FRBSF Economic Letter
99-31; October 15, 1999
 Economic
Letter Index
Living Wage Ordinances
Living wage ordinances (LWOs) have been adopted by a number of local
governments in recent years. Among the newest initiatives is the proposed
law under consideration by the City and County of San Francisco. This
LWO would establish a wage floor of $11 per hour--well above the $5.75
per hour state minimum wage--for firms that provide services to or lease
land from the local government. Support for such laws is based on the
view that employees who provide a service to local government should be
paid a wage that adequately meets the local cost of living. However, as
with broader minimum wage laws, LWOs are likely to involve some important
tradeoffs, including the possibility of unintended adverse consequences
for low-wage employment and the city budget.
This Economic Letter discusses living wage ordinances in general
and some specific aspects of San Francisco's proposal. The impact of LWOs
on the budget, the local labor market, and local business conditions depends
on various features of the law and the local economic climate. Estimating
the quantitative magnitude of these effects in a specific location is
beyond the scope of this piece. Instead, this Economic Letter
discusses some key issues that are important for understanding the likely
qualitative impacts of LWOs.
Background
Living wage ordinances are laws that have been passed by some cities
and counties in the U.S. requiring firms that have a contractual relationship
with the local government to pay workers wages that exceed the prevailing
federal or state minimum wage. Observers generally mark the 1994 passage
of an LWO in Baltimore, Maryland, as the beginning of a living wage movement
that has gained steam in recent years. Since the passage of Baltimore's
law, about 30 other U.S. cities or counties throughout the country have
passed LWOs, including three major cities in California: Los Angeles in
1997, and San Jose and Oakland in 1998 (within the Twelfth District, several
smaller cities in California and two jurisdictions in Oregon also have
passed LWOs; see ACORN 1999 for a list of LWOs in effect nationwide).
The definition of covered firms and the level of the wage floor are
the key elements of the laws. In most LWOs, coverage applies to firms
providing a minimum yearly level of contracted services to the city. Some
of the laws stipulate that instead of or in addition to service contractors,
coverage applies to firms receiving a subsidy from the city government,
such as industrial revenue bonds, tax abatements, or development grants.
The wage floors in these laws generally are in the range of $7 to $9 per
hour, often with an additional $1.25 per hour added if employers do not
provide key benefits (mainly health insurance) in covered jobs. Nationwide,
the highest wage floor in an existing law is in San Jose: $9.50 per hour
with benefits or $10.75 without.
San Francisco's law
San Francisco currently is considering a living wage ordinance, which,
if passed, would most likely become effective at the start of fiscal year
2001. The proposed ordinance would cover firms providing service contracts
that cost the city or county at least $25,000 during a fiscal year. As
with most other LWOs, businesses that sell goods to the city would not
be subject to its provisions, nor would businesses with five or fewer
employees. Unlike some other LWOs (for example, in Los Angeles, Oakland,
and San Jose), San Francisco's law would not extend to firms that receive
local government subsidies. On the other hand, an unusual feature of San
Francisco's proposed ordinance is its application to firms that lease
property from the city or county. Coverage therefore would extend to retail
and other establishments located on port property (including tourist centers
along the waterfront), as well as businesses located at San Francisco
Airport and other public spaces (Sinton 1999).
The specified wage floor in San Francisco's proposed LWO is $11 per
hour. The law also would require covered firms to pay for workers' health
benefits and provide them with 12 days of paid vacation, sick leave, or
personal leave and 10 days of unpaid leave each year. The wage floor would
be adjusted annually according to the change in the Consumer Price Index
(CPI) for the San Francisco-Oakland-San Jose region.
The wage level in San Francisco's proposed law is higher in absolute
terms than that in any existing LWO. As noted by Reich, et al. (1999),
once differences in costs of living are accounted for, San Francisco's
proposed living wage is not substantially higher than mandated living
wages in cities outside of California. For example, after adjustment for
differences in the cost of living (as of 1995), San Francisco's proposed
living wage is below those in Baltimore and Miami and only a bit above
that in Boston. On the other hand, even after adjusting for differences
in the cost of living, San Francisco's proposed living wage exceeds that
in other major California cities with LWOs by a substantial margin: it
is about 20% above the mandated living wage in San Jose and Oakland and
about 33% above that in Los Angeles (based on county cost-of-living estimates
for 1996-97 from the California Budget Project in Sacramento).
LWO impacts
Proponents of LWOs argue that living wage laws provide a means of raising
the wages paid to some low-wage workers without substantial adverse impacts
on the level and quality of public service provision, the city budget,
and employment. However, like most government mandates, the gains produced
by the LWO are likely to be accompanied by costs, some of which are unintended
and may interfere with the goal of increasing income for individuals who
earn low wages.
Assuming that an LWO applies to a significant number of workers (i.e.,
it is not purely symbolic), its first-order effect is clear: by requiring
businesses covered by the LWO to raise the wages paid to their lowest
wage employees, incomes will increase for low-wage employees at these
businesses who retain their jobs. However, two key adverse side effects
are possible: the resulting increase in costs may cause an increase in
local government expenditures relative to revenues and/or a reduction
in the level of local government services provided, and employment of
low-wage workers may be reduced as covered employers seek to avoid the
higher labor costs associated with the protected class of worker. These
two effects should be considered together, because the extent of employment
adjustment largely depends on the degree of budgetary accommodation: the
greater the degree of absorption of the LWO's costs into local government
expenditures, the smaller the associated employment reduction.
