The Economic and Distributional Consequences of the Santa Monica Minimum Wage Ordinance

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In July 2001, the Santa Monica City Council adopted an Ordinance unlike any other economic regulation ever enacted in the United States. The Ordinance designates a Coastal Zone—the most famous and most tourist-visited section of the City—within which businesses with over $5 million in annual revenue are required to pay a very high minimum wage.(1) After a short phase-in period, the minimum wage and associated mandated benefits will reach $13.00 per hour, about 250% of the current federal minimum wage and nearly double California’s $6.75 minimum wage.(2) The proponents of what we will call the Coastal Zone Minimum Wage, or simply “the Ordinance,”(3) maintain that the mandated wages and benefits are a simple matter of economic justice, which would share some of Santa Monica’s remarkable prosperity with many of its lowest-paid workers. Opponents fear the Ordinance as an economic Armageddon, a radical intervention in labor-management relations that will drive business from the area, irreparably damage Santa Monica’s business climate, and throw many of its intended beneficiaries out of work. Implementation of the ordinance has been delayed pending a citywide referendum on the measure in November 2002.

This study aims to bring economic and demographic analysis to bear on the Coastal Zone Ordinance. We believe that it is possible to understand and predict many of the effects of the Ordinance through a combination of careful use of past economic research and systematic data gathering.

Unlike “living wage” laws, which require government contractors to pay higher wages to the workers on those contracts, the Coastal Zone Minimum Wage is a minimum wage law, applying to all medium-sized and large employers in the Zone. As such, it would be the only minimum wage applied to such a small region anywhere in the United States. In fact, with only two limited exceptions, no other city has ever enacted a
minimum wage law.(4)

A local minimum wage has the potential to cause economic devastation. Firms that compete directly with other firms unaffected by the wage floor are at a disadvantage. If the competition is sufficiently head-to-head, and the minimum wage substantially raises operating costs, then firms affected by the new minimum must either relocate or go out of business.

Many of the businesses in Santa Monica’s Coastal Zone are not in this situation. For a variety of reasons detailed in Chapter Five of this study, many of these firms derive significant benefits by being located along Santa Monica’s beachfront or along the Third Street Promenade. Others firms, such as law firms and film production houses, have few low-wage workers and will thus be only marginally affected by the Ordinance. None of the regulated firms are manufacturing plants engaged in head-to-head competition with manufacturers just outside the Zone. On the other hand, some of the large retailers and restaurants covered by the Ordinance will see their profits entirely wiped out by the Ordinance, and several of these will cut operations or close down altogether. Overall, we think that the Ordinance will damage, but will not destroy, the economic viability of the Coastal Zone.

Nonetheless, if the goal of the Coastal Zone Minimum Wage is to help low-income workers in Santa Monica, the Ordinance is worse than useless. The direct benefits of the Ordinance are more poorly targeted than in any social welfare legislation we have ever studied. And the few benefits that low-income workers derive from the Ordinance are more than offset by its probable costs. To make matters worse, the Coastal Zone Minimum Wage is drafted in ways that exacerbate many of its most negative effects. We believe the Coastal Zone Ordinance would be unwise, imprudent, and ineffective in achieving its supporters’ putative goals.