Low-Wage Pay Hike to Cost Up to $42 Million

A proposed law intended to boost pay and benefits for thousands of low-wage workers whose private employers contract with Los Angeles city government would cost $28 million to $42 million a year, according to a much-anticipated study released Friday.

Although the costs estimated in the city-commissioned analysis are far below previous estimates of $93 million and $130 million a year, the new study predicts that nearly all the increased costs would be borne by taxpayers in the form of higher contractor costs or lower quality of contractor service. And it criticizes the ordinance as a highly inefficient way of fighting poverty.

The study, performed by professors at UCLA and Carleton College in Minnesota, estimates the ordinance would raise the pay of 4,800 workers and improve benefits for 2,500 more, but only affect about 800 families who now live below the poverty line.

The proposal would require about 1,000 firms holding city service contracts to pay workers at least $7.50 an hour plus family health insurance and other benefits, or $9.50 an hour with no benefits--far beyond the federal minimum wage of $4.75.

The heated debate over the proposal has pitted a pro-labor City Council and a broad coalition of workers, who say the city is obligated to set a higher standard as an employer, against Mayor Richard Riordan and the business community, which fears the proposal will hurt Los Angeles’ ability to attract new employers.

The city could accomplish more, the authors of the new report say, by covering 25% fewer workers, lowering the minimum wage to $7.25 instead of $7.50 and requiring fewer paid days off for workers. That would reduce the annual cost to less than $5 million.

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At the same time, the study suggests the city spend $1 million encouraging low-income families to apply for the federal government’s underused $3,500-a-year Earned Income Tax Credit. That would provide comparable assistance without the simultaneous drain on the local economy, they said.

“The proposal is not as big or as bad--or as good--as various people have portrayed it to be,” said its co-author, UCLA law professor Rick Sander. “Nonetheless, it’s probably bigger than it needs to be to accomplish its major goals. A much more targeted one would accomplish the goals much more efficiently.”

The release of the city’s $74,000 study sets the stage for a crucial public hearing Tuesday in which the council’s budget and personnel committees will hold a rare joint meeting to consider the proposal, which would have Los Angeles join a growing list of cities--including New York, Baltimore, Milwaukee, Portland, Ore., and San Jose--that have recently passed laws lifting the wage floor.

In the 64-page analysis, Sander pokes holes in the arguments coming from both sides of what has become a political war between Riordan and business leaders and Councilwoman Jackie Goldberg and a liberal labor coalition.

“The ordinance will not be a great boon to Los Angeles’ low-income communities,” the study concludes bluntly. “Neither is it likely to chill Los Angeles’ business climate.”

Previous studies have been heralded by one side while derided by the other as biased. But on Friday, proponents and opponents of the ordinance embraced the new study.

Deputy Mayor Gary Mendoza said the analysis supports his position that the proposal is too expensive and inefficient. And Goldberg said she is prepared to adopt all of the study’s recommendations.

The authors of previous studies, as well, expressed support for most of Sander’s numbers, methods and suggestions.

Mendoza said: “The report suggests that passage of this ordinance is going to increase the city deficit, have no increase in services and have very little impact on poverty. It’s what we’ve been saying all along. The proponents of this ordinance forget the first rule of economics: Money doesn’t grow on trees. We think this ordinance is bad medicine. It’s the wrong step at the wrong time.”

Goldberg said of Sander’s proposed modifications: “This is really what I would have hoped we’d gotten from the business community instead of: ‘The sky is falling, the sky is falling.’ This says the sky won’t fall, this won’t wreck the economy, businesses won’t flee Los Angeles or fail to come here.”

Goldberg said she was impressed by Sander’s recommendation of a scaled-back ordinance, which would affect about 75% as many workers but cost only 10% as much because of its other adjustments. It would allow the city to more closely monitor its impact because it would involve only 100 contracts instead of nearly 1,000. Goldberg also called the suggestions regarding the tax credit “absolutely brilliant” and vowed to begin work right away implementing them.

“The heart of the matter is, this helps a lot of people, it improves the services to the public, and it doesn’t cost a lot of money, though it does cost some money,” she said.

Although Goldberg said she was ready to adopt all of Sander’s recommendations, Mendoza said the mayor “at this time [is] not prepared to discuss any compromise.”

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A spokeswoman for the activist Living Wage Coalition said that she still supports the original proposal and remains confident the private sector will absorb much of the cost despite the new study’s contention that contractors will pass it back to government.

“The cost of this is tiny compared to the good that it’s going to do for a lot of people,” said Madeline Janis-Aparicio. “It’s a modest program that’s going to help a few thousand families and the city. It’s small.”

Too small to be worthwhile, Mendoza said.

“The question should be asked, do the taxpayers of Los Angeles want to pay $30 million or $40 million of increased taxes to lift 800 people out of poverty?” he said, noting that a lump-sum payment to those people would accomplish the task more cheaply. “We have a very tight budget as it is. . . . The best way in our mind to improve the prospects for low-wage workers is to increase their level of skills.”

The UCLA study puts the cost of the ordinance far lower than past studies, in part because it evaluates a scaled-back version of the original proposal. But it also strikes middle ground between the opposing views.

Like the business-backed study of the ordinance conducted by Spectrum Economics, the new study predicts that the city, not the private sector, would absorb most of the increased cost. However, it drastically reduces those estimated costs, in part by providing a more accurate picture of what workers are currently paid and how much it costs to provide them with health care.

Perhaps the most interesting element of the new study is its discussion of the federal earned income tax credit, which was begun in the late 1970s and expanded in 1993.

Sander estimates that only 48% of the families eligible for the tax credit in Los Angeles currently collect it, leaving $100 million of unused benefits still available at no cost to the city, its private contractors or the local economy. He suggests the city require its contractors to encourage their low-wage workers to apply for the credit, and launch a publicity campaign to all citizens.

“The enormous advantage of an EITC over a Living Wage is that the EITC brings more outside funds into the metropolitan area,” the study points out. “Moreover . . . the EITC is perfectly targeted at the neediest population: all of its benefits go to low-income families.”

Robert Pollin, the UC Riverside economist who conducted a study that has been embraced by labor, said he still believes the contracting firms would absorb nearly all of the increased costs, in some cases passing them on to customers--for example, raising the price of hot dogs at a sporting event or the airport.

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But Pollin acknowledged that boosting wages and benefits will cost money, and said that ultimately, it’s simply a question of public priorities.

“I’ve seen studies that were favorable to the living wage come up with these ridiculously low numbers, and I say the only way you’re going to get that is if you don’t give people a raise,” Pollin said. “If you give 5,000 or 10,000 people with low wages a raise, it’s going to cost money.”

While Pollin believes that increased costs would be repaid through improved productivity, Spectrum’s Richard Carlson said a living wage is simply not an efficient way to address poverty.

“The whole ball of wax is very expensive to a city that’s in quite serious financial difficulties,” he said. “The problem is, this thing has gotten to be a religious movement: It looks like a magic wand, and people are excited about it. But if your goal is to help poverty, is this the best way to spend $35 million?”