Proposition L - Minimum Wage

What it does

Proposition L would raise the minimum wage in San Francisco to $8.50 per hour from its current level of $6.75. Beginning in January 2005, the minimum wage would be automatically adjusted to keep pace with inflation, based on the change in the Consumer Price Index for the Bay Area. Businesses with fewer than ten employees and non-profit organizations would be exempt from the increase until 2005, at which time the increase would be phased in over a one-year period.

At $6.75 an hour, a worker earns $13,500 gross pay for a 2,000-hour work year. At $8.50, this would rise to $17,000, a difference of $4,000, or an almost 30% increase.

Because it is an ordinance, Proposition L could be enacted by a majority vote of the Board of Supervisors, with Mayoral approval. Its sponsors instead chose to gather signatures and submit the measure directly to the voters.

Why it is on the ballot

The federal government has set minimum wages since the 1930s, but a handful of states, including California, choose to set their own minimum wages at a higher level. The current minimum wage in San Francisco is $6.75 per hour under California State law, which is over 30 percent higher than the federal minimum wage of $5.15. San Francisco is one of more than 100 cities and counties in the United States with a “living wage” law, which requires that local government, businesses contracting with the City, and organizations having other financial relationships with the City to pay their employees substantially more than the State minimum. San Francisco’s living wage law requires these groups to pay a minimum of $10 to $11.25 per hour depending on benefits. However, living wage laws are generally much more limited in scope than federal or state minimum wages, as they apply only to businesses having direct financial relationships with City government.

Although historically it is extremely rare for local governments to set their own minimum wages, recent years have seen a number of efforts in cities across the country to do so. As of yet, only three local governments in the United States have successfully adopted a minimum wage, though none has yet been implemented. A voter-approved minimum wage increase in New Orleans has been stalled by legal challenges; Santa Monica adopted a local minimum wage ordinance that was subsequently overturned by voters; and a recently adopted increase in Santa Fe is expected to face legal challenges prior to implementation.

Changes in the Minimum Wage Over Time

Over the past 35 years the minimum wage in California has declined in purchasing power and failed to keep pace with rising living expenses in San Francisco. The perception that state and federal policy have failed to provide an adequate wage floor in an expensive, high-income city was a primary motivation for Proposition L’s sponsors to seek a local minimum wage.

Although both the federal and California minimum wages are increased periodically, neither has grown fast enough to keep pace with inflation over the past several decades. The purchasing power of the minimum wage peaked in 1968 and has declined ever since, despite economic growth and increases in worker productivity. Thus, while the numerical value of the minimum wage has increased, the value of the dollar has declined at a faster rate, making a minimum wage earner today relatively poorer than a minimum wage earner 30 years ago. At its 1968 peak, the minimum wage was worth $8.45 in current dollars. In other words, if the minimum wage had been increased to keep pace with inflation since 1968, it would be $8.45 today. Proposition L would return the minimum wage to its historical peak purchasing power.

Wages overall have increased much faster than inflation, particularly in San Francisco. Average incomes in the city have increased dramatically over the past 30 years while the value of the minimum wage declined. Between 1959 and 1999, per capita income in San Francisco grew by 250 percent, while the value of the minimum wage remained substantially constant.

Pros

Proponents state:

• Federal and state policies have failed to establish an adequate wage floor in high-income, expensive cities such as San Francisco. Local minimum wages allow cities to ensure that the needs of their poorest residents are met. San Francisco is an extraordinarily expensive place to live and our minimum wage should reflect that
• The current state minimum wage is not enough to meet basic needs for many in San Francisco, and as a result public money must be used to support the poor through social programs and income redistribution. Raising the minimum wage will give low-income families higher purchasing power and decrease the need for government spending.
• There is little evidence that a minimum wage increase will cause undue harm to the economy; the city can improve the welfare of its low-income residents without increasing unemployment
• By indexing the minimum wage to inflation, Prop. L will ensure the purchasing power of the minimum wage does not decline over time and will depoliticize the process of setting minimum wage levels

Cons

Opponents state:

