payroll taxes

paid by those who receive wage hikes will go

51. In his 2000 study for the City of Santa Monica, Economic Analysis of Santa Monica Living Wage Proposal, 94, Dr.

Pollin used a similar method to the one illustrated here, although he simply looked at the marginals of individual variables rather

than their combined effect. Even with this simpler method, he found “significant, if not dramatic” labor-labor substitution effects.


61

up, but the income taxes paid by businesses

in the Coastal Zone (whose profits will, as

we have discussed, fall sharply) will go

down; it is plausible that this will be rough-

ly a wash. No very sophisticated analysis is

needed on this point.

J. Summing Up: The Short-TermDistributional Effects of theCoastal Zone Minimum Wage

We have attempted in this chapter to trace the

complex and often surprising ways that the

Coastal Zone Minimum Wage will redistribute

income to workers. The recurrent theme of

this discussion is that the claimed benefits of

the Ordinance for low-income people have

been greatly oversold; there are many com-

pelling reasons to expect that few low-income

households will actually be on the receiving

end of the mandated wage increases. Some of

these effects, like the labor-labor substitution

effect and the effects of job losses in the

Coastal Zone, may take months or years to

make themselves felt. But some of the short-

term effects can be measured, and in this con-

cluding section we will attempt to “add up”

these short-term effects.

Three groups of workers will receive imme-

diate benefits under the Ordinance: the

employees whose total wage is between $6.75

and $10.50 per hour (we will call them the

“intended” beneficiaries), the employees who

will receive wage increases despite the fact

that most of their current income comes from

tips (the “tipped” beneficiaries), and the

employees who will receive pay increases

because of the health benefits provision or the

ripple effect on pay scales (the “ripple effect”

beneficiaries). We know the relative numbers

of these groups; we know their typical pay

range; and we can compute with CPS data the

Cumulative Distributional Impact of Pay and Benefit

Increases Under the Coastal Zone Minimum WageTable 7.7


62

range of incomes of the households in which

Los Angeles workers with those wages gener-

ally live. By weighing the relative numbers of

these workers and the average benefits each

group will receive, we can develop a cumula-

tive distributional picture of the proportion of

Coastal Zone Minimum Wage pay increases

that will go to each income class in Los

Angeles County. (See Table 7.7.)

The cumulative distribution shown in the

right-hand column of Table 7.7 shows us that,

even setting aside the labor-labor substitution

effect and the loss of jobs, the beneficiaries of

the Coastal Zone Minimum Wage are heavily

tilted towards the affluent, middle and upper-

middle side of Los Angeles residents. Only

10.9% of the pay increases under the

Ordinance go to the bottom 30% of the

income distribution; over 65% goes to the

most affluent half of households. By no

stretch of the imagination could the

Ordinance be characterized as a measure that

aids the poor. If we want to find a govern-

ment program with a redistributive impact

similar to this Ordinance, a good place to

start would be the homeowners’ deduction

for mortgage interest payments.


63

The EITC AlternativeA. Introduction.Whatever the motivations of SMART and the

City Council in proposing and enacting the

Coastal Zone Minimum Wage, a great many

of its supporters are motivated by a serious

desire to help the poor in Santa Monica. And

with good reason: despite the City’s great

affluence, the poverty rate of individuals in

Santa Monica (10.4% in 1999) is not much

lower than in the United States as a whole

(11.9% in 1999). We have argued in this

report that the Coastal Zone Minimum Wage

will do little or nothing to reduce poverty,

either in the City or generally in Los Angeles

County, and could very conceivably increase

poverty. But there are other policies that

could do a substantial amount to reduce

poverty. In this chapter, we provide some

detail on a proven tool for reducing poverty—

the Earned Income Tax Credit, or EITC. It is

valuable to think about the EITC both on its

own merits as a City policy, and as a yardstick

against which to compare the Coastal Zone

Minimum Wage.

B. Wage Subsidies and the Earned Income Tax Credit

The EITC is the most significant modern

federal initiative against poverty. The pro-

gram reaches some twenty million families

and is projected to cost about $32 billion in

2002. The EITC is essentially a wage subsidy

program for low-income workers; for a sin-

gle-earner family with two children, the fed-

eral EITC makes a grant equal to $400 on

each $1,000 in earnings, up to a maximum

grant of about $4,008. Thus, a family with

two children that has wage earnings of

$12,000 and only minimal other sources of

income receives a tax credit of $4,008, rais-

ing family income to $16,008. At incomes

above $13,100, the credit is reduced by $210

for each $1,000 in earnings, thus phasing

out the credit entirely for these families at

$34,000 of income. Families can receive the

credit either in a lump sum when they file

taxes (most participants take this option) or

as a mix of tax refund and paycheck supple-

ment. The size of the credit is slightly small-

er for families with one child, and much

smaller for single persons or families with-

out children. The federal EITC is pointedly

designed to provide maximum benefits for

low-income, working families with children.

The EITC has been an enormously popular

program in Washington across the political

spectrum. Presidents Carter, Reagan, Bush,

and Clinton all sponsored expansions of the

credit, and former Vice-President Gore pro-

posed a modest further expansion during the

2000 Presidential election. Three aspects of

the EITC account for its popularity. First, it is

extremely well-targeted. It is intended to help

the working poor, and nearly all of its benefits

go to that group. The EITC lifted over five

million people out of poverty in 2001—half of

them children.52 Second, it encourages low-

Chapter Eight

52. Nicholas Johnson, A Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty

(Washington, D.C: Center for Budget and Policy Priorities, 2002).


64

income households to seek out work; a full-

time worker earning $6.75 per hour effective-

ly makes $8.70 per hour if he or she is eligible

for the full EITC.53 Third, and unlike a higher

minimum wage, it imposes no perverse incen-

tives on employers because it has no effect on

employers’ costs; workers essentially get a

raise paid for by the government. Thus, the

EITC neither eliminates jobs, nor gives

employers incentives to hire more skilled

workers.

The “Piggyback” EITC

Eleven states across the nation have enacted

refundable piggyback EITCs as part of their

income tax systems.54 These programs simply

provide state funding to match the federal

EITC payments received by state residents,

usually in a 1:5 or 1:10 ratio. A 20% piggyback

program increases the maximum EITC grant

to $4,800.

In January 2002, the City of Denver became

the first local government in the nation to

adopt a city-based Earned Income Tax

Credit.55 Funding the program with a small

fraction of its federal TANF allocation (which

supports programs for the working poor), the

City created a 20% matching grant program

for any Denver household receiving the EITC.

Families could apply by submitting a two-page

application with a copy of their federal

income tax return. The City verified income

with state authorities, and issued checks a few

weeks after receiving applications. According

to an early study of the initiative, the Denver

EITC immediately generated higher participa-

tion levels than any anti-poverty program in

the city and had an administrative cost equal

to only 1% of distributed benefits (about one-

twentieth the administrative cost of other

Denver programs for the working poor).

Moreover, Denver officials found that the city-

based EITC actually helped them identify the

poor in Denver, improving connections and

access to other social services.56

Outreach Programs to Increase EITC

Participation

Another local, EITC-based approach to help-

ing low-income workers lies in outreach.

