Starting in the 1990s, San Francisco launched a series of bold but relatively unknown public policy experiments to improve wages and benefits for thousands of local workers. Since then, scholars have documented the effects of those policies on compensation, productivity, job creation, and health coverage. Opponents predicted a range of negative impacts, but the evidence tells a decidedly different tale. This book brings together that evidence for the first time, reviews it as a whole, and considers its lessons for local, state, and federal policymakers.
When Mandates Work Raising Labor Standards at the Local Level
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.
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 as a blueprint for many of the labor standards policies passed in San Francisco in the succeeding years. It has also served as a model for laws passed in nineteen other cities around the country as well as the state of California.
Majority Sign-Up (Card Check)
The next major piece of labor standards legislation came in December 1997, when the San Francisco Board of Supervisors passed the Employee Signature Authorization Ordinance, sometimes referred to as the labor peace ordinance. The first of its kind in the United States, the ordinance requires that employers in hotel or restaurant developments in which the city has a proprietary interest as a landlord, lender, or loan guarantor enter into a card check agreement with a labor organization requesting such an agreement. The agreement must provide for a card check procedure with a neutral third party, binding arbitration over disputes, a prohibition on economic action by the union against the employer at work sites covered by the agreement as long as the employer is in compliance, and a prohibition on coercion or intimidation of workers by the labor organization or employer during the process.
The stated purpose of the ordinance is to protect the city's economic interest from the threat of labor-management conflict where it is acting as a market participant, with the same risks and liabilities as others participating in similar ventures. It is expressly not intended to affect the outcome of the determination of preference regarding unionization.
Prevailing Wage Revisions and Creation of the Office of Labor Standards Enforcement
A 1998 ordinance mandated that local prevailing wages, including the cost of benefits, be paid to janitors working on city contracts. This mandate was later extended to include window cleaners, parking lot attendants, theatrical workers, solid waste haulers, and movers contracting with the city. In addition, the 1998 Displaced Worker Protection Act required new city janitorial and security contractors and subcontractors to retain the same workers for a transitional employment period of ninety days.
The following year, the Board of Supervisors overhauled and strengthened the city's prevailing wage policy for public construction projects. But labor organizations soon became concerned about whether the law would be enforced. In 2000 they successfully advocated that the city create the Office of Labor Standards Enforcement to promote compliance.
Living Wage Laws (Compensation Conditions on Public Contracts and Leases)
San Francisco was a relative latecomer in passing a living wage law. Labor and community organizations and policy makers drew from the experiences of other cities in crafting the San Francisco laws. At the same time, they introduced their own innovations and used San Francisco's power as both a city and a county to reach greater numbers of workers. Between 1999 and 2001 a series of policies placing conditions on firms doing business with the city were passed by the San Francisco Airport Commission, the Board of Supervisors, and the Redevelopment Commission.
Living Wages for Screeners and Baggage Handlers at SFO (Quality Standards Program)
In January 2000, the San Francisco Airport Commission passed the Quality Standards Program, which was designed to improve safety and security at the San Francisco International Airport. At the time, the turnover rate for airport security screeners at SFO was nearly 100 percent a year (Reich, Hall, and Jacobs 2005). Officials at SFO expressed concerns over the impact of the high turnover rates on worker performance and airport security. Airport director John Martin reported seeing workers sleeping in the stairways between two shifts.
With many security and airline service jobs carried out by airline contractors, the airport had no direct relationship with-or oversight of-many of the firms operating there. SFO crafted an innovative policy designed to give it greater oversight of airline contractors and to address the high turnover rates. The Quality Standards Program established a permitting process for airline contractors operating in secure areas of the airport or carrying out security functions; and minimum training and compensation standards were required as a condition for receiving a permit. This policy went into effect in April 2000. Nearly one-third of the airport's thirty thousand workers received pay increases in the year following the implementation of the ordinance (Reich, Hall, and Jacobs 2005). As of January 1, 2013, the minimum compensation rate under the program at SFO was $12.93 an hour, fifty cents above the rate for other airport workers as established by the minimum compensation ordinance.
Living Wages on City Contracts and Leaseholders at SFO (Minimum Compensation Ordinance)
In August 2000 the San Francisco Board of Supervisors passed an ordinance establishing living wage standards for firms contracting with the city or holding leases at San Francisco International Airport. At the time of implementation, the policy affected an estimated 4,200 lower-wage workers on city contracts and 3,000 workers at SFO working in restaurant and retail concessions and parking and rental car facilities and not covered by the Quality Standards Program (Reich, Hall, and Hsu 1999; Reich and Hall 1999). It also applied to San Francisco's 18,000 In-Home Supportive Service (IHSS) workers. The San Francisco Redevelopment Agency adopted the living wage requirements the following year. The wage is indexed to the Bay Area Consumer Price Index. As of January 1, 2013, the required rate was $12.43 an hour, $11.03 for nonprofit organizations (including IHSS).
