The International Experience - Living wage ordinances (LWO)
Description
LWO are the result of very active USA State campaigns by coalitions of unions, community groups and academics to improve the wages and employment conditions of low wage workers employed by state contractors.
In 1994, Baltimore was the first American city to adopt a LWO. Since then about 130 municipalities have adopted LWO. 'Why have living wage ordinances been so widely embraced by so many cities at a time when economic conservatism and faith in 'market forces' seem politically dominant? At the heart of the movement's success are both the simplicity of its message and the organisational strategy that activists have employed to carry the message forward. The motivation for living wage ordinances originates with two related trends: the deterioration of the economic opportunities available to low-income working families, and the use of taxpayer dollars to create poverty level jobs.'[8]
The level of the living wage is usually determined by consulting the federal poverty guidelines for a specific family size. Often, living wage levels are equal to what a full time worker would need to earn to support a family of four at the poverty live ($17,690 or $8.20 an hour in 2000) . Some living wage rates are set at 130 percent of the poverty line, which is the maximum income a family can have and still be eligible for food stamps.
The laws mandate that businesses under contract with the city - or in some cases businesses that receive grants, subsidies, or tax breaks from the city -pay employees a wage large enough to lift their families out of poverty.
In California, wages under such agreements range from a low of $7.25 in Pasadena to a high of $11 an hour in Santa Cruz. Santa Fe, San Francisco, New Orleans, and Washington DC have broader LWO that cover workers in all private businesses in their communities. Such ordinances have been banned in several cities.
LWO vary in scope and conditions e.g. indexation to inflation, size of contract, inclusion of non-profit contractors, hours worked, union 'friendly' or not etc:
- More than half the ordinances are indexed to inflation.
- Some ordinances have 'labour friendly' clauses in them. In San Jose, the living wage ordinance requires proposed contracts to undergo a so-called 'third-tier review' which allows the city to ensure that its contractors adhere to good labour practices. The Minneapolis ordinance gives preferential treatment to firms that engage in 'responsible labour relations'.
- Ordinances can be quite specific about who is covered - In Los Angeles (LA), non-supervisory workers who work for a service contractor are covered but not the employees of firms that sell goods to the city. A security guard who worked for a firm providing cleaning or bus services would be covered; a guard who worked for a firm providing building supplies would not.
- As a result of bargaining during the political process, certain exceptions are usually built into the ordinance. For examples, contracts and subsidies below a certain dollar value may be exempted. In Boston, the living wage ordinance applies to firms which have direct service contracts with the city for more than $100,000; for subcontractors, the threshold is $25,000.
- Hours worked can also affect coverage. In Jersey City all workers under service contracts are covered by the living wage, but only full time workers are required to receive vacation and health benefits. In Milwaukee all workers, including part-timers and temporary staff, are covered.
- Some ordinances exempt non profit contractors (e.g. Chicago) while others include them, arguing that the city or county should increase the funds to cover the wage increases. Unlike private firms, non profits are unable to absorb the cost of a LWO through reduction in their profits, although they can absorb some through decreases in turnover and absenteeism.
Unlike minimum wage laws that cover the vast majority of the low-wage workforce, living wage ordinances have a much narrower coverage - a few hundred in a small city, a few thousand in larger cities like LA and Chicago. There is no 'one size fits all' model ordinance - and the flexibility is reported as positive. For example, the living wage in San Jose is one of the highest in the nation, in recognition of the very high cost of living in the Silicon Valley area and the long distances many employees must travel to get to work. However, flexibility at a State level can also carry political risks in that it depends on who has the upper hand in the negotiation and how forceful the ordinance is.
Current living wage rates are between 50 percent to well over 100 percent greater than the federal minimum rate - and families will still generally require some form of state assistance.
Impact
Predictably, the LW movement has its fierce supporters and detractors. There is a wealth of research modelling the predicted impact of the introduction of LWO in different States - mostly around employment loss, business migration, cost to the city and limited impact on the target workers. Other studies have focussed on the actual impacts on contracting firms, workers and state coffers and have tended to found more positive outcomes and impacts.