Although exact estimates vary, all observers

agree that millions of households eligible for

the EITC do not currently receive it. Several

cities and private organizations around the

country have launched local efforts to

increase awareness of, and participation in,

the EITC program. One of us (Sander) suc-

cessfully urged the Los Angeles City Council

to launch such an outreach effort in March

1998. By 1999, the County of Los Angeles

and a host of private and public agencies had

joined the Earned Income Tax Credit

53. However, the EITC can discourage secondary workers from entering the job market in a low-income household,

since the credit is taxed away at incomes above $13,100. Studies have shown a small, but real work disincentive in this “phase-

out” range. Its net employment effect, however, is strongly positive, and it probably helps to account for the sharp decline in

welfare recipients during the 1990s.

54. Nicholas Johnson, A Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty.

55. Denver is the first city, but the second local government, to create an EITC: Montgomery County, MD, adopted

a refundable credit equal to 15% of the federal EITC in 1999, in lieu of a living wage law.

56. Shepard Nevel, The Local Path to Making Work Pay: Denver’s Earned Income Tax Credit Experience

(Washington, D.C.: The Brookings Institution, March 2002).


65

Campaign Partnership, with a budget of

roughly $140,000 per year.57 By 2001, thou-

sands more households in Los Angeles were

participating in EITC, and total EITC pay-

ments to Los Angeles residents increased by

an estimated $30 million per year.

An EITC in Santa Monica

What Denver has done—creating a simple, effi-

cient, and highly effective program for raising

the incomes of poor and near-poor workers—

Santa Monica can do. What the City and

County of Los Angeles have done—creating an

effective outreach program to raise EITC par-

ticipation—Santa Monica can do, too.

Moreover, Santa Monica doesn’t have to

mimic the existing federal program; it can tai-

lor a local EITC to meet the social needs that

the community deems most important. For

example, an unusually high proportion of

Santa Monica’s poor are not families with chil-

dren, but single individuals and couples with

no children at home. The federal EITC

strongly favors families with children; a Santa

Monica EITC could be designed to avoid

these disparities. Similarly, Santa Monica has a

significant homeless population. Most home-

less persons hold jobs, even if sporadically,

and are thus eligible for EITC payments, but

of course are greatly handicapped in their abil-

ity to file tax returns. A Santa Monica EITC

could include a record-keeping service that

could assist the homeless and other displaced

persons (e.g., battered spouses) to track down

payroll forms needed to file a tax return and

receive both a federal and local EITC. These

are merely hypothetical examples, but they

illustrate the potential versatility of a local

EITC to meet Santa Monica’s needs.

To provide a concrete illustration of a Santa

Monica Earned Income Tax Credit

(SMEITC), consider the following program:

The City implements a SMEITC for eligible

Santa Monica residents. The credit for fami-

lies with children is set at 50% of the federal

level (a maximum credit of over $2,000); the

credit for single persons and families without

resident children is set at 400% of the federal

level $1,450.

Implementation and operation of the

SMEITC follows the Denver model.

Applicants for the credit submit a two-page

application, a copy of their federal tax return,

and proof of residence in Santa Monica.

At the same time, Santa Monica imple-

ments an outreach program to increase par-

ticipation in the federal and local EITC (fol-

lowing the Los Angeles model), and a

record-keeping service for homeless persons

with accumulated credits.

The cost of the SMEITC, along the parame-

ters described here, would be about $2.2 mil-

lion, based on recent data about Santa Monica

recipients of the federal EITC. If administrative

costs follow the Denver pattern, these should

run not much more than 1%—say $30,000 per

year.58 An outreach program that partnered

with the existing Los Angeles taskforce would

also be very inexpensive—say, another $30,000

per year. A record-keeping service for the home-

less might, hypothetically, require a full-time

staff person; suppose an administrative cost of

$50,000 per year. The total cost would thus be

between $2.3 and $2.4 million.

57. Richard Sander and Mike Blakely, An Evaluation of the Los Angeles EITC Outreach Initiative (Report to the City

of Los Angeles, 2001).

58. See Nevel.


66

What benefit would flow from this pro-

gram? The benefit to the homeless is specu-

lative, since that part of the initiative is exper-

imental. But we have hard evidence about the

impact of the other programs. Virtually all of

the EITC program costs (the $2.2 million)

would go to working households and fami-

lies, and 81% of these benefits (see Table 8.1)

would go to households that are poor or

near-poor (defined as households within

150% of the poverty line). The outreach pro-

gram would generate an additional $300,000

in EITC benefits to residents even if it were

only as effective as the Los Angeles program

on a per capita basis; but paired with the

introduction of a city-based EITC, the pro-

gram would probably have a much larger

effect in bringing eligible families into the

fold of federal EITC recipients. At a mini-

mum, then, this program would generate

$2.025 million in benefit for low-income fam-

ilies and households—about an 86% ratio of

successfully targeted benefits to costs.59

We know, moreover, that the federal EITC

lifts about five million people each year above

the poverty line. The Santa Monica EITC, using

the improved targeting methods we have dis-

cussed, ought to have a somewhat larger effect

in proportion to the funds spent. Even with a

modest improvement in efficiency, this would

mean over 1,400 people in Santa Monica lifted

above the poverty line by the program, or a

reduction of about one-sixth in the total num-

ber of Santa Monicans living in poverty. It is

true that this single step does not wipe out local

poverty—but in relation to its cost, the poverty-

reduction effect is remarkable.

How might such a program be financed?

There are many possibilities; recall that the

Denver EITC was financed through federal

TANF grants, at no direct cost to the City.

(Santa Monica might seek a grant from the

Los Angeles County TANF program to pio-

neer a similar pilot program.) But given the

context of Santa Monica’s current debate,

consider the idea of financing the SMEITC

through an increase in the City’s hotel occu-

pancy tax. One argument advanced by

Distribution of EITC Recipients and Benefits by Poverty

Status for Workers of Selected OccupationsTable 8.1

59. The $300,000 in increased participation from outreach is 1% of the Los Angeles program’s increase (Santa Monica

has about 1% of the County’s population, hence the extrapolation). $300,000 in increased participation, plus $2.2 million in

new benefits under the program, produces a total of $2.5 million in increased EITC benefits for Santa Monica residents. If 81%

of this goes to families, as Table 8.1 suggests, that benefit will total $2.025 million. Dividing this total by the program cost

(approximately $2.35 million) yields an 86% rate of successful targeting.


67

SMART that we do accept is that existing

Santa Monica hotels have derived some bene-

fit from Proposition S, which limits the devel-

opment of new beachfront hotels. For reasons

we discussed in Chapter Five, we think the

benefit is much smaller than SMART con-

tends, but the benefit exists. The City already

derives a very substantial income from the

hotel tax (about $18.3 million is estimated by

the Finance Department for the current fiscal

year). An increase of one to one-and-a-half

points in the hotel occupancy tax would be a

reasonable way of recouping the benefits con-

ferred by Proposition S. And it would fully

finance the Santa Monica EITC. Would there

be significant opposition by the hotels to such

a tax as an alternative to the Coastal Zone

Minimum Wage? Not a chance.

A Santa Monica EITC is administra-

tively straightforward, easy to finance, and

very direct and effective in achieving its goals.

There is a reason why huge majorities of econ-

omists argue that the EITC is a dramatically

more efficient way to reduce poverty than

minimum wage legislation. In the Santa

Monica context, these reasons are even more

powerful. We return in the conclusion to a

specific comparison of our proposed Santa

Monica EITC with the Coastal Zone

Minimum Wage.


68

The Pollin Report

The City of Santa Monica sought and com-

missioned an economic study of the SMART

proposal by the nation’s leading academic

advocate of living wages, Dr. Robert Pollin.

