Thursday, May 28, 2015

Who really won the LA minimum wage fight

The “Fight for $15” is a great sound bite, but it is an empty promise. Why make employers and employees the losers in order to make unions and politicians the short-term winners? 
With the recent ruling by U.S. District Judge Andre Birotte Jr. rejecting the efforts of the American Hotel & Lodging Association and the Asian American Hotel Owners Association to forestall implementing a minimum wage of $15.37 for hotel workers in Los Angeles starting 1 July 2015, unions, social change activists and politicians celebrated. 
Judge Birotte wrote: “that hotel employers have a meaningful choice between paying the $15.37 minimum wage and entering into collective bargaining agreements.” It is interesting to note the judge alluded to collective bargaining. This raises the question as to who really won in Los Angeles: the workers or maybe the union and politicians? 
The Los Angeles City Council followed up and passed an ordinance increasing the minimum wage for all workers to $15 by 2020, joining Seattle and San Francisco. The “Fight for $15” movement continues to gain momentum as unions and social activists across the country organize protests and lobby elected officials for social change.
The slugfest between the pro and con economists who argue on both sides of the issue continues. On the pro $15 minimum wage side, economists point to static models that they have used for decades and say an increase to $15 will not have serious ramifications on the labor market, and the increase in cash in the pockets of low wage earners will spur the sluggish U.S. economy. The economists who argue against the increase point to their models and say the increase will result in a negative impact on the economy and higher unemployment. Any increase in the cash in the pockets of those workers who get the raise will be more than offset by those who lose their jobs and go on welfare. 
The big question
So once again, it comes down to who really benefits from the $15.37 minimum wage at Los Angeles hotels? As a CPA and a non-economist, my approach to the question begins with a question: 
What are minimum wage earners receiving now versus what will they be getting when their hourly wage increases to $15.37 on 1 July 2015? 
The simple answer is $9 an hour equates to $360 a week or $18,720 a year, and $15.37 an hour equates to$31,970—a lot more. For a single parent with two small children at home that is not much to cover the bare essentials in Los Angeles as pointed out by Tania Bradkin in her Huffington post blog. But this is not a complete picture of the financial condition of a single parent with two children at home.
While $18,720 is below the poverty guidelines even if you add a minimal amount of tips for a hotel maid or a front-desk agent of 5% of their wages—which brings their gross income up to $19,700 a year—the U.S. Federal Poverty Guidelines for a family of three is $20,090. The importance of this fact is all kinds of federal and state programs use the HHS poverty guideline or multiples thereof as eligibility criterion. There are more than 30 programs at the federal level and many more at the state level.
I reviewed the major social programs that included income tax credits, child care tax credits, child care subsidies, Section 8 housing vouchers, SNAP and Medicaid—all of which are readily available to a low wage earner. In total, these programs would add $20,589 to the $19,700 for a total of adjusted gross income of $40,289. The parent also receives free child care for the two children, which is valued at about $1,000 to $1,200 a month in Los Angeles. If you add the lower amount to the adjusted gross income, this brings the total to $52,289 a year. Also, there are no federal or state taxes on this income. (In case you are wondering, I checked and rechecked the numbers as I was surprised at the amount of the benefits.)
The next step was to do a similar calculation for the same family with an income of $15.37 an hour. The adjusted gross income of $32,950 is adjusted upward by $17,021 to a total of $49,971. The major differences are:
  • The wage earner no longer qualifies for Medicaid (138% of PG) and must pay for his or her share of a health care premium that is estimated to be $160 a month.
  • Payroll taxes increase.
  • A child care fee in California of $2,148 is assessed.
  • The SNAP debit card (Supplemental Nutrition Assistance Program) of $310 a month stops.
  • The Section 8 housing credit of $10,890 a year declines to $6,915.
  • The federal income tax credit is reduced by $2,791.
In this example, the hotel employee is financially better off to keep his or her $9 an hour minimum wage and have almost $200 a month more in his or her pocket to spend. This same analysis would hold true for one or three children in the family. The takeaway from this is the “Fight for $15” is of little real value to low income wage earners. 
Who wins?
Who are the winners? Unions are winners, as hoteliers may be forced into collective bargaining agreements as the judge noted. Politicians and social change advocates are winners (as I previously wrote about in “Why LA hotels are minimum wage targets”). Clearly, the hotel employees and their employers are not winners.
The impact of “Fight for $15” on hotels in Los Angeles is just a glimpse into the future for small businesses and entrepreneurs across the country. As I pointed out previously, there are very few employees earning the $9 minimum wage at hotels. Typically, it is an entry-level job that within a year they are promoted or receive a raise, or it is a tipped position. The broader leisure and hospitality supersector and retail supersector are where the real impact will be felt.
These two super sectors as reported by the U.S. Bureau of Labor Statistics represent more than 30 million jobs in the economy. Both sectors have only within the last year recovered all of the jobs lost in the recession. Many of the new jobs created in our economy have come in these supersectors.
Starting out at a minimum wage is fairly common for the unemployed or those just entering the workforce in retail or food and beverage jobs. There is little doubt that increasing the minimum wage to $15 will result in the loss of jobs in these supersectors as Reihan Salam wrote. The question is how many jobs?—which I will leave to the economist to argue over.
We are already seeing the impact of the loss of jobs in Seattle. This article and this article are examples of the disruption extreme minimum wage increases will bring to our economy. 
The “Fight for $15” is not the end all, be all solution to low wages. Low minimum wage has historically been viewed as an entry to the workforce. We have built a safety net of income credits, housing vouchers, health care services and so on to supplement low wage workers. Providing a safety net of services and support to the unemployed or new workers has worked well for our economy. The social goal is to get the unemployed off welfare and into the workforce.
The “Fight for $15” is a great sound bite, but it is an empty promise. Why make employers and employees the losers in order to make unions and politicians the short-term winners? 
Randall Pullen is President and CEO of WageWatch, Inc., which he founded in 1999 to design and implement Web-based wage and benefit surveys. Mr. Pullen‘s work experience includes over 30 years of software development and consulting to the hotel industry. Mr. Pullen is a certified public accountant and a member of the AICPA. He earned a Bachelor’s Degree in mathematics and an MBA from Arizona State University. He serves on the boards of a number of companies and associations, and is currently the Treasurer of the Arizona Housing Finance Authority.
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