News Release

October 12, 1999
Contact: Rob Valletta (415) 974-3271

Living Wage Ordinances

In recent years, a number of local governments have adopted living wage ordinances (LWOs). Among the newest LWO initiatives is the proposed law under consideration by the City and County of San Francisco, which would set a wage standard of $11 per hour for businesses and non-profit organizations that provide services to or lease land from the local government. In the October 15 issue of the FRBSF Economic Letter (99-31), San Francisco Fed Senior Economist Rob Valletta discusses issues important for understanding the impacts of LWOs in general, along with some specific aspects of San Francisco's law.

LWO proponents contend that employees who provide services to local governments should be paid wages that adequately meet the local costs of living. By requiring businesses covered by the LWO to raise the wages paid to their lowest-wage employees, incomes will increase for low-wage employees who retain their jobs. However, Valletta points out that as with 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."

The author describes two potential adverse side effects: first, increased costs resulting from LWOs may increase local government expenditures (relative to revenue) and/or decrease local government services; second, as covered employers try to avoid higher labor costs, employment of low-wage workers may be reduced. Valletta explains that 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."

If passed, the living wage ordinance under consideration by San Francisco most likely would become effective at the start of fiscal year 2001. Once differences in costs of living are accounted for, San Francisco's proposed living wage of $11 per hour is not substantially higher than mandated living wage cities outside of California. However, Valletta notes that San Francisco's proposed living wage exceeds that in other major California cities with LWOs by a substantial margin, "÷about 20% above the mandated living wage in San Jose and Oakland and about 33% above that in Los Angeles." Moreover, San Francisco's law would apply broadly, including both service contractors and firms leasing city land.

Overall, "it appears likely that the costs÷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," concludes Valletta. "Such adverse effects are limited mainly by the extent of noncompetitive elements in the government contracting and leasing process."