Dr. Pollin is an economist at the University of

Massachusetts at Amherst; he and his team of

researchers produced a massive report on the

proposal in August 2000. The Pollin study is

not directly comparable to our own report,

because it is based on a proposal that differs

in important ways from the actual Ordinance

adopted in 2001. Dr. Pollin hypothesized a $3

million (rather than a $5 million) revenue

threshold for coverage, and he assumed that

tipped employees would somehow be exempt-

ed from coverage, a difference that of course

dramatically alters the redistributive effect of

the Ordinance. Nonetheless, since the Pollin

report is the only other systematic attempt to

evaluate what became the Coastal Zone

Minimum Wage, we feel our report would be

incomplete without some commentary on it.

Professor Pollin’s conclusions were almost

diametrically opposed to our own. The Pollin

report argued that the SMART proposal

would have relatively modest effects on the

regulated businesses while effectively helping

families in great need. His report contended

that hotels would not be seriously affected

because they can readily raise prices to cover

the higher costs and because they would reap

substantial productivity gains from better-paid

workers. It argued that retailers would not be

seriously affected because the higher labor

costs would represent a tiny proportion of

total revenues for most retailers. It also con-

tends that the impact on restaurants would be

small because only a few restaurants would be

covered by the proposal, because these, too,

could raise prices, and because the effects on

restaurants could in any case be mitigated by

exempting tipped employees.

The Pollin report was also optimistic that

the SMART proposal would hurt few workers

and would reach predominantly needy fami-

lies. It contended that the median household

income of Coastal Zone workers was only

$20,000, and that nearly all of the workers

have household incomes under what the

report called the “L.A. basic needs income”

($45,683 for a family of four). The report

came up with a variety of estimates of how

many jobs would disappear in the Coastal

Zone, but all the estimates were low and the

authors maintained that the unemployed

would readily find jobs elsewhere. And, final-

ly, the report holds that relatively few employ-

ers would replace their former low-wage

employees with higher-skill workers if higher

wages were mandated.

It must be disturbing to most readers to

learn that two sets of economists studying the

same proposal come to such different results.

It suggests, perhaps, that data and theory can

be manipulated any way an author likes. But

we disagree: we think that while it is hard to

know for certain the effects of a Coastal Zone

that hasn’t been tried anywhere else, the use

of sound economic methodology can produce

some fairly clear, unambiguous results. The

Pollin report’s conclusions are different from

ours because Pollin and his coauthors made

specific methodological, definitional, and

Chapter Nine

research choices that we believe nearly all

economists would reject.

What follow are key problems in the Pollin

Report that explain (and in many cases invali-

date) his distinctive conclusions:

1. The Pollin report claimed that hotels could

pass on higher costs by simply raising prices,

with no negative consequences for occupancy

rates and employment, and quite possibly

with positive consequences. Put another way,

Professor Pollin argued that, in the case of

hotels, the law of demand has been repealed.

The law of demand, which simply states that

the quantity demanded of any good is inverse-

ly related to its price, is perhaps the strongest

proposition in all of economics.

The Pollin report reached this claim

through a “time-series” analysis of data show-

ing that, during the 1990s, hotels in Santa

Monica were able to raise their room rates

even as their occupancy rates went up. From

this analysis, the authors concluded that

somehow these hotels have upward-sloping

demand curves—that the higher their prices

go, the more customers they will have. What

Professor Pollin and his collaborators failed to

recognize is that the data could just as easily

be tracing out a supply curve (which econom-

ic theory does predict slopes up) or, more

likely, an interaction of demand and supply,

which are themselves shifting over time. In the

technical language of econometrics, the Pollin

report’s analysis suffers from an “identifica-

tion” problem. In plainer language, Professor

Neumark (a leading labor economist and a

reviewer hired by the City to give Dr. Pollin

feedback) correctly noted it is “simply wrong

and would not survive professional scrutiny.”

Yet, despite the fact that economists reviewing

a draft of his report pointed out this fatal

flaw, Professor Pollin kept it in his final

report; indeed, he relied heavily upon it.

How can we account for the positive corre-

lation between room rates and occupancy for

Santa Monica hotels in the 1990s? The expla-

nation is actually very simple. The Santa

Monica hotels were until recently riding the

crest of a remarkable period of economic

expansion, and a period where the growing

popularity of the Third Street Promenade and

the upgrading of hotel quality on the ocean-

front have made some of the Santa Monica

hotels competitive with other premier

Westside hotels. In other words, the demand

for Santa Monica hotel rooms from 1995

through 2000 consistently exceeded the avail-

able supply of rooms. When this has hap-

pened, hotels, in a manner very consistent

with economic theory, have increased their

prices to ration out the available supply of

rooms and to bring demand more in line with

supply. It is important to keep in mind that

hotels do not have unlimited capacity to raise

rates—otherwise, of course, they already

would have done so. As with nearly all other

businesses, the hotels set prices as high as

competitive conditions, and the need to main-

tain optimal occupancy levels, will permit.

Of course, the pattern observed in the

Pollin report abruptly reversed course in 2001.

Hotel occupancy rates dropped slightly from

the recession, and cataclysmically from the

September 11th attacks. Room rates have con-

sequently been stagnant or have fallen. The

unshakable market power described in the

Pollin report proved ephemeral indeed.

2. Contrary to our analysis, the Pollin report

contended (p. 61) that retailers operating in


69


the Coastal Zone would not be much affected

by the mandated wage increases because the

total cost would only represent about 2% of

their total revenues. The flaw in this analysis

lies not so much in his estimate as in his logic.

The “2%” figure is low, but probably in the

correct ballpark: we estimate in Chapter

Three that the wage and benefit increases will

cost retailers from 2.5% to 6% of revenues,

depending on the sector considered. But to

leave the story there is tremendously mislead-

ing, since the relevant question for predicting

business decisions is not how the wage costs

relate to revenues, but how the wage costs

relate to total profits. If a business has a prof-

it margin that is only 3% of total revenues,

then a 2% increase in costs would be devas-

tating to profits.

Moreover, a figure like “2%” (for the ratio of

new wage costs to revenue) is only an average.

Suppose that the correct average figure is clos-

er to 4%, and suppose that this ranges among

the retail firms in the Zone from 1% to 7%.

Suppose that most of the firms facing 6% or 7%

ratios have profit margins of 4% or 5%. It is

likely that firms in this situation will very seri-

ously consider closing or relocating. This is,

indeed, exactly what we find is likely to happen

for at two of the major department stores, with

the resulting loss of hundreds of jobs.

3. The Pollin report contended that the

SMART proposal would do a good job of

helping the neediest workers in Los Angeles.

The reported based this in large part on a sur-

vey the Pollin study team conducted of work-

ers in the Coastal Zone, which found that the

median reported household income of these

workers was $20,000—much lower than the

$31,500 to $40,000 range we estimated from

CPS and PUMS data. The problem with the

Pollin survey is that it is not scientific.

Without random sampling, there is no assur-

ance that his survey results are at all represen-

tative of the target population. Apparently

research assistants on the project simply

approached people who struck them as likely

workers in covered businesses in the Coastal

Zone, and asked them about their household

income. Even if we ignore the unmeasurable

selection bias built into this process, the

reported data on household income is simply

not credible. Compared to the Current

Population Survey, which conducts in-home,

detailed interviews over four successive

months on all aspects of household earnings

and income, a casual on-the-street survey is an

invitation to substantial underreporting of

income. That underreporting occurred is evi-

denced by the fact that the average respon-

dent reported 1.9 workers in his or her

household. As Professor Neumark points out,

if one tries to reconcile this statistic with a

$20,000 median household income, the impli-

cation is that virtually everyone in virtually all

of these households made no more than the

minimum wage—which is itself belied by other

statistics in the Pollin report. We agree with

Professor Neumark that these results are inter-

nally contradictory.