• Prop. L does not need to be on the ballot. The Board of Supervisors could enact this legislatively. It is on the ballot to serve as a vehicle to turn out the progressive vote, and to avoid having to compromise with the restaurant industry’s demand for a tip credit
• Raising the minimum wage will project a negative message about San Francisco’s business climate. San Francisco is an expensive place for businesses, and a wage increase will reinforce the impression that San Francisco is unaccommodating, deterring new businesses from moving to the City. Even if the economic literature casts doubt on whether a minimum wage increase would harm the economy, the symbolic message to the business community could hurt job creation in our city, given the particular challenges San Francisco faces in overcoming its anti-business reputation
• Increasing the minimum wage only in San Francisco will create competition for the lowest-paying jobs, as people from outside the city come to the City seeking the higher wages. Employers would attempt to raise the minimum skill level that they can command for work. This increased competition could make it more difficult for City residents, particularly the least skilled, to find jobs
• Because Prop. L would index the minimum wage to inflation, the difference between wages in the City and elsewhere could grow larger each year. This would exacerbate the negative effects of the measure over time. Furthermore, the minimum wage would be increased even during periods of combined inflation and economic recession, when such increases would be most economically harmful
• The measure should include a tip credit, which would allow increases for the lowest paid workers but limit the impact on restaurants that are already struggling

SPUR's analysis

Who Would A Minimum Wage Increase Affect?

Detailed wage data are not readily available for San Francisco, but it has been estimated that a $1.75 minimum wage increase would affect five to ten percent of the overall San Francisco workforce, some 25,000 to 50,000 workers. The primary impact of the minimum wage increase would be on workers currently earning less than $8.50 per hour. There would also be a secondary effect, where many workers currently earning slightly above $8.50 would experience wage increases. For example, a worker earning $9.00 may experience a wage increase if those she supervises are increased to $8.50. Minority groups are disproportionately represented among low-wage workers, and consequently would gain a greater share of the benefits from a minimum wage increase.

Minimum wage workers are concentrated in low-skill, non-unionized industries. Businesses in these industries would experience the greatest increases in costs as the wages of their employees increased. In San Francisco, the businesses most affected would undoubtedly be eating and drinking establishments, followed by retail and other assorted service industries. Both large and small businesses would be affected by an increase in labor costs.

The role of tips in calculating wages is a controversial issue with respect to minimum wages. The federal minimum wage allows for a “tip credit,” meaning employers can pay $2.13 per hour, as long as the employee earns the additional $3.02 of the minimum wage in tips. If the employee does not earn enough in tips, the employer is responsible for the difference between tips earned and the minimum wage. There is no tip credit provision in California’s minimum wage law, nor is there one in Proposition L. Labor advocates generally oppose tip credits because they view tips as inconsistent and supplemental. Many restaurant owners have advocated strongly for a tip credit, on the grounds that many tipped employees make fairly high hourly wages after tips. San Francisco restaurant industry representatives say a minimum wage increase would be acceptable if it contained a tip credit, offsetting the impact of cost increases while increasing the wages of non-tipped low-wage workers such as dishwashers and line cooks. According to a restaurant lobbying group, restaurants and bars in the city average 18 tipped employees and 6 non-tipped employees earning less than $8.50 per hour, meaning that a wage increase with a tip credit would have a much smaller affect on both businesses and workers than one without a tip credit.

The Impact of Indexing the Minimum Wage to Inflation

Proposition L would require that the minimum wage be adjusted annually to reflect the increase, if any, in the cost of living based on the Consumer Price Index for Urban Wage Earners and Clerical Workers for the San Francisco-Oakland-San Jose metropolitan statistical area (CPI-SF), one of the many variations of the national consumer price index. The CPI-SF has historically measured inflation as slightly higher than the national CPI, since it accounts for the higher cost of goods such as housing in the Bay Area. If the minimum wage had been indexed to the CPI-SF at its peak purchasing power in 1968, it would be $9.08, slightly higher than the $8.45 level using the national CPI. Neither the federal or state minimum wage laws contain any such provision; increases are made individually through the political process.

