Good vs. Evil
Santa Monicas pioneering living-wage proposal, which has provoked a misleading counterattack and competing measure from the business community, would have little economic effect on its primary target -- the citys luxury beachfront hotels -- according to a new report.
Massachusetts economist Robert Pollin examined what would happen if the 72 businesses in Santa Monicas lucrative coastal zone that grossed more than $3 million a year were required to pay their workers at least $10.75 an hour. His 370-page report found that hotels would have the easiest time absorbing the cost, which could be a one-time expense averaging $200,000 per business. The hotels employ half of the 2,477 workers who would get higher pay under the City Council proposal.
Hotels could raise prices to cover at least some, if not all, of their additional living-wage costs, said the report. Hotels gross receipts have been rising rapidly. If the hotels gross revenues were to continue growing over time, the cut in their profit margins due to the living-wage ordinance would occur on a one-time basis only.
The City Councils effort to pass a living-wage law has been met by a costly campaign of subterfuge by a half-dozen hotels, which spent $434,267 and got enough signatures on a petition to place their deceptive measure on the November 7 ballot. Unlike the councils more generous measure, the business communitys plan would cover only businesses with city contracts or subsidies and would help only a fraction as many workers as the council-backed plan. The city estimates 220 workers would be covered by the business plan; Pollins report gives a range of 62 to 821 workers.
The council plans to hold a public hearing on its proposal September 12 at the Santa Monica Civic Auditorium, and vote on its living-wage ordinance by October. With a living-wage law on the books, the council would direct its energy toward defeating the business-backed measure, which, if approved by voters on November 7, would kill the council-approved plan. The central point in the campaign by the council and Santa Monicans Allied for Responsible Tourism (SMART) would be this: The business-backed measure is living-wage in name only, and its sole purpose is to interfere with the more liberal measure. Santa Monicas living-wage law would be the only one of its kind in the nation; 51 measures in place nationwide are limited to businesses receiving government contracts or subsidies.
Vivian Rothstein, a SMART organizer, said the report shows the need for a living-wage measure. It does show there is significant worker poverty in the coastal zone, and that basically were not talking teenagers from middle-class families but workers who provide the overall majority of the income for their families, said Rothstein. At the same time, the report shows there is significant profitability in the hotels.
The Pollin report found that the hardest-hit by the council-backed measure would be the coastal zones six restaurants -- all of them upscale -- that gross more than $3 million each. After tipped employees are exempted (one of the reports key recommendations), 214 employees would qualify for raises. The increased costs, however, could be offset by raising the price of the average meal from $30 to $33 per person, including tips.
Within this segment of the market, customers choose restaurants more on the basis of product quality and service than price alone, according to the report, which was compiled by Pollin and nine contributing authors and researchers for the Political Economy Institute at the University of Massachusetts, Amherst.
But compared to hotels, which have had little new competition since voters in the early 1990s approved a ballot initiative banning new hotels along the beach, restaurants are more vulnerable to wage hikes. In addition, their profit margins are much slimmer than those of hotels, which saw gross-revenue increases between 1993 and 1999, according to the report.
The restaurants have not experienced gains in gross revenues in recent years comparable to those at the hotels, the report said. It therefore appears unlikely that the restaurants would be able to operate at profit margins significantly below those that they presently receive.
Least affected would be the 55 low impact businesses, including retailers, that would be required to give raises to approximately 1,000 workers. While the hotels and restaurants covered by the proposal face average increases of 10 percent of gross receipts, other businesses would see increases of only 2 percent to 2.5 percent.
These firms should therefore be able to manage a fairly smooth transition into a living-wage environment through some combination of small price and productivity increases, and perhaps slight one-time declines in profit margins, according to the report.
Despite the fears of Santa Monicas business community, the report found that the proposed ordinance would result in, at most, between 30 and 186 layoffs. While some businesses would likely hire more-educated workers, the change would not be dramatic and could be countered if the city were to establish a hiring-hall provision that would provide better opportunities for disadvantaged workers.
If anything, the report concluded, increasing salaries could benefit businesses by reducing turnover and increasing employee morale and productivity.
For some firms increases in productivity resulting from living-wage raises could absorb as much as 20 to 25 percent of the total cost increase in hotels and restaurants, according to the report.
The report suggests that the city use gross income instead of the number of employees (50, according to the original proposal) to determine which businesses would be required to pay a living wage. It also recommends exempting workers earning at least 50 percent of their income from tips, a measure that would dramatically reduce the costs of the ordinance for covered employees.
The proposal would be a boon for low-wage workers, who would see salaries increase by an average of $3.17 an hour, or $5,819 a year.
The people coming in are making $6.50 an hour, said Edith Garcia, who has been a housekeeper at the Loews Santa Monica Beach Hotel for 11 years. Those making $10 have been here for 10 to 15 years. We should have made that a long time ago.
Garcia, like many of the employees of hotels along the coast, saw her salary increase only after the living-wage proposal was floated last summer by SMART. In fact, the results of the report, which surveyed workers between March and June, may be outdated, since they likely dont reflect recent raises at Loews Hotel reported by the Hotel Employees & Restaurant Employees Union Local 814.
Some hotel officials were quick to react to the report, which they argue does not accurately reflect the financial realities of operating a hotel. Gross receipts, they contend, are not an indication of profitability.
Hotels increase rates to cover increased costs, said Sig Ortloff, the general manager of Le Merigot Beach Hotel, which opened in January and which expects to begin turning a profit in its third year. This is just ludicrous. Somebody makes an assumption that we work with margins that are beyond anyones imagination.
The number-one plan from day one has been to get it from the hotels because hotel guests are not voters, so they can get it from the goose that lays the golden egg, Ortloff said.
Erwin Chemerinsky, the USC law professor who chaired the Los Angeles Charter Reform Commission, views the Pollin report as a model of research for policymaking.
I think this is exactly the right way of looking at a living-wage proposal, Chemerinsky said. I thought the [hotel-backed initiative] was a very dishonest attempt at tricking people into limiting the living wage. This is a very careful study.
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