4. The Pollin report also suggests that anyone

earning less than the “Los Angeles Basic

Needs Income” is a low-income person wor-

thy of being targeted for assistance by policies

like the Coastal Zone Minimum Wage. This

income threshold is $45,683 for a family of

four, and $37,589 for a family of three. We

agree with Professor Pollin that Los Angeles is

an expensive place to live and that existing

70


71

poverty lines are too low.60 But the 2000

Census documented that the median income

of all households in Los Angeles County, at

the time the Pollin report came out, was just

over $42,000. Nearly 55% of Los Angeles

households had incomes lower than the Pollin

report’s “basic needs income” of $45,683. To

classify half of the metropolitan population as

“needy” tends to render a discussion of tar-

geting meaningless. The point in question is

how well a proposal like the Coastal Zone

raises incomes of those most in need. We find

that the Coastal Zone Minimum Wage mostly

benefits the middle class.

5. The Pollin report contended that the

SMART proposal would not cause significant

unemployment. It based this partly on the

claims we have already discussed (e.g., hotels

can raise prices to cover the cost without los-

ing customers). It also undertook a general

analysis of the problem, using economic meas-

ures of “employment elasticities” (the propen-

sity to use fewer workers as wages rise) devel-

oped by leading labor economists who have

worked on these issues.

The problem is that the Pollin report’s cal-

culation of the employment loss using these

employment elasticities entailed a sequence of

either incorrect or seemingly arbitrary

assumptions. The report first underestimated

how many workers are covered, placing the

number of workers covered at 2,477 (even

though the actual Ordinance uses a higher rev-

enue threshold than the Pollin report

assumed, our measurement of its reach indi-

cates that 4,400 to 5,100 workers will be eli-

gible for wage increases). The Pollin report

then arbitrarily shrank this underestimate of

covered workers further by multiplying the

base of covered workers by the percentage of

firms the Pollin researchers surveyed who

report they will likely lay off workers. The

report justified this step on the grounds that

the labor costs of covered firms in Santa

Monica are a smaller proportion of revenues

than they are in the fast-food industry where

the employment elasticities were attained.

This may be the case but the correction is still

arbitrary because it did not directly address

differences in labor cost. Finally, the Pollin

report applied employment elasticities—which

are only valid for small changes in wage

costs—to the Santa Monica case where wage

costs are rising by 50% or more for many

employers. We believe that the Pollin report

estimates, derived through a sequence of ques-

tionable steps, provide no insight as to what

the employment losses will actually be.

6. The Pollin report conceded that firms

would have a significant incentive to replace

low-skill workers with higher-skilled workers

once higher wages are mandated. But the

report contends the actual extent of such

changes will be small. We discussed the

inconsistency between the report’s facts and

its conclusions in Chapter Seven.

The Pollin report also suggested (p. 95) that

the Coastal Zone firms would be in a position

similar to that of a firm facing unionized

workers who have just secured a pay raise.

Such a firm, he argues, is not likely to fire

large numbers of unionized employees to hire

60. Our own study, drawing on a range of government data and actual surveys of costs in Los Angeles, found that a

“basic needs” budget for a family of four in Los Angeles was approximately $27,000. This is very close to 150% of the federal

poverty line, and it is the threshold we use throughout this study to define “low-income” families. See UCLA Empirical Research

Group, The Cost of Living for Garment Workers in Los Angeles County (Los Angeles: UCLA Empirical Research Group, 1999).


72

workers with higher skills. This is correct, but

it hardly seems relevant to the situation facing

Coastal Zone employers. In the union case,

raises are negotiated with an existing work

force, by contract, with protections for exist-

ing workers. The Coastal Zone workers will

have no such protections.

Most remarkably, the Pollin report argued

that whatever displacement did occur would

impose no more than a passing trauma on the

workers concerned. Since a high minimum

wage in the Coastal Zone would not cause

any “net” reduction in jobs in Los Angeles, the

report claimed “the 1.3 million person low-

wage labor market in the Los Angeles metro-

politan area should offer opportunities for dis-

placed workers at least comparable to their

Coastal Zone jobs.” This is simply incorrect,

for reasons we explain in Chapter Six; in fact,

it is probable that about one-third of the jobs

lost in Santa Monica will not be offset by job

gains elsewhere. Such complacency about the

consequences of large-scale job loss is puz-

zling, and of course is all the more misplaced

in the midst of a deepening recession.

We hope that these points make clear why

Professor Pollin’s findings differ from our

own. Overall, we agree with Professor

Neumark’s conclusion about the Pollin

Report: “...I have enough criticisms of this

study to believe that it provides an insufficient

basis to draw strong conclusions about the

likely effects of the living wage proposal. In

contrast, I think the authors overreach, and

draw conclusions that cannot be supported by

the data and methods they use.”


73

Conclusion

Throughout this report, we have attempted to

measure the Ordinance’s scale and its effects

in every available way. As a result, our report

is heavy on numbers, perhaps to excess. In

this chapter, we have one more set of num-

bers to present (Table 10.1). But let us start

with some overarching conclusions that

emerge from our analysis.

Our principal focus in the report has been on

the question, who benefits? If the Coastal Zone

Minimum Wage would have a significant impact

on poverty, if it were well targeted on reaching

and helping the most struggling workers in our

society, then (as far as we are concerned) the

burden would be on opponents of the

Ordinance to show that its impact on business

was so harmful as to outweigh the benefits. But

the Ordinance is not well targeted. Indeed, it is

the most poorly targeted piece of social legisla-

tion we have ever encountered. This is partly

because (due to the City’s interpretation of state

law) tipped employees are covered; this brings

under the Ordinance 1600 waiters, valet parking

attendants, and hotel banquet workers who cur-

rently have an average hourly wage of $18.75,

including tips. These tipped employees will

almost all receive the maximum possible wage

increase mandated by the Ordinance, and

together they will account for nearly half of all

the required wage increases. In contrast, how

many of the workers covered by the Ordinance

live in low-income families for whom they are

the primary wage earner? No more than 200 or

300 workers, and probably fewer. The rest of

the several thousand affected workers are sec-

ondary earners in middle-income families,

young workers supporting only themselves, or

high-wage workers who will receive unintended

“ripple effect” pay increases when the new min-

imum wage goes into effect. Overall, under the

most generous assumptions, only about 10% of

the Ordinance’s benefits will go to workers in

the bottom 30% of the income distribution in

Los Angeles County. Two-thirds of the benefits

will go to households in the most affluent half

of Los Angeles residents.

Given the Ordinance’s incredibly bad tar-

geting and its tendency to distribute income

to those least in need, it would be hard to jus-

tify even if it had no other harmful effects. But

there are plenty of other harmful effects:

Our best estimate is that the Ordinance will

produce a loss of at least 1,140 jobs, about

one-seventh of all the current jobs at the

affected firms. Santa Monica Place will be par-

ticularly hard hit.

Because of an apparent oversight in the

Ordinance’s drafting, the law provides cov-

ered employers with a powerful incentive to

eliminate health insurance benefits for cov-

ered workers, and many employers will no

doubt follow this incentive.

The Ordinance (including its conventional

“living wage” components will cost the City,

directly and indirectly (through lower proper-

ty taxes) at least $4.5 million per year.