Health Benefits for Employees Working on City Contracts or on City Leased Lands (Health Care Accountability Ordinance)
In 2001 the Board of Supervisors passed companion legislation to the living wage ordinance. This legislation required firms with city contracts or leases to provide health insurance or pay $1.50 an hour per worker to the San Francisco Department of Public Health to cover the costs of the uninsured in the city. The payment rate is adjusted periodically for medical cost inflation on the recommendation of the health director. As of July 1, 2013, the rate was $4.00 an hour, not to exceed $150.00 per workweek. While limited to firms doing business with the city, the Health Care Accountability Ordinance could be considered the first pay or play health care policy to go into effect in the United States.
San Francisco's living wage policies were largely variations on policies being carried out in other cities. They differed mainly in the number of workers covered. San Francisco was able to reach more workers through these policies in part as a result of its joint powers as a city and a county. San Francisco policy could reach the airport, the thousands of home care and human service workers (a county function), and city service contractors.
Hunters Point Shipyard Community Benefits Agreement
In 2008, a coalition of unions and community organizations negotiated a community benefits agreement with the Lennar Corporation covering a massive redevelopment project at the site of the former Hunters Point Shipyard. The project is expected to generate up to ten thousand permanent jobs. It will include 635,000 square feet of retail space, 2.65 million square feet of office and research and development space, and a hotel. More than 30 percent of the housing built on the site will be below market rate, double what is required by California law. Lennar further committed to contribute $27.4 million to a fund to assist community residents in purchasing market-rate units in the district.
The agreement applies living wage conditions to the broadest scope of employers in a private commercial development anywhere in the United States. All firms with twenty workers or more operating in the redevelopment area will be required to meet the living wage standard of $12.43 an hour and provide twelve days of paid time off a year (or a cash equivalent). The agreement also requires majority sign-up for union recognition for hotels, restaurants, grocery stores, and security and custodial workers. Housing production commenced in July 2013, though full funding for the development was not yet secured (Dineen 2013).
As we have noted, San Francisco's greatest innovation is the set of policies that apply to all employers in the city. We turn to these next.
Building on the success of the living wage campaign, a coalition of labor and community organizations placed on the ballot in November 2003 an initiative to create a citywide minimum wage. The initiative passed with 60 percent of the popular vote. It was the first minimum wage law implemented in a major city, not including a much more limited ordinance in Washington DC. In a prospective study, Reich and Laitinen (2003) estimated that the minimum wage would affect 54,000 workers, 11 percent of the city's workforce. This estimate included workers who were earning under the minimum wage rate and would receive a mandated increase and those earning slightly above the new minimum wage; employers were expected to raise wages to retain these employees. The San Francisco minimum, which applies to all employers and workers covered under state minimum wage law, was set at $8.50 an hour and indexed annually to the Bay Area Consumer Price Index. The minimum wage rate in 2013 was $10.55 an hour, the highest in the nation.
Working Families Credit
Established as a pilot program in 2005, the Working Families Credit was designed to encourage take-up of the Earned Income Tax Credit (EITC), promote savings, and help working families stay in San Francisco. Initially funded with public and private sources, the program provided a 10 percent supplement to the EITC. In 2005 approximately ten thousand families received an average credit of $220. When private funding ran out at the end of the pilot program, the city switched to a flat per-family credit, currently set at $125 and available only to first-time applicants. When families apply for the credit, they are also connected to other programs for low-income working families (Flacke and Wortheim 2006).
Health Care Security Ordinance
The San Francisco Health Care Security Ordinance was approved in July 2006 and launched in July 2007. The ordinance has two central elements: It establishes a new health program, Healthy San Francisco, to provide comprehensive health services to uninsured San Francisco residents, with a focus on prevention, and it sets a minimum health spending requirement for firms with twenty or more workers.
Healthy San Francisco is open to uninsured San Francisco residents regardless of health, employment, or immigration status on a sliding scale based on income. Enrollees are assigned a medical home and a primary care physician through one of the city's public or nonprofit clinics. Acute care and specialty care are provided by San Francisco General and a network of the city's nonprofit hospitals. Healthy San Francisco is a health access program, not insurance. Health services are not available through the program outside of the local network.The program is funded by the public, individuals, and employers. It also receives in-kind contributions from nonprofit hospitals.
