A Living Wage for San Francisco

Recommendations for drafting a responsible measure

Urbanist Article October 1, 1999

Why a living wage requirement?

The theory behind this country's living wage movement is that city governments should not be contracting out work to employers who pay poverty-level wages. If government wants to contract out work, it should be motivated by real reasons of efficiency, not the fact that the contractors pay sub-standard wages.

Many of the arguments against raising the minimum wage too high in the private sector don't apply in the public sector. If a city were to establish a minimum wage for all companies within its boundaries, many companies might be forced to leave the city in order to stay competitive. Government is different because it enjoys what amounts to a monopoly. If a city raises the wages paid by firms with city contracts, those firms will not flee the city. If they want the city's business, they are a captive audience. For these reasons, the living wage movement has tried to raise the minimum wage not for all workers in a city, but just for those who are paid with tax dollars, performing work for a city government.

SPUR supports the principle that the citizenry of San Francisco has a moral obligation to pay a decent wage to workers who provide public services. Just as we would want the city to use recycled paper or to invest in safety equipment for employees, so should the city ensure that it pays people enough to live.

Beyond the moral arguments, there are also compelling policy arguments in favor of a living wage ordinance. In theory, better pay should lead to better quality service. Second, a living wage could reduce demand on the social safety net, lifting people out of poverty and providing enough income for self-sufficiency. And third, the living wage could allow the city to be more willing to contract out work when there is a good reason to do so, in effect, allowing the city to contract out with a "clean conscience."

The proposed wage rate of $11/hour is not calculated based on a price index, but rather, it emerged as a result of political compromise. When adjusted for regional cost-of-living differences, it is roughly comparable to the living wage rates in other cities. An $11/hour rate seems reasonable, provided that the living wage only applies to the groups of people described above. On the other hand, the higher wage gives employers an incentive to replace low skilled workers with higher skilled workers (people who are supposedly "worth" $11/hour). This possibility requires further study-it would be unfortunate if the living wage requirement causes a set of marginally-employable people to lose their jobs altogether.

The living wage proposal should only include employees carrying out classes of work that would otherwise be performed by city workers.

The idea behind the living wage is that when the city government decides to give work to outside contractors as a way to save money, those savings shouldn't come at the expense of the workers. Therefore, the target population to include under the legislation should be people being employed to deliver public services.

Proponents of the living wage in San Francisco are considering going beyond this core population in a way that would make the San Francisco's living wage law different from most other cities by including firms that lease property from the city at market rates.

The city operates some of its properties as revenue-generating ventures, especially the Port. If a business that happens to be located on city-owned land is required to pay higher wages than a competitor across the street, the city will be at a significant competitive disadvantage in generating lease revenues. In addition, companies currently leasing from the city, many of which have long-term leases, will have a substantial competitive advantage over new businesses seeking to locate on city property. The end result for the city will be to cause lease revenues to decline.

If firms that happen to be located on city-owned land are included in the living wage measure, competition with other firms is going to drive any firms with low pay scales out of the city. Entry level jobs for low-skilled workers will decline within the city limits. And in this way, the living wage could backfire against its stated intentions.

It should be mentioned that the Port would be perhaps the hardest hit because the firms that operate on Port property tend to have freedom of movement (ability to relocate) and competition with other firms (incentive to keep costs low). In contrast, firms at the airport have a relatively captive audience and could probably pass on higher wages to their customer base.

A lot of controversy around the living wage has centered on whether to include non-profit organizations in the measure. Some non-profit organizations that get money from the city have come forward with horror stories of what will happen if they are subjected to the $11/hour requirement: affordable housing providers will have to raise rents, job programs for the marginally-employable will disappear, etc. On the other hand, many non-profits support a living wage measure because, if the city raises its payments to non-profits with public contracts, the non-profits will be able to pay their employees better.

SPUR believes the best way to resolve the non-profit inclusion debate is to refer to the first principle, that non-profits should be included only if they are being paid to perform work that would otherwise be performed by city workers. If this is coupled with proper exemptions (people under 21, people in job training programs, summer employment programs, etc.) and with a straightforward waiver process, it makes sense to include non-profits.

It should be kept in mind that there are many reasons to contract out work to non-profits besides low wages. They may have unique skills or experience to serve a population; they may be able to match paid work with volunteer work; or they may be able more than the city to experiment with new approaches. Assuming that the city would pay higher rates to all of its contractors, then non-profit employees should be allowed to benefit from this as much as for-profits.

A living wage proposal needs a revenue source to pay for it.

There is a trade-off between three factors affecting the city government's finances:

*Income to the city (size of the tax base, tax rates, fees collected, transfers from other levels of government, etc.)

*Quantity and quality of public services provided.

*Cost of delivering public services (This is affected by both the efficiency of public services and the "social responsibility" of the operations.)

If one of these variables is going to be changed, it will affect the others. Therefore, in a policy decision, they should all be on the table together.

In the case of the living wage, its stated purpose is to increase the social responsibility of municipal operations by raising the wages of people working on city contracts. This will increase the cost of delivering public services. Proponents of the living wage measure argue that organizations with city contracts may not pass on all of the wage increases to the city. In addition, the city will save some money in reduced public health expenditures from contractors receiving health insurance. Taking account of these factors, estimates of the total net cost increase to the city to support a living wage range from a low of $32.3 million (in a paper by Berkeley economics professor, Michael Reich) to a high of $192 million (according to the San Francisco Department of Public Health-however the Department has since backed away from this high estimate, without yet offering any lower number). As we go to press, new studies are being prepared by San Francisco State University and by the Port to try to pin down these figures. But any cost within this range is a major addition to the city budget and will require significant offsets.

We should note that in the city's draft ordinance, the administration of the measure remains unclear. In order to assure compliance, the living wage needs some sort of policing, regulatory function-or at a minimum, a body to receive complaints. Even assuming that the city attempts to minimize new bureaucracy by relying on auditing and relatively less-burdensome approaches, the administration will add new costs to the city.

If the living wage proposal is enacted without compensating adjustments to the General Fund or a new revenue source, either the quantity or the quality of public services will decline. A responsible living wage measure needs either to identify a new revenue source or identify cuts in existing city expenditures that can offset the new costs. This will be no mean feat. Otherwise, the intentions of this legislation will backfire-by raising the costs of delivering public services, the living wage will force cuts in parks, social services, or some other part of the city budget, hurting the very people it was supposed to help.

There is no free lunch. If we are going to tamper with the city's fiscal and contracting out procedures in such a serious way, in a city that already has the highest per-capita municipal expenditures in the country, we must be honest about where the money will come from. A poorly crafted, irresponsible living wage measure will hurt the city and the people who depend on city services. The living wage measure needs to be drawn to include the right groups of people and needs to solve the dilemma of the taxes/services trade-off.SPUR logog

About the Authors: 

This paper was drafted by the SPUR Living Wage Task Force, chaired by Gary Kitahata.

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