The Ordinance will give employers equally

powerful incentives to replace low-skill workers

with employees whose skills are commensurate

with the mandated pay levels. This “labor-labor

substitution” effect will make Coastal Zone jobs

much scarcer for young workers, inexperienced

workers, and immigrants.

The Ordinance will poison what had been,

Chapter Ten


74

since the late 1980s, a productive and suc-

cessful partnership between the City and busi-

nesses to revitalize downtown Santa Monica

and invigorate the local economy.

Defenders of the Ordinance, when confront-

ed with some of these problems, have suggest-

ed that the Ordinance’s “hardship exemption”

can be used to avoid many of the bad effects we

describe—that restaurants with lots of tipped

employees, or department stores facing closure,

could be easily exempted from coverage. We

don’t think this is true. The hardship exemption

in the Ordinance is explicitly limited to firms

that depend heavily on young, seasonal work-

ers. It seems to have been written with the

Santa Monica Pier amusement park in mind,

and we have assumed in our analysis that the

Park will be exempted. Assuming broad, ad hoc

exemptions to “fix” defects in the Ordinance

seems unwarranted.61

The Ordinance has a broader metropolitan

and even national significance. It has attracted

partisans on either end of the political spec-

trum who see the coming referendum and

simply another epic struggle of capital versus

labor. We see a battle over something much

more profound – whether the positive and all

too scarce efforts in our society to do some-

thing positive for low-income people will be

betrayed by a cruel hoax. The political capital

in America to seriously address income

inequality is precious. To spend it lavishly on

a law that mostly benefits the middle class

will, in the end, not only make Santa Monica

look foolish, but will tragically undermine the

credibility of other initiatives that really can

help the poor. The Coastal Zone Minimum

Wage does not inspire; it will simply breed

cynicism about progressive politics.

Comparing the Coastal Zone MinimumWage with a Proposed Santa Monica EITCand a Hypothetical Helicopter Drop

The goal of addressing income inequality is

vitally important. Although our conclusions

about the Coastal Zone Minimum Wage are

overwhelmingly negative, we strongly believe

that important progress forward in helping low-

income workers and their families can be made.

In Chapter Eight we outlined our favored alter-

native approach—an Earned Income Tax Credit

(EITC) for Santa Monica residents. We con-

clude this report with a summary comparison

of the scale and effects of the Ordinance, and

the EITC alternative, in Santa Monica.

Table 10.1 compares the distributional conse-

quences of three policies: the Coastal Zone

Minimum Wage, our proposed Santa Monica

EITC, and what we call a “helicopter drop”

over Los Angeles. The helicopter drop is simply

a metaphor for a purely random distribution of

benefits. Imagine a helicopter flying randomly

over Los Angeles County, shoveling out its

doors a total of $49 million per year; imagine

that every household in the County has an

equal chance of catching this bounty. True, this

is a crazy way to help the poor—since only about

30% of Los Angeles households are within

150% of the poverty line, only about 30% of the

benefits would go to those households. But

even so, the helicopter drop is about three

times as effective as the Coastal Zone Minimum

Wage in helping low-income families.

Santa Monica can do better.

61. Even if the Ordinance does permit, or is amended to permit, a wide-ranging and discretionary exemption process, this would

hardly be less disturbing. A City board with the power to subject a firm to hundreds of thousands of dollars in additional costs

based on its ability to demonstrate “hardship” from year to year would invite abuses of power and corruption.


75

A Comparison of Salient Features of the Coastal Zone

Minimum Wage and a Proposed Santa Monica EITCTable 10.1


76

Abel, Richard. The Santa Monica Living

Wage. mimeo.

Bureau of the Census. 2000 Decennial

Census, Summary File 3 (California),

Available from

http://www.census.gov/census2000/s

tates/ca.html. Accessed 11 October

2002.

Card, David and Alan Krueger. Myth and

Measurement: The New Economics

of the Minimum Wage. Princeton,

NJ: Princeton University Press, 1995.

City of Los Angeles. Current and Prior

Living Wage Rates. Available from

http://www.ci.la.ca.us/cao/Contracto

r_Enforcement/Wage_Rates.PDF.

Accessed 11 October 2002.

Ehrenreich, Barbara. Nickel and Dimed: On

(Not) Getting By in America. New

York: Metropolitan Books, 2001.

Fox, Joel. Proposition 13: A Look Back.

Available from

http://www.hjta.org/content/ARC00

0024B_Prop13.htm. Accessed 11

October 2002.

Hamermesh, Daniel. Labor Demand.

Princeton, NJ: Princeton University

Press, 1993.

Johnson, Nicholas. A Hand Up: How State

Earned Income Tax Credits Help

Working Families Escape Poverty.

Washington, D.C.: Center for Budget

and Policy Priorities, 2002.

Kann, Mark E. Middle-Class Radicalism in

Santa Monica. Philadelphia: Temple

University Press, 1976.

Larmore, Tom. Interview by Richard Sander,

19 August 2002.

McCarthy, Susan. Interview by Richard

Sander, 25 September 2002.

McCarthy, Susan. Report of City Manager

to Santa Monica City Council. 27

March 2001.

McCarthy, Susan. Report of City Manager

to Santa Monica City Council. 22

May 2001.

Neumark, David. How Living Wage Laws

Affect Low-Wage Workers and Low-

Income Families. San Francisco:

Public Policy Institute of California,

2002.

Nevel, Shepard. The Local Path to Making

Work Pay: Denver’s Earned Income

Tax Credit Experience. Washington,

D.C.: The Brookings Institution,

March 2002.

Pollin, Robert, et al. Economic Analysis of

the Los Angeles Living Wage

Ordinance. Amherst, MA: Political

Economy Research Institute, October

1996.

Pollin, Robert, et al., Economic Analysis of

Santa Monica Living Wage Proposal.

Amherst, MA: Political Economy

Research Institute, August 2000.

References


77

Sander, Richard, E. Douglass Williams and

Michael Blakley. “Living Wages and

the Problem of Inequality in

California.” In California Policy

Options 2001, ed. Daniel J.B.

Mitchell and Patricia Nomura, 62-83.

Los Angeles: School of Public Policy

and Social Research, UCLA, 2001.

Sander, Richard and Michael Blakley. An

Evaluation of the Los Angeles EITC

Outreach Initiative. Report to City

of Los Angeles, 2001.

Stark, Kirk and Jonathan Zasloff. Tiebout

and Tax Revolts: Re-examining the

Role of School Finance Reform.

Presented at the ALEA Conference,

May 2001.

The Survey Center, University of New

Hampshire. The Living Wage: A

Survey of Economists. Washington,

D.C.: Employment Policies Institute,

2000.

Tanner, Jane. “Living Wage Movement,” 12

The CQ Researcher 33, 27 September

2002.

UCLA Empirical Research Group. The Cost

of Living for Garment Workers in

Los Angeles County. Los Angeles:

UCLA Empirical Research Group,

1999.

Wilkinson, Kelly. “Proposal Will Exempt

Tipped Workers.” Our Times. 27

August 2000.

Williams, E. Douglass and Sander, Richard.

An Empirical Analysis of the

Proposed Los Angeles Living Wage

Ordinance. Los Angeles, City of Los

Angeles, 1997.


