Last week, members of the Los Angeles City Council voted to increase the minimum wage for hotel workers within the city to $15.37 per hour by next year. Why? You'd have to ask them.
A study they commissioned me to do on the subject — then seemingly ignored — raised serious questions about the wisdom of the measure.
Months ago, the City Council asked three analysts to look at the proposed wage hike. One was decidedly pro-labor, one decidedly pro-business. My firm, Beacon Economics, was the third, selected with the approval of both business and labor groups. We had no preconceived ideas about the proposal; we merely agreed to analyze the available data and see if conclusions could be drawn.
But the City Council never seemed interested in really examining the potential economic consequences of the ordinance. We got our instructions about what questions to address just two weeks before the vote, and we were surprised to learn that the council intended to vote on the day after we turned in our final analysis, which suggests none of the members spent time looking at our findings.
That's unfortunate, because the results strongly suggest that such a steep increase in the minimum wage could result in a sharp decline in the number of jobs in the hotel industry. And that kind of job loss could mean that as many workers would be hurt by the law as would be helped by higher wages.
There is a healthy debate going on in economics about the effect of minimum wage statutes on employment levels. The mainstream consensus is that such laws do reduce the number of jobs, but only slightly. Most of the studies that have been done, however, are based on much smaller minimum wage increases within much larger geographic areas. These studies don't necessarily apply to what Los Angeles is doing: requiring one industry to institute what will amount to nearly a 50% hike in wages over the prevailing base. This is especially tricky for a city that directly borders 35 other cities as well as unincorporated terrain managed by Los Angeles County.
Because these studies cannot be directly applied, it is fortunate that we have a natural experiment by which to gauge the potential impact in Los Angeles. Since 2008, a living wage ordinance has mandated higher wages at hotels near Los Angeles International Airport but not elsewhere in the city.
We set out to look at the data, figuring that if the airport ordinance had only a small affect on employment, we could be partially reassured that this new broader statute would also have a minimal impact.
Some of the indicators seemed good. Occupancy rates in the LAX area remain some of the highest in Los Angeles County, with little change since the living wage rules went into place.
Unfortunately, the same cannot be said for the number of people employed. Indeed, we found job loss that was large enough and surprising enough that we went back through our data sources multiple times to ensure the analysis was accurate.
The data clearly show that hotels around the airport have seen a sharp decline in employment relative to hotels in Los Angeles County overall. Some 12% more people are employed at hotels in the county than in 2007. The increase is apparent not only at hotels in general but within individual hotels, which means the jump cannot be attributed to an increase in the number of hotels elsewhere in the county. But in the airport hotels covered by the law, hotel employment has declined 10%.
As for the seeming disconnect between steadily high room occupancy and fewer jobs, modern large hotels are far more than a place to sleep at night. They offer a variety of restaurants, bars, parking garages, banquet and conference halls and tourist information centers. Anecdotally we have heard that many of these secondary lines of business have been sharply curtailed or eliminated because of the increase in labor costs. If higher wages have made banquets, say, more expensive to hold at airport hotels, it would be no surprise if organizations have decided to hold their banquets elsewhere.
These findings are alarming and at the very least suggest that further study should be done before rushing into a citywide expansion of the hotel wage law. A number of important questions still need to be answered. Can we link these job losses directly to the wage hike? If so, what sorts of jobs specifically were lost? Were these replaced in other parts of the economy? And, most important, how might the citywide statute be amended to reduce the chance that these results will be replicated on a wider basis?
If the same kind of job loss we found in airport hotels were to occur in hotels citywide, Los Angeles could lose thousands of jobs over the next few years. Some Angelenos will undoubtedly benefit from higher wages. But how many others will lose jobs or not be able to find them?
Christopher Thornberg is an economist and founding partner of Beacon Economics.