The minimum health spending requirement originally mandated that businesses with twenty to ninety-nine workers spend a minimum of $1.17 an hour per employee on health services. Businesses with one hundred or more workers are required to spend a minimum of $1.76 an hour per employee on health services. The minimum spending amounts are indexed to health premium costs. In 2013 the amounts are $1.55 and $2.33 an hour, respectively. Employers may meet the requirement through contributions to health benefits, health savings accounts, direct reimbursement of health care costs, or payment into the city program. The requirement was designed to level the playing field for firms that already provide coverage, to discourage firms from dropping coverage and placing a greater burden on the new public program, and to help reduce the taxpayer cost of caring for uninsured workers.
The employer spending requirement went into effect in April 2008 for employers with 50 or more workers and April 2009 for employers with 20 to 49 workers. By June 2010 nearly a thousand employers had chosen to pay into the city plan, contributing a total of nearly $80 million on behalf of over 55,000 workers (Department of Public Health and Office of Labor Standards 2010). Healthy San Franciscois available only to San Francisco residents. If an employer pays its obligation to the city, funds are set aside in Medical Reimbursement Accounts (MRAs) for workers who are not eligible for the program. Close to 50,000 individuals were enrolled in Healthy San Francisco in March 2013, and another 10,000 transitioned from Healthy San Francisco to new insurance offerings made available through a State Medicaid waiver to bridge coverage to the new programs created by the Affordable Care Act (Healthy San Francisco 2013).
Paid Sick Leave
In November 2006 San Francisco became the first U.S. city to require employers to provide paid sick leave. A ballot initiative establishing the policy passed with 61 percent of the vote. In order to give employers time to come into compliance, implementation of the ordinance began in June 2007. The law requires employers to provide one hour of paid sick time for every thirty hours worked. Workers for businesses with fewer than ten employees may accrue at least a minimum of forty hours of paid sick time; for all other businesses the minimum required accrual is seventy-two hours. Employees may use the time for their own health care or to care for a family member who is sick.
2. The Economic and Political Context
As we have seen, San Francisco has gone much further than other cities in instituting innovative mandates. We argue in this section that the economic context in which these mandates were instituted was similar to those in many other cities. In particular, the structure of San Francisco's economy is not wildly different from that of many other U.S. cities. The move to enact local labor standards emerged in the context of eroding federal protections, the revival of the central city, and rising economic inequality. Compared to many other cities, San Francisco was a bit ahead on these trends; but it has not traveled on an exceptional trajectory.
We also argue that political coalitions among business, labor, and neighborhood organizations emerged in San Francisco that did distinguish it from other cities. In particular, the emergence in San Francisco of coalitions among labor and community-based organizations shifted policy making in new directions. These coalitions supported mandates that also encouraged economic development.
Eroding Federal Protections of Labor Standards
Over the course of the 1980s the real value of the federal minimum wage declined by 30 percent (Reich and Laitinen 2003). In 2000, 14.9 percent of workers nationally were covered by a union contract, a drop of 42 percent over two decades (Hirsch and McPherson 2012). Unionization in California was slightly above the national average, with 17.7 percent of workers covered. These erosions of protections led to a countertrend that began in 1994, when Baltimore enacted the first modern living wage law. This law required service companies contracting with the city to meet wage standards well above the federal minimum wage.
Ten years later, more than 130 local jurisdictions had passed living wage laws (Fairris and Reich 2005). Over the course of the decade, these laws became more complex, applying to wider categories of workers and containing a broader mix of protections, including minimum paid time off, requirements that workers be retained if the city contract changes hands, and protections against employer retaliation against workers who file complaints.
In this same period, over thirty states passed state minimum wage laws that exceed the federal floor and ten states indexed their minimum wage standards to inflation. As we discuss below, a number of cities and states also passed laws providing paid family and medical leave, paid sick leave, and other policies that protect living standards.
While many cities and states have passed such laws, other states have also been active, but to reduce worker protections further. A number of states moved to preempt local jurisdictions from establishing such policies. In the Great Lakes region, many states reduced protections for state and local government workers. Thus the greater activism of states and localities has had mixed effects on worker protections.