Many detractors have based their analysis on standard economic theory. This holds that a rise in the minimum wage hurts employment by interfering with flow of supply and demand. In the early days of LWO campaigns most economists accepted that when government forces businesses to pay higher wages, businesses in turn hire fewer employees.
The veracity of this view was challenged in the mid 90s by work done by two Princeton economists - David Card and Alan B Krueger - both of whom started off believing the standard theory.
Their 1995 and 2000 research[9] on the effects of raising the minimum wage in New Jersey and in Pennsylvania where it remained at the federal level showed a modest increase in wages did not appear to cause any significant harm to employment and in some cases, a rise in the minimum wage even resulted in a slight increase in employment.
Subsequent research on wage mandates has shown that their impact is proportional to the number of people they reach. Research in 2002 suggested that a typical living wage ordinance will rarely reach more than
1-2 percent of a city's workforce[10] and that this mitigates against the kinds of economic distortions - layoffs, hours reductions, fewer contract bids - that opponents feared. Coverage in cities with broader ordinances is estimated at between 5-15 percent of the local workforce[11].
Three cities currently have city wide ordinances - Santa Fe, Washington DC and San Francisco. The coverage and the wage rates vary. For example in San Francisco where coverage has been extended to cover all employees in companies of 10 or more employees working at least two hours a week.
Non-profit organisations are also excluded. In 2003, Santa Fe also passed a LWO that included all employees in businesses with more than 25 employees. It was estimated that this would only affect 15 percent of companies in
Santa Fe. In response to the ordinance, the Santa Fe challenged the ordinance in court saying that the city did not have the authority to mandate wages for private firms. In November 2005 the court re-affirmed the ordinance. The ordinances in three other cities were overturned through court challenges.
Studies describing actual impacts generally present a positive picture[12]. The conclusions of the Brenner and Luce study (2005) of three early adopters of LWO are reasonably typical. They found:
- In contrast to theoretical predications, firms forced to raise wages significantly expanded the number of staff assigned to their city contracts and did not turn to part-time jobs instead of full time jobs to absorb the higher labour costs.
- There was little evidence that they raised prices - to city or other customers. The one clear move a significant number of affected firms pursued was to accept lower profits.
- There was a growth in overall employment and a shift away from part time to full time staff.
- In Boston LW beneficiaries are primarily women and people of colour.
- The incidence of poverty fell sharply - although close to a third of these workers remained poor even after the law took effect - if poverty is defined realistically and taking into account Boston's high cost of living.
US research on both contracting and wage mandates suggests that most contractors will be able to absorb the increases in labour costs by some combination of lower profits and efficiency gains. Because every contractor faces the same mandate, the ordinance helps prevent 'low-ball' bidders - no bidder is at a comparative disadvantage because of the ordinance. To the extent that low biders with wide profit margins absorb the increase by cutting profits, the ordinance will have its intended effect: partially redistributing taxpayer dollars from low paying contractors to low wage workers.
There are some efficiency gains for participating contractors through a decrease in absenteeism and turnover and gains to the State or county through quality tender applications. Bernstein states that, 'Efficiency gains are an under-appreciated absorption mechanism.' [13]
One of the most influential studies has been the recent study of the impact of the LA LWO on workers and businesses.[14]
In 1997, LA became one of the first major cities to pass a living wage law. The city's policy currently required city contractors to pay workers $10.03 an hour, or $8.78 plus a $1.25 contribution to health benefits. It also provided workers with 12 paid days off and 10 unpaid days off per year
The study showed:
- Most firms affected by the law have adapted to the living wage without eliminating jobs. Employment reductions amounted to 1 per cent of all affected jobs, or an estimated 112 jobs - many of these were in not for profit firms
- Businesses experienced some positive results, including decline in employee turnover and absenteeism. (32 percent turnover in living wage firms compared with 49 percent in non-living wage firms) On average, affected firms recovered 16 percent of the increased cost of the mandatory wage increase through turnover reductions.