78

Percentage of Workers Earning Less Than $12.25 Per Hour by Job Type

(For Industries Represented in the Coastal Zone; N is Unweighted)Table 1A

Appendix A: Appendix Tables

Distribution of Wages Among Workers Earning Less Than $12.25 Per Hour by

Job Type (For Industries Represented in the Coastal Zone; N is Unweighted)Table 2A


79

Percentage of LA County Workers Making Less

Than $12.25 Per Hour by Industry (N is Unweighted)Table 3A

Distribution of Wages Among Workers Making Less Than

$12.25 Per Hour by Industry in Los Angeles County (N is Unweighted)Table 4A


80

Percentage of Workers Receiving Employer-provided Health

Insurance by Industry and Wage in Los Angeles County (N is Unweighted)Table 4A


81

City Council Meeting 7-10-01 Santa Monica, California

ORDINANCE NUMBER ____

(City Council Series)

AN ORDINANCE OF THE CITY COUNCIL OF

THE CITY OF SANTA MONICA ADDING

CHAPTER 4.65 TO THE SANTA MONICA

MUNICIPAL CODE CREATING MINIMUM

WAGE REQUIREMENTS APPLICABLE TO

BUSINESSES IN THE COASTAL ZONE AND

EXTENDED DOWNTOWN CORE WITH

GROSS RECEIPTS OVER $5,000,000 AND TO

THE CITY AND ITS SERVICE CONTRACTORS

WHEREAS, the public welfare requires wages

and benefits sufficient to ensure a decent and

healthy life for workers and their families; and

WHEREAS, many Santa Monica employers

pay wages so low as to imperil the public wel-

fare; and

WHEREAS, many Santa Monica workers earn

wages insufficient to support themselves and

their families; and

WHEREAS, many Santa Monica workers

receive no health care benefits and therefore

cannot protect their own health and the health

of their families; and

WHEREAS, many Santa Monica workers can-

not participate in civic life or pursue educa-

tional, cultural and recreational opportunities

because they must work such long hours to

meet their households’ most basic needs; and

WHEREAS, workers who do not receive ade-

quate wages must rely upon federal, state and

local public assistance and social services fund-

ed by taxpayers and may never escape poverty;

and

WHEREAS, workers who do not receive

health care benefits may be unable to main-

tain their own health or the health of their

children, may be forced to utilize publicly-

funded health and emergency care services,

and may unintentionally imperil the health of

others; and

WHEREAS, workers who do not have suffi-

cient income and time off work to participate

in the civic affairs and to pursue educational,

cultural and recreational opportunities may

become alienated from their communities,

their states and their nation; and

WHEREAS, minimum wage laws promote the

general welfare by ensuring that workers can

support and care for their families through

their own efforts and without governmental

intervention; and

WHEREAS, creating decent job opportunities

through minimum wage and benefit laws is a

better way to protect individuals and families

than public assistance because the availability

of decent job opportunities fosters independ-

ence, self-reliance and family unity; and

Appendix B: Copy of the Santa Monica Minimum Wage Ordinance


WHEREAS, laws mandating or encouraging

the provision of health care benefits to work-

ers promote the general welfare by minimizing

health risks to the general population and

reducing the cost of emergency and other

health care to the taxpayers; and

WHEREAS, minimum wage and benefit laws

also assure workers the means and leisure to

participate in civic life and pursue educational

and cultural opportunities and thereby

strengthen the fabric of our society; and

WHEREAS, minimum wage and benefit laws

also benefit employers and the economy as a

whole by improving employee performance,

reducing employee turnover, lowering absen-

teeism, and thereby improving productivity

and the quality of the services provided by

employees; and

WHEREAS, in recognition of these realities,

the federal government mandates the pay-

ment of a minimum wage; and

WHEREAS, in recognition of the fact that the

cost of living and other circumstances vary

substantially through the United States, feder-

al law explicitly authorizes states and munici-

palities to set more stringent wage standards

than those established federally; and

WHEREAS, the State of California has exer-

cised its power to set a minimum wage higher

than the minimum set by federal law in part

because the cost of living in California is

higher than in most states; and

WHEREAS, the California Legislature has rec-

ognized that localities may need to set more

stringent wage standards than those set by

state law and has therefore specifically author-

ized the adoption of such standards in Labor

Code Section 1205; and

WHEREAS, in Opinion Number 89-502, the

California Attorney General has recognized

the power of local governments to set wage

requirements higher than those set by state

law; and

WHEREAS, the federal minimum wage has

declined steadily in real dollars for two

decades; and

WHEREAS, the California minimum wage

has also declined in real dollars; and

WHEREAS, the California minimum wage is

inadequate to meet the needs of workers in

the Los Angeles region where the cost of liv-

ing is much higher than in most parts of the

state; and

WHEREAS, housing costs in the region are

particularly high relative to most parts of

California, and low-income workers must

therefore spend a disproportionate percent-

age of their income sheltering themselves and

their families; and

WHEREAS, disproportionately high housing

costs force workers to locate far from their

jobs and spend long hours traveling to and

from work; and

WHEREAS, the taxpayers of the Los Angeles

region must pay the cost of meeting workers’

needs through the provision of social services

because the state minimum wage is not ade-

quate to meet those needs; and

82

WHEREAS, a minimum wage standard which

condemns a full-time worker’s family to abject

poverty is simply inadequate to achieve the

long-recognized and salutary goals of the min-

imum wage laws; and

WHEREAS, the inadequacy of the state mini-

mum wage is particularly detrimental to the

public welfare in Santa Monica where the cost

of living is very high and where thousands of

workers labor long hours at very low-paying

jobs; and

WHEREAS, the highest concentration of low-

income workers in Santa Monica is in the

coastal zone and the extended downtown

core; and

WHEREAS, this same area is home to some

of the City’s largest and most profitable busi-

nesses, including luxury hotels, gourmet

restaurants and large, national retailers which

can afford to pay their employees decent

wages and can pass the cost of paying

increased wages to consumers; and

WHEREAS, most workers in this area are

heads of household who bear primary respon-

sibility for supporting their families; and

WHEREAS, eighty per cent of these workers

have incomes inadequate to meet their fami-

lies’ basic needs; and

WHEREAS, the vast majority of these workers

have no private health insurance; and

WHEREAS, tourists staying in the hotels in

this area may pay more than $400.00 per

night for their rooms, but the workers chang-

ing their bedding and serving their food can-

not support their own families; and

WHEREAS, businesses in this area have

reaped the benefits of various City policies

and investments; and

WHEREAS, the City has actively improved

this area through capital investments, operat-

ing expenditures, the promotion of tourism

and the adoption of policies which restrict

growth and limit competition among certain

businesses; and

WHEREAS, these investments, expenditures

and policies have fostered huge profits for

some businesses in the area which employ

large numbers of low-wage workers; and

WHEREAS, the City Council wishes to adopt

a local requirement to effectuate the purposes

of the federal and state minimum wage law, to

address the needs of workers, and to promote

the public welfare; and

WHEREAS, increasing the wages of low-

wage workers will help achieve Santa

Monica’s sustainable city goals by helping

low-wage workers live closer to work, reduc-

ing commute distances, and facilitating use

of public transit; and

WHEREAS, the City Council also wishes to

protect local businesses and their employees

by ensuring that no business suffers econom-

ic hardship so severe as to render it nonviable

as a result of this ordinance; and

WHEREAS, the Council wishes to take all

possible action to address the problems

caused by inadequate wages and benefits,

and Council therefore intends that the sev-

erance doctrine shall be liberally applied to

effectuate the policy served by this law,


83


NOW, THEREFORE, THE CITY COUNCIL OF

THE CITY OF SANTA MONICA DOES HERE-

BY ORDAIN AS FOLLOWS:

SECTION 1. Chapter 4.65 is hereby added to

the Santa Monica Municipal Code to read as

follows:

CHAPTER 4.65

LIVING WAGESection 4.65.010. Definitions.