Economic Context: The Revival of Many Central Cities but with More Inequality
In the half century from 1940 to 1990, economic activity and population in urban areas shifted from central cities to the suburban rings of metropolitan areas. This shift began with the emergence in the 1920s and subsequent spread of decentralized truck- and car-based transport modes that replaced centrally located rail and harbor facilities. In the immediate postwar period, the greater availability of land in the suburbs, postwar federal subsidies for suburban housing developments, and the creation of the interstate highway system also contributed to the decentralization of economic activity. As a result, although most central cities in the United States nonetheless continued to grow in absolute terms, they did so at a declining rate. In the 1980s, rapid deindustrialization of the U.S. economy multiplied the economic problems of most central cities, and declining growth gave way to absolute population and economic shrinkage (Boustan and Shertzer 2010).
San Francisco experienced these same trends, except that they emerged earlier than in the nation as a whole (Glaeser and Gottlieb 2008; Birch 2009, table 1). Indeed, in the early postwar years San Francisco declined more than most cities, as it lost most of its industrial base, first to the suburbs and then to overseas competition. By 1999 less than 5 percent of San Francisco's workers were employed in manufacturing, one of the lowest proportions among U.S. cities. In this dimension, San Francisco has not been an exception but rather ahead of other cities, whose industrial bases also declined in the same period.
Beginning in the late 1980s and continuing in the 1990s, many, but not all, central cities were experiencing positive growth (Boustan and Shertzer 2010, fig. 1a). The decline of San Francisco relative to its surrounding counties ended in the early 1990s. Although the city's concentration in high technology led to substantial declines again after the dot.com bust of 2000, the city recovered again in the subsequent years.
San Francisco's previous decline and more recent revival are especially apparent in data on the median income of San Francisco households, both in real terms and relative to California households and to all U.S. households. These patterns are presented in the left columns of table 1.1 for the period 1969-2010. After stagnating in the 1980s, real median household income in San Francisco rose in real terms in the 1980s and 1990s. In the 2000s, although not shown in table 1.2, median income increased until the Great Recession and then fell less than in California or the United States. In 2010 San Francisco's median household income ranked third among major U.S. cities, behind San Jose, California, and Austin, Texas.
Median income among San Francisco households, expressed relative to that of California and U.S. households, followed a similar pattern. In the 1970s, the median income of San Francisco households was lower than in California as a whole. Beginning in the 1980s, the relative median income of San Francisco households rose sharply and continued to do so into the 2000s. The same pattern appears when San Francisco is compared to the United States as a whole.
San Francisco's economic resilience continued even after the onset of the Great Recession. Although not shown in table 1.2, from 2006 to 2010 median income continued to rise in the city while declining by 6 percent in California and 4.4 percent nationwide. Of course, the wealth of the average home-owning household fell substantially with the sharp decline in home prices that began in 2006, erasing many of the steep gains in property values of the previous decade. This decline did not affect the highest-income households to the same extent, since more of their wealth was held in securities that had recovered their prerecession values by 2012.
San Francisco's prosperity has also produced increasing inequality, a pattern that has been repeated in other growing cities, in individual states, and in the United States as a whole. This increase has occurred in both the upper and lower halves of the income distribution. We focus here on the upper half of the distribution and discuss in section 4 developments in the lower half. The three columns on the right side of table 1.2 display the ratio of mean to median income over time in San Francisco stet and the United States for the period 1979-2010. A rising ratio of mean to median income indicates the growth of inequality among the more affluent half of households. This ratio increases during these decades in all three columns. By this measure, San Francisco exhibits more inequality than California or the United States as a whole.
San Francisco's prosperity, like that of other recent "superstar" cities, such as San Jose and Austin, has been based more on innovation than mass production. Figure 1.2 displays the changes between 1990 and 2010 in the economic structure of San Francisco and of the twenty largest central U.S. cities. To keep the figure readable, we have included only eight sectors. The selected sectors include three that are high paying: financial services; information and communications; and professional, scientific, and management services. Two of the sectors in figure 1.2 pay middle-level wages-manufacturing and health, education, and social services-and three are relatively low paying-administrative support services, retail, and accommodation and food services. We have analyzed the data for the remaining sectors and found that they do not change the patterns that we observe among these eight.
Two major patterns can be seen in figure 1.2. The first pattern is shown by the relative importance of each of these sectors in 1990. Relative to the twenty other largest central cities, San Francisco's industrial mix in 1990 was already overrepresented in the high- and low-paying sectors and underrepresented in the middle-paying sectors. Surprisingly, however, the importance of the accommodation and food services sector, which includes the tourism industry, is only 2 percent higher in San Francisco than in the comparison central cities.
