Special Report

Minimum Wages of Inequality

San Francisco offers preview of Seattle's $15/hr. ploy.

By 6.17.14

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It is remarkable these days how quickly an idea, once resurrected by a spastic media, can move from the fringe into the mainstream. Formerly the utopian din exclusive to protesters swarming the nation’s Burger Kings and Pizza Huts, minimum wage reforms are now reality for some cities.

At the federal level, the debate has remained relatively moderate, with President Obama recently urging Congress to increase the wage to $10.10 an hour. But in cities, conversation has become action. Last November, Seatac, WA, became the first city to raise its minimum wage to $15, a seemingly radical move that was attributed to the region’s socialist rumblings. But the idea has spread in the half-year since. Two weeks ago, Seattle approved its own increase to $15. Days later the always struggling Bay Area city, Richmond, CA, approved a hike to $13. Similar raises are being weighed in New York City, Chicago, and Los Angeles. Thus, debates have resurfaced about the theoretical merits of raising the minimum wage, especially to those levels. But if officials want to see the actual consequences they should note one city where wage hikes have already occurred — San Francisco.

In 2003, San Francisco voters approved a measure that increased the minimum wage to $8.50, with future raises linked to the consumer price index. Today, the wage is $10.74 — the nation’s highest — and is supplemented by additional city-mandated provisions. Since 2007, businesses have been required to grant employees paid sick leave; those employing twenty or more must provide health care. These provisions bring San Francisco’s minimum compensation to $13.12 an hour, making the city a pioneer in the “living wage” movement.

So how has this worked? The results have been mixed, further muddling a controversial issue. UC-Berkeley’s study of the law is most comprehensive, measuring the effect on San Francisco’s wages and employment. One finding was that, rather than killing jobs, the law oversaw slight employment increases even during the recession. The city’s unemployment rate during this period has remained below the national average, recently dipping to 4.4 percent.

One reason is that San Francisco has benefited from a tech boom, which has brought the sort of unbridled growth that no mere wage law could stop. According to the study’s authors, Michael Reich and Ken Jacobs, the higher wages also reduced employee turnover, potentially creating the savings needed to preserve jobs.

But San Francisco’s minimum wage law did raise prices, including a increase of 2.8 percent for food services. A survey conducted by the Golden Gate Restaurant Association found that in response to the law over half of restaurants cut staff, 89 percent raised prices, and some left the city altogether. Henry Karnilowicz, president of a local merchants association, agreed that the law had raised prices without increasing purchasing power accordingly.

“It’s just a matter of inflation,” he said by phone. Because of the law, “everything just goes up and up.”

Karnilowicz’s claim dovetails nicely with the facts. In the decade since the minimum wage law took effect, the Bay Area’s consumer price index has increased by 23 percent, and of the region’s nine counties, inflation has been highest in San Francisco. Residents’ purchasing power ranks in the bottom 10 percent of cities nationwide, with a dollar going only three-fifths as far as it would in Houston. The city now ranks third-highest nationally in cost of living, manifested in high prices for goods and services from toilet paper to bottles of beer, day care to doctor’s visits. Never mind the ever-bloating housing market.

There are several possible causes for these higher prices. San Francisco’s housing is expensive because demand for living there is high, while unit supply is kept artificially low by land-use regulations. The city’s high tax burden gets passed down onto prices as well. But “it doesn’t take a brain surgeon,” noted Karnilowicz, to also attribute them to the minimum wage law, which raised wages for an estimated 11 percent of workers, influencing not only the food industry, but hospitality, tourism, retail, and manufacturing. In the past decade, the law has generated $1.2 billion in added compensation, but as economist Jeffrey Dorfman noted recently in Forbes, this comes at an expense.

“Raising the minimum wage adds no money into the local economy,” he wrote. “It only redistributes money among people who are already part of the economy. Low wage workers will have more money to spend; business owners and customers of those businesses will have less.”

Minimum wage reformers hope that rich business owners and patrons will primarily shoulder the burden of this redistribution. But that hasn’t been the case in San Francisco, where high costs affect everyone, especially the poor. In recent years, media accounts have proliferated about how San Francisco’s traditional populations — whether bohemian, black, or Hispanic — have been priced out of the city, and driven into suburbs like Oakland. Again, this can be attributed to numerous factors, but it seems ironic that in the ten years since the minimum-wage law’s passage, San Francisco has become more expensive, and as a result, more unequal.

Yet, this may not prevent the city from expanding the policy. Recently a measure that would raise the minimum wage to $15 was proposed by mayor Ed Lee, and will face the ballot in November. Meanwhile, other cities, apparently ignoring the effects of San Francisco’s law, are hell-bent on writing their own. The Seattle measure will increase the minimum wage to $15 over a seven-year period, in a city already made expensive by high taxes, regulations, and labor costs (the current minimum wage there is $9.32). As in San Francisco, such factors have caused Seattle’s poor population to concentrate in the suburbs. Raising the minimum wage to $15 will increase costs all the more, and it is unclear whether the added money in workers’ pockets will offset these costs.

Such laws are crafted in places like San Francisco and Seattle to address inequality, and the applied measure of lifting wages is theoretically good. But by doing this forcefully, and without offering higher productivity in return, they just burden select businesses and customers. A more equitable method for boosting income would be to offer tax credits that supplement working households. Programs like the Earned Income Tax Credit have already proven effective at the federal level, but remain little discussed in cities. Another method could be for cities to provide workforce training that increases earning potential through authentic rather than artificial means. But so far raising the minimum wage has proven more popular, perhaps because it is more symbolic. Whether it actually helps the intended groups — or just increases expenses for them and everyone else — seems beside the point to public officials.

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About the Author
Scott Beyer is traveling the nation to write a book about revitalizing U.S. cities. He blogs at BigCitySparkplug.com.