Los Angeles Business Journal

San Jose’s minimum-wage increase a cautionary tale for Los Angeles.

OP-ED: Two Views By By Michael Saltsman Monday, January 27, 2014

While Congress debates a $10.10 minimum wage in Washington, the labor-backed Los Angeles Alliance for a New Economy has set its sights even higher. It recently launched the Raise LA campaign to demand a $15-an-hour minimum wage for employees of large L.A. hotels.

LAANE’s campaign is a poor attempt at a fig leaf to cover over a unionization drive – their proposed law exempts employees covered by union bargaining agreements. Still, legislators who are considering whether to vote for such an ill-conceived proposal should look north, where the consequences of a dramatic wage hike are playing out in real time. 

In March, a ballot initiative launched the year before with union backing succeeded in raising San Jose’s minimum wage to $10 an hour – a 25 percent increase. Proponents used much of the same rhetoric that we’re now hearing in Los Angeles, arguing that a mandated increase in wages would stimulate the economy and even create jobs.

To gauge whether this rhetoric matched the facts, the Employment Policies Institute conducted a survey of affected employers during a one-month period at the close of 2013. EPI’s survey focused specifically on restaurants, where the potential for unintended consequences seemed greater given the industry’s difficulty with the law’s cost pressures.

The results should give Angelenos pause. The survey found that two-thirds of respondents reported a big increase in business costs. (About 40 percent put the additional cost – per location – between $10,000 and $69,000 a year.) Those costs were offset in a number of ways: Sixty-six percent increased prices, 42 percent reduced employees and 45 percent reduced staff hours. Worst of all, fully 12 restaurants reported closing at least one location as a result of the higher minimum wage. Thirty percent limited their future expansion plans within San Jose.

Economic realities

Sadly, these kinds of results were predictable given the economic realities of the restaurant industry. There, profit margins average between three and six cents on the dollar, according to Deloitte’s Restaurant Industry Operations Report. Businesses can’t simply absorb higher costs in the form of increased minimum wages. That means either higher prices or more self-service for consumers as employers find ways to scale back on labor costs.

This isn’t unique to San Jose. Economists at the Federal Reserve and UC Irvine summarized the past two decades of research on minimum-wage increases and the conclusion is clear: They reduce employment opportunities for the least skilled employees.

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