Unprecedented Living Wage Measure Benefits Low Wage Workers Without Harming Business, Peer Review Concludes

By Jorge Casuso

A renowned Harvard University economist has concluded that a proposed living wage ordinance being considered by the City is an effective way of transferring government benefits from hotels to low wage workers with little economic harm.

In a peer review of Dr. Robert Pollin' report on the unprecedented living wage measure, Dr. Richard B. Freeman agrees with the Massachusetts economist that hiking wages to $10.69 an hour will have little effect on how hotels operate in Santa Monica's lucrative Coastal Zone.

That is because hotel profits have been bolstered by Proposition S, an initiative approved by voters in the early 1990s that bans any new hotels in the Coastal Zone, thereby limiting any new competition, Freeman contends.

"City policies restricting growth in the Coast Zone create extra profits for hotels -- profits associated solely with the location that they can afford to spend on wage increases without altering much of their operations," Freeman wrote in a short report to City Manager Susan McCarthy Friday. "The rents ultimately come from Proposition S, and can be distributed to workers through the living wage rather than to the hotels."

"One might criticize particular statistics or calculations as being imperfect," Freeman added, "but the fact that much of the cost of the living wage will be paid out of economic rents from hotels and other businesses that benefit from the restricted growth policy comes across clearly."

The proposed measure - which would be the nation's first living wage law to cover businesses with no city contracts or subsidies - will have a greater impact on restaurants, Freeman said. But Freeman agrees with Pollin that the impact will be greatly lessened by exempting tipped workers.

"The case that restaurants can readily absorb the costs is less powerful, but the exemption of workers with sizable tips arguably protects the restaurants from excessive cost increases," Freeman wrote. "The study also provides some evidence that lower turnover induced by higher wages will save the firms plausible amounts."

Freeman also commends Pollin's decision to apply the proposed measure to businesses with more than $3 million in annual gross revenues. The original proposal crafted by Santa Monicans Allied for Responsible Tourism (SMART) set the threshold at more than 50 employees.

"The decision to pursue the sales threshold seems correct," Freeman wrote, "and the discussion of how to deal with the problem of variability in sales and possible incentives for firms to operate so that they fall below the threshold shows considerable sensitivity to the way such limits may affect behavior or accounting."

But Freeman suggested several ways that firms could get around the $3 million threshold, measures that Pollin's 370-page report did not explore.

"I think that firms may have more ways to avoid this than the study recognizes," Freeman said. "A firm that increases sales from below to above the threshold will suddenly face a rise in wages for its below-living wage work force. This seems to call out for subcontracting or some other evasive scheme."

To close some of the loopholes, Freeman suggests tying the size of the wage increases to the size of the firm.

"Thresholds are discontinuous, so why not do what the market does and relate living wages to the size of a firm through a continuous transformation - for instance applying a lower graduated living wage for smaller firms?" Freeman wrote.

Freeman also agreed with Pollin that although some low-wage workers will be displaced by more skilled employees if the salaries are increased, the overall benefits will make the proposed measure worthwhile.

"I think that even if substitution is a more serious issue, this does not affect the overall conclusion that the living wage will benefit low wage workers," Freeman wrote. "If the Coastal firms hire more skilled workers attracted by the better wages, the less skilled who might have gotten the Coastal jobs could find work with the firms that would otherwise have hired the more skilled.

"In this case the unskilled workers still gain, though by less than if there was no substitution of more skilled for less skilled workers, while more skilled workers (also relatively low paid) also gain."

Freeman also argues that the proposed measure will have less of an economic impact on residents than a traditional living wage measure, where the increased salaries are paid for in part by the local taxpayers.

"Residents will pay for at least part of a contractors only living wage while the Coastal Zone ordinance will largely tax non-residents, so it seems to be better on both the benefit and cost side to residents," Freeman wrote.

Freeman also advocates restricting the proposed living wage to the Coastal Zone, rather than applying it citywide. (The Coastal Zone includes the area west of 4th Street north of Pico Boulevard and west of Lincoln Boulevard south of Pico.)

"Since businesses outside the Coastal Zone do not have economic rents from restrictive growth policies, applying the living wage to them is likely to create greater economic costs, so that the level of the living wage would have to be lower to obtain the same benefit-cost ratio," Freeman wrote.