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L.A. small-business owners weigh both sides of a wage hike

Debate over whether benefits of a higher minimum wage outweighs costs continues among small firms, researchers

Some weeks, Gaston Letelier forgoes his own pay so he can afford to keep running his Meltdown Comics & Collectibles store in Hollywood.

Before the economy crashed, he paid for his employees' health insurance. But the downturn forced customers to save their money for food, gas and online bargains instead of graphic novels and individual issues.

Letelier eventually stopped offering health coverage and capped wages at a dollar above the current $9 state minimum wage.

"I can't do more," he said.

He may have no choice if Los Angeles Mayor Eric Garcetti succeeds in passing a proposal to gradually raise the city's minimum wage to $13.25 an hour by 2017.

Like officials in other high-cost cities such as San Francisco and Chicago, Garcetti has framed the issue as a "moral imperative" to support working-class citizens struggling with stagnant wages. But how the proposal could affect employers in Los Angeles — which has one of the nation's largest concentrations of small businesses — is a complex question at the center of the national minimum wage debate.

In the Los Angeles, Long Beach and Santa Ana metropolitan area, 273,173 businesses operated with fewer than 100 employees in 2011, according to the Census Bureau. That's 97% of all firms in the area — employing 1.8 million people.

Some small-business owners say the higher labor costs would be offset by productivity gains from employee retention and better morale. Others, such as Letelier, call the plan a "heavy-handed move" that makes it impossible for struggling mom-and-pops to survive in a city where it's tough to turn a profit. With much slimmer margins than corporations, small businesses' additional costs will prevent entrepreneurs from expanding and hiring, he said.

Letelier understands Garcetti's reasoning, and though he said his operations cost probably would increase nearly 40%, he hopes he's wrong about his ability to pay workers more.

"If I could pay $13.25 and so could everyone else, maybe more people could buy comic books," he said.

The debate continues to rage among researchers as well. Historically, studies found that minimum wage increases hurt job opportunities for low-wage workers. Firms facing higher costs, the logic went, would have no choice but to freeze hiring or cut workers.

But in the mid-1990s, researchers began to assert that raising wages slowed hiring only marginally, while providing a big boost to workers' quality of life — and their contributions to the economy.

The Congressional Budget Office drew conclusions from both camps while analyzing a proposal to raise the federal minimum wage to $10.10 by 2016 from $7.25. The February report estimated that the move would indeed cost jobs — 500,000 positions nationally, or a 0.3% decline — but that it would also lift 900,000 people above the federal poverty threshold of $18,700 a year for a family of three.

Toby Burke Hemingway already pays at least $13.25 an hour to his three employees at his Hemingway & Pickett home decor store in Silver Lake.

The strategy enables Hemingway to adjust his workers' hours according to seasonal demand without worrying about their ability to survive.

"For what we need — people who are here on time, are respectful and presentable — I don't think we could get the right people for less than what we're paying," Hemingway said. "If your employees feel like they're being ripped off, it's hard to run a productive and friendly business."

As population growth and the recovery bring more job seekers into the workforce, small shops must compete with larger companies to attract high-quality employees, said Maria Contreras-Sweet, head of the U.S. Small Business Administration.

Compared with larger companies, most small businesses tend to have tighter margins, more competition, limited access to loans and less guidance through copious red tape.

"Corporate America is already paying good, hefty wages," Contreras-Sweet said. "So what we want to do is also make sure small businesses are able to attract a talented, skilled workforce. And to do that, they need to pay a substantial salary."

Kita Marie Williams has seen an upswing in demand at her 2-year-old home staging and interior design business in Los Angeles as the housing market regains its footing. Recently, she hired her first-ever intern.

Raising the minimum wage too high might not be a good idea for employers of low-skilled workers, where the simplicity of tasks wouldn't always justify the higher pay, Williams said. But it may be necessary to lure future employees like her well-trained and "super-qualified" intern, she said.