- Firms adapted to the remaining costs is a variety of ways including cutting fringe benefits and overtime, hiring more highly trained workers, cutting profits and passing on costs to the city or to the public.
- The ordinance had no impact on the use of part-time workers, the intensity of supervision, the tendency to fill vacancies from within or the use of equipment and machinery.
- Firms have not actively displaced workers in order to hire workers who arte better qualified and most firms had not changed hiring standards as a result of the ordinance.
- Compared to the original workforce, workers hired after the LWO have similar levels of education, are of similar age and are no less likely to be members of racial or ethnic minority groups.
One of the interesting findings was that new hires were more likely to be male (56 per cent cf 45 percent before) and have more formal training (22 percent cf 12 percent). These changes occurred mainly through normal attrition at the firms. The results suggest somewhat diminished job opportunities in city contract work for women and workers with less formal training, compared to before the ordinance. The writers speculate that the decreased proportion of female workers may result from employer discrimination, facilitated by the increased wages and the more male dominated applicant pool that it may generate.[15]
The LA research found that while workers and their families experienced measurable gains from the living wage, it also showed that many workers still struggle to get by. Thirty one percent lack health benefits and 44 percent rely on at least one government assistance programme.
There were also some unexpected outcomes such as the behaviour of non-state contractors who raised their wages to compete effectively for workers. This means that the LWO effectively established a new market rate for particular kinds of employment. (See also Brenner and Luce[16].)
It is acknowledged in the literature that where the ordinances included non-profit organisations, these organisations had difficulty absorbing the increased costs and reported that they would be deterred from seeking government contracts in the future. While some states increased contract rates for non- profits in acknowledgement of the increased cost, this is by no means universal.
The Howes study deals specifically with the impact of the LWO on homecare workers and reports positive outcomes for both workers and the quality and sustainability of services provided.[17]
All the direct care services in the US (as elsewhere) employ low-wage, frequently immigrant workers and native born women of colour, and all are afflicted in varying degrees by high rates of turnover, labour shortages and quality problems. In contrast to the more usual practice of providing publicly funded homecare services through agencies that contract directly with the state, 85 percent of California IHSS (in home supportive services) are provided through the independent provider model - the consumer has the option to directly hire, train and supervise the caregiver.
The Howes study is one of the few large scale empirical investigations on the effect of wages on labour market outcomes in any direct care industry, and possibly the only such study specifically addressing conditions in the homecare industry. It records the impact of nearly doubling the wages for homecare workers in San Francisco County over a 52 month period.
The principle conclusions are:
- There was a 54 percent increase in the numbers if IHSS workers over the four year period of the study.
- Possibly because the wage increase and/or the addition of health benefits made it easier for consumers to hire an acceptable provider, the number of consumers increased by 47 percent over the same period.
- The number of hours worked per caregiver increased significantly for non-family caregivers in some ethnic groups.
- The annual turnover rate of matches between consumer and caregiver fell by 6 percent. When adjusted to eliminate the turnover of matches that may end for natural reasons, the annual 'bad'[18] turnover rate of matches fell 20 percent.
- The annual turnover rate of the workforce fell 17 percent, but adjusted to measure only 'bad' turnover, the rate fell by 30 percent.
- The proportion of consumers matched to a provider of their own ethnicity - which is a measure of the quality of the match - rose by 6 percent.
- A rough calculation shows the wage increase could have reduced the number of people living below the poverty line in San Francisco by as much as 15 percent, other things being held constant.
- In 2001, the IHSS program was bringing in $114 millions every year to San Francisco, compared to $37 million in 1997, at a gross cost to the county of $18 millions and possibly a net cost of as low as $8 million. That would mean every dollar spent by the county brought an additional $13 in income from state and federal sources to very poor San Francisco communities.
In addition to supporting the finding of previous studies, the Brenner and Luce research of LWO in three cities in New England, found, 'The law has also turned a discrete set of jobs into better paying jobs - typically with better hours and sometimes better benefits...Our results also show that far from disadvantaging lower-paid workers, the living wage policy has given many a pathway to a better job.'