Assume for the moment that the bidding process for local government
contracts and property leases is fully competitive, and consider the general
case of service contractors first. They are likely to respond to the increase
in labor costs by attempting to reduce their usage of low-wage (covered)
workers. Even if reduced reliance on low-wage workers is possible, average
costs to covered firms probably would rise, which in turn would raise
their minimum bids on contracted services. This increases the level of
local government expenditures needed to maintain the existing level of
service provision; the local government can respond by cutting the level
of services provided or supporting the necessary expenditure increase
through increased revenues.
San Francisco's law also would apply to businesses that lease city land.
Like service contractors, covered leasers would face higher labor costs
for low-wage workers. Although covered retail establishments may be able
to absorb these costs in part through higher prices charged to consumers,
their ability to do so is limited by the degree of competition in retail
sales markets, which typically is quite high (except in relatively protected
locations such as the airport). The costs of the LWO to leasers therefore
will be passed on to the local government budget. However, in contrast
to the expenditure increase associated with covered service providers,
most of the increase in leasers' costs probably would be absorbed through
a reduction in their bids for leased property and therefore a reduction
in local government revenues. The city would then face the choice of raising
additional revenue from other sources (such as taxes) or cutting expenditures
on other services.
Although employment losses for low-wage workers also are of concern,
several factors are likely to limit the disemployment effects of LWOs
in San Francisco and elsewhere. Compared to firms affected by an increase
in a state or local minimum wage law that applies to the entire workforce,
contractors and many retail firms affected by an LWO are not able to shift
production to another location and avoid paying the higher wage while
maintaining the same lines of business (Bernstein 1998). Moreover, employers'
ability to reduce their use of covered labor through altering their service
delivery methods is limited for services that are largely dependent on
low-wage labor, such as retail sales and home visits made by health services
workers. The costs of providing such services are likely to rise, with
corresponding adverse effects on the local government budget.
Up to this point, the depiction of LWO effects on low-wage employment
and the government budget has relied on the assumption of a competitive
bidding process for government service contracts and property. However,
if these processes are not fully competitive, bids on service contracts
are not minimized, leasers receive an implicit subsidy through lease rates
that fall below market value, and both types of firms earn above-normal
profits. If so, imposition of the LWO may force local government agencies
and potential contractors to evaluate bids more closely and squeeze out
contracting inefficiencies or implicit subsidies. Under these circumstances,
the LWO may have largely neutral budgetary effects. Contractors and leasers
earning above-normal profits will absorb some or all of the extra labor
costs, thereby reducing their excess profits and perhaps improving efficiency
in the supply of city services. Although a noncompetitive bidding and
leasing process could be addressed directly by local legislators, passage
and enforcement of an LWO might provide an alternative means to realize
the associated gains. As such, it may provide a means of transferring
income to low-wage workers with little or no efficiency loss for the allocation
of government services and property.
Beyond these budgetary and employment issues is the key issue of who
receives the wage increase. Covered employers who are unable to reduce
their labor usage may nonetheless shift employment away from the lowest
productivity workers and instead hire workers whose underlying productivity
(hence their alternative opportunities) are in the $11 range. Under these
circumstances, adverse employment effects will be most severe for the
lowest-wage workers, who can least afford them. A related issue is the
interaction of LWO effects on employment and wages with the impact of
tax and transfer programs more generally (Bernstein 1998, Williams and
Sander 1997). The increased income received by workers who benefit from
the LWO will be offset to some degree by their reduced receipt of tax
subsidies and government transfers. Although some of the reduction in
government subsidies may produce savings for local government, much will
come from reduced transfer payments from the state and federal government
(for example, through reduced eligibility for the Earned Income Tax Credit).
Thus, the increased wage payments made by private-sector employers due
to the LWO could be offset to some degree by reduced subsidies from higher
levels of government. Although increased private-sector wage payments
are at the philosophical core of the living wage movement, in narrow economic
terms such offsets may not represent an improvement in the well-being
of the local community.
Conclusion
A key concern regarding government labor market mandates is the possibility
of unintended side effects that undercut the law's intent. In the case
of living wage ordinances, reduced employment of low-wage workers is one
such possibility. However, it appears likely that the costs of San Francisco's
LWO primarily will be passed on to the local government budget, through
higher expenditures needed to maintain existing services or through reduced
lease payments from firms that lease city land. Such adverse effects are
limited mainly by the extent of noncompetitive elements in the government
contracting and leasing process. Finally, depending on the exact employment
and tax effects, LWOs may not be well targeted at improving the income
of workers at the bottom of local pay scales.
Rob Valletta
Senior Economist
References
Association of Community Organizations for Reform Now (ACORN). 1999.
"Summary of Living Wage Ordinances on the Books." http://www.livingwagecampaign.org/
(updated July; accessed October 5).
Bernstein, Jared. 1998. "Living Wage Campaigns: A Step in the Right Direction."
Unpublished manuscript (March). Washington, DC: Economic Policy Institute
.
Reich, Michael, Peter Hall, and Fiona Hsu. 1999. "Living Wages and the
San Francisco Economy: The Benefits and the Costs." Unpublished manuscript
(June). University of California, Berkeley: Institute of Industrial Relations.
http://socrates.berkeley.edu/~iir/
(accessed October 5).
Sinton, Peter. 1999. "'Living Wage'--Effects on Firms." San Francisco
Chronicle, May 5, p. B3.
Williams, E. Douglass, and Richard H. Sander. 1997. "An Empirical Analysis
of the Proposed Los Angeles Living Wage Ordinance." Report prepared for
the City of Los Angeles, January 2.
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, CA 94120
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