Wage pressures hitting business.

Impact From Minimum Pay Plans

Advocates for Santa Monica's "living wage" proposal contend it would raise the standard of living for thousands of workers at some of the busiest restaurants and hotels in the city, while opponents rail that certain establishments would face prohibitive labor costs that would result in layoffs and possibly in financial ruin.

They're both right. And wrong.

While no comprehensive studies have been done on the effects of the living wage laws now on the books in cities like Los Angeles, San Jose and Baltimore, studies on minimum wage increases indicate that a dramatic jump in low-wage workers' paychecks doesn't necessarily translate into a reduction in the number of people living in poverty.

On the other hand, businesses find ways to survive, and aren't likely to go under because they have to pay more for menial jobs. Of course, one of the ways they survive is often by trimming staff.

"There's no doubt that, if you keep your job, you are better off. And people who are using $6-an-hour workers will still need some of them at $10 a hour. But not all of them," said David Neumark, professor of economics at Michigan State University who has done studies on the impact of minimum wage increases. "But we're not talking about big hotels closing their doors and moving out (of Santa Monica), that's absurd."

While Neumark is convinced that boosting the minimum wage results in job losses, not everybody sees it that way.

Robert Pollin, an economist at the University of Massachusetts at Amherst, asserts in his book "The Living Wage: Building a Fair Economy" that when demand for a company's product or services is high, the company will work to keep up with that demand, regardless of whether minimum wages are rising.

The economy, and thus demand for products and services, was expanding during the last hike in the federal minimum wage in 1997, and the unemployment rate was unaffected, he argues.

Further, he maintains that living wage measures such as the one being considered in Santa Monica end up boosting employee productivity and result in less absenteeism and turnover, helping businesses.

But the living wage measure being proposed in Santa Monica in some ways is harsher than those instituted by the cities of L.A., Baltimore and San Jose. Those other cities' living wages apply only to city contractors, and only for workers who are working on city contract jobs. In that sense, they are voluntary. Any business wishing not to pay the living wage need merely not bid on those cities contracts.

The Santa Monica measure, however, would apply to all large businesses (50 or more employees) located in a one-mile-long coastal zone. (The zone includes the prosperous Third Street Promenade and several large hotels overlooking the beach.) The only way a business could opt out would be to relocate out of the zone.

Living wage increases are typically far more dramatic than minimum wage increases. The national minimum wage last rose to $5.15 an hour from $4.75, although the California minimum wage was raised last year to $5.75. Living wage increases often double the minimum wage, producing a much more jarring effect on businesses.

Under the Santa Monica proposal, businesses in the coastal zone would be required to pay at least $10.69 an hour, plus benefits, the amount believed necessary for a worker to feed a family of four without food stamps.

While that pay boost would certainly be welcomed by workers, it would also likely lead to layoffs.

Most minimum wage studies focus on 16- to 24-year-olds, so their findings are hard to extrapolate to low-income families. But those studies suggest that a 10 percent rise in the minimum wage results in a 1 percent to 2 percent reduction in employment.

In a robust economy, the impact is certainly muted, but low-wage jobs are the first to go in the event of a downturn, studies have found.

Florida State University economist David Macpherson published a study on the overall economic impact of California's March 1998 increase in its minimum wage to $5.75 from $5.15 per hour. Macpherson predicted that the increase would reduce statewide job growth by 25,000 jobs, which would translate to approximately $230 million in lost annual California worker income.

He also predicted that, even without those additional 25,000 jobs, the higher minimum wage would increase California businesses' net labor costs by $790 million.

Of course, it didn't exactly work out that way. California's unemployment rate is at its lowest level since July 1990 - which points up some of the problems with economic forecasts. Macpherson's predictions were based on what would have happened had all other conditions remained the same, but California's economy underwent a major resurgence last year.

Advocates of the Santa Monica proposal dispute that assertion. They say low-skilled workers are the only people interested in performing the menial tasks at the targeted businesses - primarily hotels and restaurants - in the mile-long coastal zone.

"That's a common misperception of service-industry jobs - people who work in the laundry, dishwashers, housekeepers. The reality is that no one else is going to do those jobs," said Stephanie Monroe of Santa Monicans Allied for Responsible Tourism, which is sponsoring the living wage measure.

Economists like Neumark say there may be an overall cost benefit derived from forcing businesses to have fewer workers at higher wages, because it could serve as a catalyst for greater use of technology and a more-productive workforce. But that's not reassuring for low-wage workers who would lose their jobs.

Santa Monica politicians are aware of the possible Catch-22 of the situation, and are hoping that a study they commissioned last week will provide some answers.

"One of the things the study should make clear to us is, are there trade-offs between more employees at lower wages vs. fewer employees at higher wages?" said City Councilman Michael Feinstein.

The city plans to hire a consultant by Dec. 1 to provide a report by April l, 2000 about the impact of the proposed living wage ordinance.