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When Mandates Work Raising Labor Standards at the Local Level

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When Do Mandates Work?

Ken Jacobs and Michael Reich

*Portions of this chapter are based on or appeared in Ken Jacobs, "San Francisco Values: The New Social Compact," Labor and Employment Relations Association Series, 61st Annual Proceedings, edited by Adrienne E. Eaton, 180-87 (n.p.).

Beginning in the late 1990s, the City of San Francisco enacted a notable series of laws designed to improve pay and benefits, expand health care access, and extend paid sick leave for low-wage San Francisco residents and workers. Remarkably, and despite many warnings about dire negative effects, these new policies raised living standards significantly for tens of thousands of people, and without creating any negative effects on employment. While modest by most European and Canadian standards, San Francisco's policies represent a bold experiment in American labor market policies that provides important lessons for the rest of the United States.

In contrast, over the past three decades living standards have stagnated-at best-for a majority of Americans, decreased for large swaths of America, and increased dramatically for a very select few. The causes of stagnating living standards and rising inequality are much debated. One side focuses on technological change and the effects of globalization, each of which is said to reduce the demand for less educated workers. Another side focuses on changes in business and public policy, particularly on changes that loosened standards that put floors on worker pay and benefits while allowing incomes at the very top to rise dramatically.

Our volume addresses this debate through a novel perspective: an examination of the scope and effects of the innovative but relatively unknown set of public policy experiments in San Francisco. Although other cities and states have adopted somewhat similar policies, the number, scope, and reach of the San Francisco standards are unequaled anywhere else in the United States. It is not an exaggeration to state that they represent a new social compact among businesses, workers, and government.

The first set of policies mandated wage and benefit standards for firms doing business with the city, beginning with equal benefit laws and continuing with a set of living wage standards. While these living wage standards resembled policies that have been adopted by more than 130 local governmental entities in the United States, the scope and share of workers affected exceeded those of any other city. These early initiatives were followed by pioneering new laws that applied higher standards to all firms operating within San Francisco's geographic boundaries. These citywide programs established a minimum wage that applied to all employers, a universal health access program for all San Francisco residents with a mandated employer health spending requirement, and a minimum level of paid sick days for all San Francisco workers.

San Francisco's innovative labor standards policies have gone further than those in other U.S. cities or states. As this chapter and the chapters that follow show, their implementation did not hurt jobs or the local economy. Indeed, in recent decades San Francisco has enjoyed more prosperity than most U.S. cities. What lessons can we draw from this experience? Are the circumstances that led to the adoption and benevolent effects of these policies unique to San Francisco, or are they generalizable to other areas?

As it turns out, the local economic setting-a city in recovery from the hollowing out of industry and a loss of middle-paying jobs, with growth alongside increasing economic inequality-is representative of trends in the majority of metropolitan areas and the United States as a whole. The San Francisco experience thus does carry important lessons for city, state, and national policy.

The evidence collected in this book demonstrates how the specific crafting of San Francisco's mandates contributed to their success. In particular, San Francisco has been attentive to the issue of compliance, wage increases were indexed so the benefits persist over time, and an inclusive political process accounted for local economic conditions and community needs. With similarly careful consideration of local conditions, San Francisco-type standards would work in many other places. Indeed, many of San Francisco's innovative policies have been adopted in other localities, and more are undergoing serious consideration.

* * * *

San Francisco's pay and benefit standards were not only more far-reaching than those in other cities; they also have been studied intensively. A wealth of careful new research, mostly conducted by scholars at the University of California, Berkeley, has documented the effects of the policies on employee compensation, productivity, job creation, and health outcomes. Although opponents of the laws predicted significant negative impacts on jobs and the local economy, the research evidence indicates more positive results. Our volume brings this evidence together for the first time, reviews it as a whole, and makes it accessible to a broader audience.

