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
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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
The Economic and DistributionalConsequences of the Santa Monica
Minimum Wage Ordinance
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."
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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.
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3
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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
Employment Policies Institute | www.EPIonline.org
5
Employment Policies Institute | www.EPIonline.org
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.
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Employment Policies Institute | www.EPIonline.org
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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.
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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.
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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.
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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.
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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.
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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.
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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-
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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.
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16
Livi
ng W
age
Ordi
nanc
e M
ap
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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
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
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27
Employment Policies Institute | www.EPIonline.org
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.
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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.
Employment Policies Institute | www.EPIonline.org
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.
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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.
Employment Policies Institute | www.EPIonline.org
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
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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
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35
Employment Policies Institute | www.EPIonline.org
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
General Description of Market for
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.
Scale Effects From Price Increases
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.
Labor-Capital Substitution
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.
Labor-Labor Substitution
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-
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Employment Policies Institute | www.EPIonline.org
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
General Description of Market for
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.
Scale Effects From Price Increases
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.
Labor-Capital Substitution
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.
Labor-Labor Substitution
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
General Description of Market for
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
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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.
Labor-Capital Substitution
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.
Labor-Labor Substitution
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.
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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
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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
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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.
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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.
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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.
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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).
Employment Policies Institute | www.EPIonline.org
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).
Employment Policies Institute | www.EPIonline.org
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).
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
52
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
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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.
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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
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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.
Employment Policies Institute | www.EPIonline.org
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
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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.
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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).
Employment Policies Institute | www.EPIonline.org
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).
Employment Policies Institute | www.EPIonline.org
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.
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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.
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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.
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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
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69
Employment Policies Institute | www.EPIonline.org
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
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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).
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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.”
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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
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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.
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75
A Comparison of Salient Features of the Coastal Zone
Minimum Wage and a Proposed Santa Monica EITCTable 10.1
Employment Policies Institute | www.EPIonline.org
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
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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.
Employment Policies Institute | www.EPIonline.org
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
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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
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80
Percentage of Workers Receiving Employer-provided Health
Insurance by Industry and Wage in Los Angeles County (N is Unweighted)Table 4A
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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
Employment Policies Institute | www.EPIonline.org
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,
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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
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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
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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
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Appendix C: UCLA Study of the Santa Monica Wage Survey of Potentially Affected Businesses
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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
The Economic and DistributionalConsequences of the Santa Monica
Minimum Wage Ordinance