Coastal Zone.

That area bounded by the Pacific Ocean on the

west, by the City border on the south, on the

north by the San Vicente Boulevard centerline

from the eastern border of the City to its inter-

section with the norther City border and along

the City border west to the Pacific Ocean, and

on the east by the Lincoln Boulevard centerline

south of Pico Boulevard and Fourth Street

north of Pico Boulevard. Properties adjacent to

the east side of Fourth Street between Pico

Boulevard and Colorado Boulevard are includ-

ed within the area defined by this subsection;

otherwise the Fourth Street boundary shall be

at the centerline.

Extended Downtown Core.

That area bounded by Ocean Avenue on the

west, Wilshire Boulevard on the north, Fifth

Street on the east, and Colorado Boulevard

on the south. Properties on both sides of

the boundary streets shall be included with-

in this definition.

Employee.

Any person who does not actually work as a

manager, supervisor, or confidential employ-

ee, and who is not required to possess an

occupational license.

Gross Receipts Threshold.

Gross receipts over $5 million per year which

amount shall be adjusted annually each July

1st, beginning in 2003 by an amount corre-

sponding to the previous year’s change in the

Consumer Price Index for Urban Wage

Earners and Clerical Workers in Los Angeles

County.

Health Benefit.

A payment towards the provision of health

care benefits for Employees and their depend-

ents in the amount of $1.75 per hour in the

first year that this Chapter is in effect, $2.50

per hour in the second year that this Chapter

is in effect, and thereafter adjusted annually

each July 1st, beginning in 2004, by an

amount corresponding to the previous year’s

change in the Consumer Price Index for

Urban Wage Earners and Clerical Workers in

Los Angeles County.

Minimum Wage.

A wage payment at an initial hourly rate of

$10.50 per hour with Health Benefits or

$12.25 per hour without Health Benefits.

These rates shall be adjusted annually each

July 1st, beginning in 2003, by an amount cor-

responding to the previous year’s change in

the Consumer Price Index for Urban Wage

Earners and Clerical Workers in Los Angeles

County.

Section 4.65.020.

Minimum Wage Payment Requirements.

The Minimum Wage required by this Chapter

shall be paid by:

(a) the City of Santa Monica to all workers

employed by the City;

84

(b) any contractor or subcontractor working

for the City of Santa Monica on a service con-

tract to workers performing the work on that

contract;

(c) any private person or private corporation

doing business at a location in the Coastal

Zone or Extended Downtown Core with

gross receipts over the Gross Receipts

Threshold at that location for the previous

two years to Employees working at that loca-

tion. The gross receipts of a contractor, sub-

contractor, lessee or sublessee received at that

location for performing part of the business

activities of the private person or corporation

shall be included in determining whether the

Gross Receipts Threshold is exceeded; and

(d) any contractor, subcontractor, lessee or

sublessee performing part of the business

activities of a private person or private corpo-

ration described in subsection (c) to

Employees doing that work during at least

half of their work time.

Section 4.65.030.

Exemption for Severe Economic Hardship.

An employer who contends that compliance

with this Chapter would constitute a severe

economic hardship may apply to the City

Manager for a waiver applicable to all or part

of the employer’s work force. Criteria for

determining hardship shall include whether:

(a) compliance with the requirements of this

Chapter would render the employer’s business

nonviable; (b) the employer’s business

depends for its viability upon young people

and other first-time workers who are

employed on a seasonal basis; and (c) whether

granting a waiver would otherwise advance

the policies underlying this Chapter. The City

Manager shall promulgate an Administrative

Instruction establishing specific criteria appli-

cable to and procedures for processing hard-

ship applications. Said Administrative

Instruction shall set forth information to be

included on the hardship application, proce-

dures for filing and processing applications,

and procedures for administrative review by a

City hearing examiner whose final decision

shall be subject to judicial review.

Section 4.65.040.

Prohibitions Against

Retaliation and Circumvention.

It shall be unlawful for any employer or

employer’s agent or representative to take any

action against an individual in retaliation for

the exercise of rights under this Chapter. This

Section shall also apply to any individual

working in or for the City who mistakenly, but

in good faith, alleges noncompliance with this

Chapter.

Taking adverse action against an individual

within sixty (60) days of the individual’s asser-

tion of rights shall raise a rebuttable pre-

sumption of having done so in retaliation for

the assertion of rights.

Additionally, it shall be unlawful for any

employer to intentionally circumvent the

requirements of this Chapter by contracting

portions of its operation or leasing portions

of its property.

Section 4.65.050. Remedies.

(a) Criminal Penalty. Any person who is convicted of violating this

Chapter shall be guilty of a misdemeanor and

upon conviction shall be punished by a fine of

not greater than five hundred dollars or by


85


imprisonment in the county jail for not more

than six months, or by both such fine and

imprisonment.

(b) Civil Action.

Any person, including the City, may enforce

the provisions of this Chapter by means of a

civil action for injunctive and monetary relief.

The burden of proof in such cases shall be

preponderance of the evidence. Any person

who violates or aids or incites another person

to violate the provisions of this Chapter is

liable for each and every such offense for the

actual damages suffered by any aggrieved

party or for statutory damages in the sum of

five hundred dollars, whichever is greater, and

shall be liable for such attorney’s fees and

costs as may be determined by the court in

addition thereto. The court may also award

punitive damages to any plaintiff, including

the City, in a proper case as defined by Civil

Code Section 3294. The burden of proof for

purposes of punitive damages shall be clear

and convincing evidence.

(c) Administrative Complaint.

Any Employee claiming violation of this

Chapter may file an administrative complaint

with the City Manager or his or her designee

who shall investigate the complaint and ren-

der a determination on it. If the City Manager

or Manager’s designee concludes that a viola-

tion has occurred, he or she may issue orders

to the employer appropriate to effectuate the

complaining Employees’ rights, including, but

not limited to, back pay and reinstatement. If

the employer refuses to comply with such

orders, the City Manager may revoke the

employer’s business license. The City

Manager’s determination shall be appealable

to a hearing officer who shall conduct an evi-

dentiary hearing and issue a written decision

thereon. The hearing officer’s decision shall

be reviewable in court.

(d) Nonexclusive Remedies and Penalties. The

remedies provided in this Section are not

exclusive, and nothing in this Chapter shall

preclude any person from seeking any other

remedies, penalties or relief provided by law.

Section 4.65.060.

Supercession by

Collective Bargaining Agreement.

All of the provisions of this Chapter, or any

part thereof, may be waived in a bona fide col-

lective bargaining agreement, but only if the

waiver is explicitly set forth in such agreement

in clear and unambiguous terms. Unilateral

implementation of terms and conditions of

employment by either party to a collective

bargaining relationship shall not constitute, or

be permitted as, a waiver of all or any part of

the provisions of this Chapter.

Section 4.65.070.

Effective Date and Implementation.

Employers’ obligations under Section

4.65.020 shall be effective as of July 1, 2002.

SECTION 2. Any provision of the Santa Monica Municipal

Code or appendices thereto inconsistent with

the provisions of this Ordinance, to the extent

of such inconsistencies and no further, is

hereby repealed or modified to that extent

necessary to effect the provisions of this

Ordinance.