To introduce the volume, this chapter provides first a brief historical account of each of the policies and how it came into being. Section 2 presents the economic and political context in San Francisco that led to the adoption of the pay and benefit mandates. In section 3, we discuss the economic theory of pay and benefit mandates. Our goal is to provide a unified explanatory framework that accounts for the impacts of the policies. Section 4 assesses how the San Francisco economy has performed, relative to its immediate neighbors, as a result of the aggregate effects of all these policies. In section 5, we discuss the lessons that the San Francisco experience holds for local, state, and national policy. Finally, section 6 provides an overview of the volume and summarizes the findings in each of the chapters, which individually examine the impacts on pay, employment, and other outcomes.

1. A Nexus of Mandates

The series of pay and benefit standards enacted by San Francisco began in 1996. The first set of mandates applied primarily to contractors doing business with the City. These contractor-only policies began with a legally contentious battle to extend benefits to domestic partners (1996), continued with a labor peace and majority sign-up agreement with simplified union recognition procedures (1997), an overhaul of prevailing wage law in 1999, and the creation of a labor standards enforcement office in 2000. From 1998 to 2001 the set of contractor-only policies was extended in a series of laws that included not only city contractors, but, in some cases, companies doing business on City-owned land, such as at the airport, the port, and the major league baseball park. In 2006 the city passed a sweat-free contracting ordinance, and in 2008 it entered into an expansive community benefits agreement that covers all employers in a new large-scale economic development project.

By 2003, San Francisco's policy initiatives began to focus on programs that would affect all employers in the city, not just city contractors. This shift represented a major expansion in coverage. The citywide policies included a minimum wage (enacted in 2003 and implemented in 2004), a local earned income tax credit (2005), a health access program (passed in 2006 and implemented in 2008), and paid sick leave for all workers (enacted in 2006 and implemented in 2007).

While the greatest impact of these policies is on low-wage workers, the health and sick leave policies also reach into the middle-income workforce. For low-wage workers, these standards do not operate independently of each other. They form a nexus of mandates that affect workers and firms in an interdependent manner. Table 1.1 summarizes their evolution as a timeline. The rest of this section elaborates the evolution in more detail.

Contractor-Only Policies

Equal Benefits for Domestic Partners

In November 1996, the San Francisco Board of Supervisors enacted the Equal Benefits Ordinance, requiring firms that did business with the City of San Francisco to provide the same benefits to employees' domestic partners that they provide to married spouses. The law applied to all firms entering into contracts or leases of more than $5,000 with the City. Benefits were defined broadly as including health insurance, retirement plans, leaves of absence, use of company facilities, and employee discounts.

United Airlines, Federal Express, and the Air Transport Association sued the City, arguing preemption under federal law, including the Employee Retirement Income Security Act (ERISA), and violation of the commerce clause of the U.S. Constitution. The federal district court upheld the ordinance, with several important restrictions. Outside of the city or land owned by the city, the ordinance could apply only where work related to a city contract is being performed. Employees of United Airlines not working in San Francisco or at San Francisco International Airport (SFO) would not be covered by the law, but employees working on service agreements for the City of San Francisco would be, even if they are located outside of the city.

The court further determined that when the city is acting as a regulator, rather than in its proprietary interest as a consumer, the ordinance could apply only to benefits not covered under ERISA, such as bereavement leave, paid family leave, and company discounts. In the case of the airlines, the court found that the city's monopoly power over the airport meant that it wielded greater power than an ordinary consumer so was not shielded from preemption as a market participant (Air Transport Ass'n v. City and County of San Francisco, 1998). The distinction between the city acting as a market participant or as a regulator would prove important for other San Francisco laws.

While the Equal Benefits law was fundamentally a human rights ordinance, it did broaden health coverage. Many contractors chose to extend the same rules to their entire workforce, not only to those covered by the law. A 2002 report by the San Francisco Human Rights Commission estimated that more than fifty thousand people in 39 states and 500 cities had taken advantage of health insurance offered to domestic partners by firms contracting with the city (Goldstein 2002). By 2013, 62 percent of Fortune 500 companies provided health benefits to domestic partners (Human Rights Campaign Foundation 2013).

With the Equal Benefits Ordinance, San Francisco directly established labor standards conditions on a wide range of firms, and it did so in a manner that survived legal challenge. The law then served