The research reporting the positive outcomes of LWO have been steadfastly criticised by an organisation called Employment Policies Institute (EPI). In particular Aaron S Yelowitz[19] has written several papers for the organisation. He maintains:
- Research that claims positive outcomes of LWO have used flawed economic and statistical techniques.
- That the broad Santa Fe LWO has resulted in job losses for low waged workers - especially those with low education levels.
- Those that do keep their jobs work an average of 1.6 hours a week less than before the LWO.
- The minimum wage has increased unemployment.
- Loss of tax and welfare entitlements by low waged workers once their pay is increased effectively makes them worse off financially - their living standards are not improved.
At first reading, the papers appear convincing. However, the EPI is one of several front groups created by Berman and Co - a public affairs firm owned by Rick Berman who lobbies for the restaurant, hotel, alcoholic beverages and tobacco industries. Launched in 1991, the Institute has been accused of trying to create confusion by adopting a name which closely resembles the Economic Policy Institute - a much older, progressive think tank with ties to organised labour. The Economic Policy Institute supports a living wage and mandated health benefits for workers. Berman's organisation opposes both and opposes any minimum wage at all. It is hard to avoid the conclusion that this view could be connected to the nature of his PR clients that tend to employ low waged workers.
The research acknowledges that in some cities, enforcement of the LWO appears weak.
Possible relevance to New Zealand
LWO have had a very significant impact on low waged workers in the States (although in reality on a very small proportion of the labour force) but do operate in an environment of extremely poor statutory minimum employment standards.
In the US living wage rates are about 50-120 percent higher than the federal minimum wage. Translated into the New Zealand context, this would mean a rate of between $15-22 an hour or approximately $31-45,000 a year.
Calculations of poverty lines and ''living wage' equivalencies[20] is complex and often controversial. LWO depend on a definition of the poverty line and an acceptable margin above that line to life workers out of poverty. This is clearly a possible policy step in New Zealand.
The argument often mounted in New Zealand that moderate increases in minimum wages hurts employment by interfering with flow of supply and demand and that when government forces businesses to pay higher wages, businesses in turn hire fewer employees is not supported by the research on LWO in the USA.
Previous page | Contents | Next page
[8] Bernstein (2002), op cit.
[9] Card, D., & Kruger, A. B. (1995). Myth and Measurement: The New Economics of the Minimum Wage. Princeton University Press.
Card, D., & Kruger, A. B. (2000). Minimum Wage and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. American Economic Review, Vol. 90.
[10] Bernstein, op cit
[11] Sonn, P.K. (2005) Citywide Minimum Wage Laws : A New policy Tool for Local Governments, Economic Policy Brief, Brennan Center for Justice.
[12] See Farris, D., Runsten, D., Briones, C. & Goodheart, J. (2005). Examining the Evidence: The Impact of the Los Angeles Living Wage Ordinance
on Workers and Businesses.
Howes, Candace. (2002). The
Impact of a Large Wage Increase on the Workforce Stability of IHSS Homecare
Workers in San Francisco County. University of California Institute for
Labor and Employment, and the University of California Center for Labor Research
and Education, Berkeley.
Bernstein (2002), op cit.
[13] Bernstein (2002), op cit.
[14] Farris et al (2005), op cit.
[15] Farris et al (2005), op cit.
[16] Brenner, Mark D., & Luce, Stephanie. (2005). Living Wage Laws in Practice - the Boston, New Haven and Hartford Experiences. University of Massachusetts: Political Economy Research Institute.
[17] Howes (2002), op cit.
[18] ‘Bad’ turnover excludes turnover as a result of events such as death or moving out of the area.
[19] Yelowitz, Aaron. S. (2005, September). Santa Fe’s Living Wage Ordinance and the Labor Market. Employment Policies Institute.
Yelowitz, Aaron. S., & Tiokka, Richard. S. (2005, May). Effective Tax Rates and the Living Wage. Employment Policies Institute.
[20] These take into account different household compositions when assessing the amounts required to provide an equivalent standard of living between the households.