"I want to pay her something that's going to make her want to stay working for me, the wage I would want to make," Williams said. "I know how much it costs to live here."

To compensate, Williams is boosting her fees so slightly she said they're barely noticeable. She reasons that workers spending their higher incomes would speed up the city's economic recovery, boosting hiring and ultimately compelling more Angelenos to splurge on discretionary home improvement projects.

"In the end, I just think everyone's going to win," she said.

Michael Reich, director of UC Berkeley's Institute for Research on Labor and Employment, is inclined to agree.

One of the leading economists on the minimum wage issue, Reich has co-written studies calculating potential effects in San Jose, San Diego, San Francisco, Oakland and — at Mayor Garcetti's request — Los Angeles. His work has been cited by the Obama administration, many left-leaning policy groups and mayors in major U.S. cities pushing for local minimum wage increases.

Focusing mostly on the restaurant industry, which has one of the highest percentages of low-wage workers, research from Reich and his colleagues suggests that businesses don't cut jobs following minimum wage increases — because higher pay makes workers more efficient.

And higher retention rates mean businesses can direct fewer resources to recruiting and training new workers, according to the studies.

"There are going to be more workers who want to work for you, and they're going to stay longer," Reich said. "There's also the effect on productivity and absenteeism when you have higher wages."

But a separate faction of economists argue that employment takes a measurable hit once minimum wage increases are enacted.

David Neumark, director of the Center for Economics & Public Policy at UC Irvine, has consistently found correlations between higher minimum wages and declines in employment by comparing states with differing minimum wage laws.

He agrees that there may be lower turnover after raising wages, but argues that "there's no evidence it fully offsets for the price increase."

As a partner in Innovative Dining Group, Philip Cummins oversees operations at a dozen restaurants throughout the Los Angeles area, including Sushi Roku, BOA Steakhouse and Katana.

The company is facing higher food costs because of the drought, along with rising healthcare and workers' compensation expenses. If the $13.25 wage went into effect, Cummins said, he would expect to raise prices at least 10%.

"The restaurant business is a thin-margin business," Cummins said.

An additional frustration, he said, is that California's minimum wage law doesn't factor in tips as income. But Cummins recommends that Los Angeles do so if Garcetti's proposal is passed.

"If an employee takes home $100 in tips over a six-hour shift, he is already making $14 or $15 per hour, even before receiving the minimum wage," Cummins said.

Garcetti told The Times that he's skeptical that small businesses would be harder hit than larger businesses by a minimum wage increase.

"I don't know that the evidence actually shows that," he said. "But I understand that fear, so I think it's important to listen to it, to get into the very specific things."

Central City Assn. of Los Angeles, a business lobbying group, said Garcetti's minimum wage proposal would exacerbate the city's notoriety as a bad place for businesses while putting employers at a competitive disadvantage to other cities and states. The law could result in "widespread layoffs," the group warns.

If the $13.25 minimum wage is adopted, the group said nonprofits and companies with fewer than 500 employees should get seven years instead of two to start paying workers more. The group also suggests a lower, separate minimum wage for younger workers, who might be the first laid off, or not hired at all, with a broader mandatory wage hike.

The greater threat to the Los Angeles economy could be a chilling effect on business formation, some entrepreneurs argue.

"The burden and costs of starting up a business in California are so exorbitant," said Michael Pycher, who recently co-founded alcohol delivery app Nestdrop in Los Angeles.

Pycher and his businesses' co-founder recently hired two tech managers who earn $9 an hour. Many applicants were overqualified for the job but willing to work for a pittance — a sign of a difficult job market, which may tighten even more if businesses trim workers to offset higher labor costs.

Pycher said he'll make do with a $13.25 floor but added that the wage hike "would hinder our opportunity to grow." He said the onus is on the government to create a business-friendly environment so that entrepreneurs can properly reward their workers.

"A start-up's goal is to expand, not to stay stagnant," he said.

tiffany.hsu@latimes.com

chris.kirkham@latimes.com

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