Living Wage Study Flawed, Peer Reviewer Concludes

By Teresa Rochester and Jorge Casuso

A long-awaited report analyzing the impacts of a proposed living wage law being studied by the City Council trivializes the anticipated loss of jobs and poorly targets the low-wage workers it is meant to assist, according to a peer review by a leading economist.

In his review, Dr. David Neumark, a visiting fellow at the Public Policy Institute of California, specifically contends that the study conducted by Massachusetts economics professor Dr. Robert Pollin downplays the impact the unprecedented proposal would have on the loss of jobs in hotels and restaurants.

"Interestingly, for both restaurants and hotels a high fraction indicated they were likely to raise prices in response to the living wage," wrote Neumark, an economics professor at Michigan State University. "More importantly, the evidence pointed to a high likelihood of employment reductions in response to the living wages. To my surprise, though, the authors conclude, in both cases, that these results 'send no clear message' regarding layoffs.

"The projected employment losses are not trivial," Neumark warned. "However, the authors have constructed arguments to try to trivialize these employment losses, which I think are not valid.... The estimated employment losses ought to give one pause, because they could conceivably be large enough to more than offset the wage gains."

Pollin's report, which the City released last week, weighed what would happen if the 72 businesses in Santa Monica's lucrative coastal zone grossing more than $3 million a year were required to pay their workers at least $10.75 an hour.

The proposal - which would make Santa Monica the first city in the nation to require businesses with no municipal contracts or subsidies to pay their workers a living wage - would raise the salaries of 2,477 workers, according to the study.

In a letter to City Manager Susan McCarthy last week, Neumark - who is well known for his research on the minimum wage - also poses the following "nagging questions about living wages as distinct from minimum wages."

· Why does who you work for determine whether the government steps in and tries to raise your family's income? "I can imagine no rationale for drawing these distinctions among workers, which have nothing to do with their families' needs," Neumark wrote.
· Why would a smaller city pass a law that essentially taxes employers located in the city to pay out benefits to many workers who do not live in the city?
· Why does the proposed law draw no distinction between the low-wage teenage worker of an affluent family and the low-wage single breadwinner in a poor family? "For that reason," Neumark wrote, "I am more supportive of income support programs, which target poor families well, can be directed toward residents of a particular jurisdiction, and if structured correctly can encourage work."

Neumark also questions the 370-page report's failure "to assess how firms were likely to respond to the higher costs."

"In particular, this proposed study made no attempt to infer what the Santa Monica living wage was likely to do, based on the experience with living wages in other cities, which is the standard way to evaluate policy effects in social science research," Neumark wrote.

Supporters of the living wage proposal quickly responded with a statement questioning Neumark's objectivity and pointing out "errors" in his review.

"David Neumark's response... should come as know surprise," said the statement from the Santa Monica Living Wage Coalition. "He is well known critic of the minimum wage who has argued that increases in the minimum wage cause job loss and do not target poor people, despite mounting evidence to the contrary."

The statement points to a landmark study conducted by economists at UC Berkley and Princeton that found that increases in the minimum wage do not have a negative effect on employment. The report found that 86 percent of minimum wage earners in Los Angles County are adults and 70 percent work full time. In addition 63 percent of the gains of a minimum wage increase would benefit workers in families making less than 25,000 a year, according to the study.

The statement also charges that Neumark made "fundamental factual errors" in his analysis, particularly in his evaluation of the impacts of Los Angeles' living wage ordinance. According to the release, Neumark "assumes that the ordinance covers all private firms in the city - or 87 percent of the city's workforce. This figure has no empirical basis."

Neumark places too much emphasis on a survey of local businesses, many of which back a living wage measure sponsored by the major hotels, according to the statement.

"It is dubious at best to place much stock in their response to questions about what they would do in the event of a living wage ordinance," the statement said. "Neumark himself warns in early comments to Prof. Robert Pollin that 'the results (of an employers survey) would have to be interpreted cautiously, because they are nothing but subjective explanations."