The automatic increases would ensure that the minimum wage would retain its purchasing power indefinitely. However, the disparity between the minimum wage in San Francisco and that in surrounding communities could grow if the state or federal wage is not increased over a prolonged period of time. Another complicating feature of the automatic increase provision in Proposition L is that while inflation and economic growth often occur at the same time, that is not always the case. During the 1980s the United States experienced “stagflation,” where inflation was high despite a recession. In such a scenario, the San Francisco minimum wage would rise despite an overall poor economic climate.

General Economic Perspectives on the Minimum Wage

There are a number of reasons for the existence of a minimum wage. First and most familiar is the ethical argument that society’s least well-off deserve some minimum level of income. But on economic grounds, many view the minimum wage as a correction for the failure of the market to efficiently set the price of low-wage labor. When the labor market is operating inefficiently—due to lack of information or conscious market manipulation—wages can be set below their optimal market level. Workers are underpaid, and the government steps in to provide services and income assistance to the poor. In such a failing market, where labor is undervalued, the government is essentially subsidizing employers by allowing them to pay a discounted price for labor, then making up the difference through social programs and income transfers. Establishing a minimum wage can help to correct the undervaluation of labor, while reducing the need for government social programs. Thus, many view the minimum wage not as simply a gift to low income people, but as an attempt to improve economic efficiency.

Standard microeconomic theory predicts that increasing the minimum wage will reduce employment. As the cost of labor rises, employers will respond by hiring fewer workers—replacing labor through automation or replacing lower skilled labor with higher-skilled labor. As a result, even though some individuals have higher wages, there will be fewer total jobs for low-wage workers. Empirical research attempting to determine whether such a theoretical effect actually occurs has had mixed results. While much of the traditional economic literature has supported the concept that minimum wage increases will lead to fewer jobs, a substantial body of more recent research challenges that conclusion.² Some economists contend that minimum wage increases are offset by gains in productivity and modest increases in the prices of goods. For example, increasing minimum wages can lead to lower turnover, higher employee morale, and greater productivity associated with longer tenure, all of which reduce real costs to employers but are not accounted for by textbook microeconomic theory. The impacts on businesses can also be offset by the fact that wage increases to low-income people are generally cycled back into the economy, often spent at the types of businesses that employ minimum wage workers. Other research has concluded that the impact of a minimum wage increase may have an effect on employment, but if it does it is so small in magnitude that its influence is impossible to detect. Generally speaking, the effect of a minimum wage increase on employment is somewhat controversial among economists.

A local minimum wage also raises several issues that are not relevant for larger geographies. Businesses within the city would be affected, but those just across the county lines would not. This fact raises the important question of whether San Francisco businesses will suffer competitively in comparison to the city’s neighbors. Some argue that a minimum wage increase will cause businesses to move away from the city to avoid the cost increases. Of course, the ability of businesses to relocate depends on a number of factors, including whether their customer base depends on being located within the city. Most restaurants, for example, are dependent on having a convenient, high-traffic location, and would lose the vast majority of their customers if they were to relocate outside San Francisco.

The SPUR Board was unable to achieve a 60% majority vote to either support or oppose the measure.

There are powerful reasons to support a minimum wage increase from both an ethical and a policy perspective, many of which reflect SPUR’s fundamental commitment to improving the well being of the City’s residents at all income levels. However, a minimum wage increase can be enacted legislatively, and does not need to be on the ballot. Had this measure been enacted through the legislative process, it is most likely that the Board of Supervisors would have included a tip credit, through the tug and pull of the different interest groups lobbying them. This balancing would have been a good thing—it’s exactly why the legislative process can often lead to more carefully crafted outcomes than ballot measures. If Prop. L passes, which is all but certain, the “pro” side will get everything they want. The restaurants will not get anything they want. This measure exemplifies the “winner take all” nature of ballot box policy-making. For this reason, with great reluctance, SPUR is neutral on Proposition L.

SPUR takes "No position" on Prop. L.

Notes
2. Some of the most prominent research challenging the negative effects of the minimum wage was done by David Card and Alan Krueger, most famously in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage. That book and other research, together with the Clinton Administration’s proposals to raise the minimum wage during the 1990s, have led to vigorous debate over the impact of raising wage floors.