SECTION 3. If any section, subsection, sentence, clause, or

86


87

phrase of this Ordinance is for any reason

held to be invalid or unconstitutional by a

decision of any court of competent jurisdic-

tion, such decision shall not affect the validity

of the remaining portions of this Ordinance.

The City Council hereby declares that it

would have passed this Ordinance and each

and every section, subsection, sentence,

clause, or phrase not declared invalid or

unconstitutional without regard to whether

any portion of the ordinance would be subse-

quently declared invalid or unconstitutional.

SECTION 4.The Mayor shall sign and the City Clerk shall

attest to the passage of this Ordinance. The

City Clerk shall cause the same to be pub-

lished once in the official newspaper within

15 days after its adoption. Except as provided

in Section 4.65.070, this Ordinance shall

become effective 30 days from its adoption.

APPROVED AS TO FORM:

MARSHA JONES MOUTRIE

City Attorney


88

Appendix C: UCLA Study of the Santa Monica Wage Survey of Potentially Affected Businesses


89


90


91

Recent Publications

Living Wage and Earned Income Tax Credit: AComparative Analysis By Dr. Mark D. Turner and Dr.Burt S. Barnow, Johns Hopkins University, October 2002

Helping Working Poor Families, Advantages ofWage-Based Tax Credits Over the EITC AndMinimum Wages By Dr. Thomas MaCurdy & FrankMcIntyre, Stanford University, October 2002

The Employment Impact of a Comprehensive LivingWage Law, Evidence from Florida by David A.Macpherson, Florida State University, June 2002.

The Effects of the Proposed California MinimumWage Increase by David A. Macpherson, Florida StateUniversity, June 2002.

Measuring Poverty in America, by the EmploymentPolicies Institute, April 2002.

The Economic Well- Being of Low-Income WorkingFamilies, by Dr John P. Formby, Mr Hoseong Kim,University of Alabama and Dr. John A. Bishop, EastCarolina University, March 2002

The Long-Term Effects of Youth Unemployment, byDr. Thomas A. Mroz and Dr. Timothy H. Savage,University of North Carolina, Chapel Hill and WelchConsulting Economists, October 2001.

National Good Times, Local Bad Times: The LocalArea Unemployment Crisis, by Employment PoliciesInstitute, August 2001.

Who Would Benefit from a $6.65 Minimum Wage?A State-by-State Profile: 2001 Edition, byEmployment Policies Institute, July 2001.

The Case for a Targeted Living Wage Subsidy, byEmployment Policies Institute, June 2001.

The Effect of Minimum Wages on the Labor ForceParticipation Rates of Teenagers, by Walter J.Wessels, North Carolina State University, June 2001.

Winners and Losers of Federal and State MinimumWages, by Thomas MaCurdy and Frank McIntyre,Stanford University, June 2001.

Does the Minimum Wage Reduce Poverty? byRichard K. Vedder and Lowell E. Gallaway, OhioUniversity, June 2001.

State Flexibility: The Minimum Wage and WelfareReform, by Employment Policies Institute, March 2001.

Evaluating the Effects of Medicaid on Welfare andWork: Evidence from the Past Decade, by Aaron S.Yelowitz, University of California at Los Angeles,December 2000.

Higher Minimum Wages Harm Minority and Inner-City Teens, by Mark Turner and Berna Demiralp,Johns Hopkins University, September 2000.

The Living Wage: Survey of Labor Economists, byThe Survey Center, University of New Hampshire,August 2000.

The Relative Compensation of Part-Time and Full-Time Workers, by Barry Hirsch, Trinity University,April 2000.

Living Wage Policy: The Basics, by EmploymentPolicies Institute, March 2000.

Rising Above the Minimum Wage, by William Even,Miami University of Ohio, and David Macpherson,Florida State University, January 2000.

Economic Analysis of a Living Wage Ordinance, byGeorge Tolley, University of Chicago, Peter Bernstein,DePaul University, and Michael Lesage, RCF Economic& Financial Consulting, July 1999.

Effective Marginal Tax Rates on Low-IncomeHouseholds, by Daniel N. Shaviro, New YorkUniversity School of Law, February 1999.

An Analysis of the Baltimore Living Wage Study, byEmployment Policies Institute, October 1998.

Targeted Jobs Tax Credits and Labor MarketExperience, by Frederick J. Tannery, University ofPittsburgh, June 1998.

Work Ethic and Family Background, by Casey B.Mulligan, University of Chicago, May 1997.

The Minimum Wage Debate: Questions andAnswers, Third Edition, by Employment PoliciesInstitute, May 1997.

From Welfare to Work: The Transition of anIlliterate Population, by Employment PoliciesInstitute, February 1997.

Who Are The “Low-Wage” Workers? by Derek Neal,University of Chicago, July 1996.

Jobs Taken by Mothers Moving from Welfare toWork: And the Effects of Minimum Wages on thisTransition, by Peter D. Brandon, Institute for Researchon Poverty, University of Wisconsin—Madison,February 1995.

Minimum Wage Laws and the Distribution ofEmployment, by Kevin Lang, Boston University,January 1995.

he Employment Policies Institute (EPI) is a nonprofit re-

search organization dedicated to studying public policy is-

sues surrounding employment growth. In particular, EPI

research focuses on issues that affect entry-level employment.

Among other issues, EPI research has quantified the impact of

new labor costs on job creation, explored the connection be-

tween entry-level employment and welfare reform, and ana-

lyzed the demographic distribution of mandated benefits. EPI

sponsors nonpartisan research that is conducted by indepen-

dent economists at major universities around the country.

T

Dr. Richard H. Sander is a professor of law at UCLA and the director of UCLA's Empirical Research Group.

He was educated at Harvard and Northwestern Universities, and holds a doctorate in economics (specializing

in labor economics) as well as a law degree. Sander's past work has studied community economic development,

housing segregation, anti-poverty policy, and class-based affirmative action. He is an adviser to the National

Science Foundation and the Department of Justice, and is founder and President of the Fair Housing Institute.

This report is the fourth major study Sander has published on living wage issues. His studies with Doug Williams

on the Los Angeles Living Wage Ordinance are widely considered the most authoritative research available on

the operation and implementation of living wage laws.

Dr. E. Douglass Williams is an Associate Professor of Economics at the University of the South. Williams has

a doctorate in economics from Northwestern University, where he specialized in labor economics. He coau-

thored a 1997 study of the Los Angeles proposed living wage ordinance with Sander and is currently evaluating

with Sander the effect of the Los Angeles ordinance on contracting costs and practices. In addition, Williams

has published studies on anti-poverty policy and the market for lawyers. From 1997 to 1999, Williams served

as the economist for the City of Milwaukee where he advised city officials on regional economic, tax, pension,

collective bargaining and other policy issues.

Mr. Joseph Doherty is Associate Director of the Empirical Research Group at UCLA. He is a long-time observ-

er of Santa Monica politics and clerked for three years at the Santa Monica City Attorney's office. He is cur-

rently completing a doctorate in political science at UCLA and he is principal investigator for a $1.1 million

national project, funded by the Pew Charitable Trusts, that aims to bring greater transparency to the nation's

campaign finance disclosure laws. For many years, Doherty has been a consultant for Fairbank, Maslin, Maullin,

and Associates, a Santa Monica-based public opinion and research firm.

Dr. Richard H. Sander, Dr. E. Douglass Williams, and Mr. Joseph Doherty

University of California Los Angeles, University of the South, and Empirical Research Group at UCLA October 2002



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