How Not to Help the Poor

 Richard Sander

The Docket, UCLA School of Law

November, 2002

 

            The issue that most galvanized activists at the law school this fall was Proposition JJ, a proposed minimum wage law that would have set a high minimum wage ($12.25 for employers not providing generous benefits) in parts of Santa Monica.  The proposal was revolutionary enough to attract national attention, and stimulated so much local interest that more people voted on JJ than on anything else on the Santa Monica ballot.  But even though 71% of Santa Monicans voted “Green” or Democratic in the governor’s race, JJ was narrowly beaten.  Why?

 

            Surely part of the answer is the $1.2 million campaign that Santa Monica businesses sponsored against JJ.  That was probably a necessary element in a JJ defeat, but it was by no means sufficient.  Supporters had substantial resources, too – over $500,000 in contributions and many, many more volunteers than the opponents had.  Two years ago, when the same businesses spent heavily to promote an initiative that would have precluded the City Council from passing any minimum wage, voters overwhelmingly rejected it.

 

            The difference this time was a growing awareness among Santa Monica voters – despite generally banal media coverage – that JJ was not what it seemed to be.  Proponents portrayed the law as a simple matter of economic justice, suggesting that the main burden would fall on upscale, beachfront hotels and the main beneficiaries would be severely underpaid maids whose miserable wages left their children mired in poverty.   It was a powerful image, exploited to the hilt (see, for example, last month’s Docket article by Judy Marblestone and accompanying picture of hotel maids).  The problem was, it had very little to do with reality.

 

            Proposition JJ would have covered about one hundred businesses – only fourteen of them hotels and only half of those “high-end”.  Of the four-to-six thousand workers directly affected, only about two hundred and fifty were maids and janitors.  The hotel maids currently make an average of $9.75 an hour, and most receive benefits, so they would have received relatively small raises under JJ – indeed, they would have accounted for less than 2% of the total wage increases mandated by the law.

 

            By far the biggest group of beneficiaries would have been tipped employees at Santa Monica restaurants and hotels.  By a quirk in the law, workers earning tips would have been covered but their tips would have been exempt.  So a waiter making a $6.75 minimum wage and $12 an hour in tips would be eligible for the maximum increase possible under the law, even though his income puts him firmly in the middle class.  At least on paper, such wage increases to tipped workers accounted for over 40% of the wage increases mandated by JJ.  Many employers might have adjusted to these bizarre results by eliminating tips and putting all workers on straight salary, but this general pattern – that JJ did a poor job of targeting true low-wage workers – was pervasive.

           

             There are more fundamental problems with any attempt to address poverty through a very high minimum wage.  Most people who have low-wage jobs do not live in low-income households  --  they are usually secondary earners in their families.   This was obviously true for the teenagers working the rides at Santa Monica Pier, but it is even true for hotel maids.  In Los Angeles as a whole, less than 20% of maids (and fewer than 15% of low-wage workers generally) are the primary wage-earner for a family with children, and fewer than 5% are the sole wage earner for a family.  The argument that minimum wages should be determined by what is enough money to lift a family out of poverty is, therefore, logically a non-starter.  Overall, Prop JJ was so poorly targeted that 65% of the benefits went to households with incomes in the top half of the Los Angeles  income distribution, and only 7% went to households that were poor or near-poor (that is, within 50% of the federal poverty line).

 

            One might think that even really bad targeting of benefits is okay if the costs simply come out of capitalist pockets.  But there are two other problems.  First, imposing higher costs in a small area causes some businesses to shut down or move.  My colleagues and I estimated that Prop JJ would eliminate about 1100 jobs in Santa Monica (about 1 job for every 4 to 6 workers affected).  Even a much smaller loss would be hard to justify.  Second, imposing a high minimum wage gives employers compelling incentives to hire staff with higher skills (and higher earning potential), thus displacing the very type of worker JJ purported to help.  When one adds it all up, the poor come out as the prospective victims, not the beneficiaries, of JJ.

 

            But this isn’t the worst of it.  Many of JJ’s original backers knew perfectly well that, as a redistributive measure, JJ was a fraud.  Its primary purpose was never to help the poor, but to force the luxury hotels in Santa Monica to unionize (unionized firms could get an exemption from the law).  That’s why most of the money spent on JJ’s behalf came from unions, and why a leading “community activist” in Santa Monica favoring JJ turned out to be a highly-paid union lobbyist..  Supporters persuaded a majority of the City Council to hire a highly partisan advocate of living wage laws to do an “economic analysis” of JJ (the resulting study  was clear only in its enthusiastic support of the idea) and consistently avoided, throughout the JJ campaign, substantive debates on the merits.  In the process, hundreds of idealistic volunteers signed on for what they thought was a campaign to help the poor.

 

             The moral of this sad episode is that helping the poor is always hard.  Since low-income people are generally powerless, it is always wise to look at the fine print in any well-organized effort that proclaims itself  as protectors for the poor, whether it be unions supporting minimum wages, developers supporting housing subsidies, or agribusinesses supporting farm price supports.   It’s worth the effort, though, because it’s hard to think of anything more important than providing meaningful help to the poor.  The Earned Income Tax Credit (EITC) is one federal program that has proven its ability to lift millions of families out of poverty with very few unintended side effects.  I am working with a small group in Santa Monica that hopes that, out of the ashes of JJ, can be fashioned the first city-based EITC in California.  We’ve studied it carefully, and think it can really work.  If you’d like to be involved, please get in touch.

 

     Richard Sander recently completed, with Joe Doherty and Doug Williams, The Economic and Distributional Consequences of the Santa Monica Minimum Wage Ordinance.  He can be reached at sander@law.ucla.edu.