L.A. firms see peril in tying minimum wage increases to inflation
A little-debated provision of the Los Angeles minimum wage hike — future increases tied to inflation — may produce its most profound and controversial consequences over the long term.
In a single vote, the City Council backed a plan that would raise the minimum wage not just once but forever, with automatic annual hikes starting in 2022, after phasing in a $15 hourly wage by 2020.
The requirement aims to ensure that wages keep pace with cost-of-living increases, but business advocates say it could cripple entrepreneurs’ ability to adjust wages to unpredictable economic conditions — effectively enshrining automatic annual layoffs when times get tough.
Ruben Gonzalez, policy chief for the Los Angeles Area Chamber of Commerce, called it the “most insidious” portion of the law.
“This is just putting it on a runaway train without anyone steering,” he said.
In a 14-to-1 vote Tuesday, council members directed City Atty. Mike Feuer to draft an ordinance that would increase the wage in phases from the current $9 statewide minimum. As many as 800,000 workers in the city could be affected, officials said.
Local entrepreneurs, still haunted by memories of the recession, said the inflation provision could hit them hard in future downturns. Inflation data often lag behind real-time events, and many fret that the outdated numbers may force them to raise their wages even when the economy starts to sink.
They can’t always raise prices to make up the difference.
“Sometimes it’s not easy for a small place like a bar to pass along those expenses,” said Ben Adams, who employs three people at his Know Where Bar in Hollywood. “I am competing with bars down the road that are massive.”
Advocates counter that such provisions protect workers from grinding political battles that often prevent local officials from raising wages on any regular schedule.
“It takes a huge political push to get any adjustment,” said Marieka Klawitter, a professor of public affairs at the University of Washington. “This is a way to allow the minimum wage to respond directly to the economy, to adapt to the current conditions automatically without requiring the political process to intervene.”
Starting July 2022, annual wage increases will be pegged to the local version of the consumer price index, a monthly gauge produced by the federal Bureau of Labor Statistics. The proposal will head back to the council for final approval next month. Mayor Eric Garcetti has said he would sign the council’s version into law.
“It’s really the only logical way to do it, otherwise you have a lot of unnecessary battles,” said Councilman Paul Koretz, who represents the 5th District. “The ideal is a relatively gradual increase that tracks the actual value of the wage and that’s not going to upset the apple cart and drive anyone out of business.”
Over the last two decades, inflation has averaged 2.3% annually in the Los Angeles region.
Other cities passing minimum wage hikes recently have also included inflation-adjustment measures. Currently, 20 localities have their own minimum wage policies, with all but three indexed to inflation, according to the Institute for Research on Labor and Employment at UC Berkeley.
Michael Reich, who heads the institute, said he studied San Francisco’s experience tying wages to price fluctuations from 2002 to 2013 and found that the strategy worked as designed. In restaurants, wages kept pace with inflation within San Francisco, but not the rest of the Bay Area. Employment grew at the same rate as other nearby counties, he said.
But historical data about inflation indexing is in short supply because most of the laws are fairly new, said Michael R. Strain, deputy director of economic policy studies at the American Enterprise Institute.
“You’re taking a big leap into the unknown,” he said of the Los Angeles plan. “This will really be disruptive and will have a different effect than in, say, Seattle.”
Los Angeles is a much bigger city with a high population of low-wage and undocumented workers, he said. Faced with permanently mandated wage increases, L.A. employers may be more likely to hire more off-the-books labor, slash jobs or rely more on technology and automation, Strain said.
Business groups often complain about any minimum wage hike, but they don’t often radically change their business or cut workers in response to one-time hikes, Strain said.
Inflation indexing, however, could produce more drastic cost-cutting to account for permanent increases in labor costs — potentially hurting the workers the law aims to help, Strain said.
Business groups say that a company’s ability to pay workers doesn’t automatically increase as the cost of living rises. Instead, the opposite is often true, they said: Many small businesses would struggle to boost wages while expenses such as rent and supplies balloon.
Richard LoGuercio, owner of Town & Country Event Rentals in Van Nuys, worries about staying competitive.
About 100 of his 430 employees at the San Fernando Valley location would get mandated wage raises under the new rules, he said. But he anticipates having to lift pay for everyone to keep workers happy.
Already, he’s told his real estate agent to keep an eye out for locations outside of Los Angeles so he doesn’t have to compete against outside rivals “with my hands tied behind my back,” he said.
“If it goes up 3% a year forever, we are going to look at raising prices, and the companies that aren’t in L.A., they have an advantage,” LoGuercio said. “I don’t even see how I can sustain this.”
Todd Schwartz, owner of a Dickey’s Barbecue Pit franchise in Northridge, raised prices roughly 25 cents on average after California’s minimum wage rose a dollar to $9 last year.
The wage hike in Los Angeles, combined with tight margins, will probably force him to sell his sandwiches, baked potatoes and brisket for more, possibly as much as an extra dollar or two in five years, he said.
“Autopilot” inflation adjustments will exacerbate price increases across the board at his restaurant, Schwartz said. The higher prices would in turn push up inflation measures, resulting in a “never-ending spiral” of wage increases, he said.
“Wages don’t come from me; they come from the customer,” he said. “What is the most you are willing to pay for a barbecue sandwich?”
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