The second pattern in figure 1.2 is shown by changes in the relative importance of these sectors over the 1990-2010 period. Two of the three high-paying sectors-financial services and information and communications-did not increase in economic importance. The proportion of the San Francisco economy in one of the three high-paying sectors-professional, scientific, and management services-increased in San Francisco and in the twenty comparison cities, but the increase was greater in San Francisco. Changes over time in the importance of the two middle-paying sectors-manufacturing and health, education, and social services-offset each other in both San Francisco and the twenty comparison cities. Changes in the importance of each of the three low-paying sectors were remarkably similar in San Francisco and the twenty comparison central cities.
These comparisons suggest that San Francisco's relative prosperity is reproducible in other cities. Indeed, Moretti (2011, 2012) argues that the cities that have seen the biggest revivals had greater concentrations of highly educated, highly productive, and innovative workers. This workforce created agglomeration economies and knowledge spillovers that made all workers-including those with only high school degrees-more productive and better paid. These agglomeration economies in turn attracted more highly skilled workers to the area, in a virtuous circle. In contrast, economic recovery was much weaker in cities that were weaker in these dimensions.
San Francisco and nearby San Jose had the two highest proportions of college graduates in 1970 and in every succeeding decade. As Moretti shows, the relative abundance of skilled workers in 1970 or 1980 predicts the relative success of these cities by 2000, as measured, for example, by median earnings or median household income. This success is evident in the left-hand columns of table 1.2. In 1969 and 1979 median household income in San Francisco stood at 86 or 87 percent of the state median. Twenty years later-in 1999-the comparable figure had risen to a substantially higher level, 116 percent.
San Francisco's boom was based in particular on such high-paying industries as finance, high-tech, and biotech, as well as on tourism, which generates low- and middle-paid jobs. According to Moretti's calculations, every additional job in innovative industries generates five additional jobs, three of which are filled by workers who have not attended college. Highly paid workers in the innovative industries spend a large part of their income on local services-many of which employ large numbers of low-paid workers.
These highly paid workers also spend large shares of their growing incomes on housing, driving up house prices relative to less prosperous areas. Rising housing costs put increased pressure on working families. Median home prices in San Francisco rose from $270,000 in 1996 to $590,000 in 2002 to $760,000 in 2008 (California Association of Realtors 2013). In 2010 the California Budget Project estimated that a full-time single worker would need to earn $15.37 an hour to meet basic needs in San Francisco. For a single-parent family, the comparable figure was $36.64 (California Budget Project 2010).
The presence of middle-income families had already diminished because of the decline of middle-paying jobs in industry in the central city. The growth of house prices, which was greater in San Francisco than in its neighboring counties as well as in other regions of the United States, further fueled the exodus of middle-income families. The result of these economic forces: prosperity for some hand in hand with economic stagnation for many. In other words, growth occurred together with increasing inequality.
To summarize, while San Francisco's economy was doing relatively well by the 1990s, income inequality was increasing. A growing number of San Francisco's workers were earning very low pay in an increasingly high-income economy. Indeed, many of these low-paid workers were employed in industries that provided services directly to ever more affluent San Franciscans.
These conditions led to calls for greater economic justice as well as to the recognition that the affluent could easily afford to pay a bit more for these services. In the language of economics, the price elasticity of these services is relatively low, indicating that modestly higher labor costs could be passed on to affluent consumers in higher prices without substantially reducing demand for the services. Mandates, therefore, might lead to greater shared prosperity without substantially reducing the number employed.
Political Trends: The Rise of a Progressive Economic Development Coalition
San Francisco has long been a Democratic Party stronghold, as well as a strong labor city with a rich tradition of community organizing. It shares these features with many other central cities in the United States. As in most cities, a pro-growth coalition of business allied with unions and middle-class professions had responded to the postwar decline of central city manufacturing and transportation by promoting urban redevelopment. The growth model was based upon real estate, finance, and tourism and on building a transportation infrastructure that would better serve suburban white-collar commuters (Mollenkopf 1983).
Beginning in the 1950s, Democrats in most major cities built urban electoral bases around urban renewal policies that fostered economic growth, with benefits not just for downtown businesses but also for some unions and racial minorities. In the 1980s, when federal funds for urban redevelopment dried up, growth strategies in San Francisco and other cities increasingly involved public-private partnerships, with an increased role for neighborhood participation. San Francisco was distinctive from other cities in the degree to which its redevelopment policies became more inclusive of the interests of neighborhood groups. A further shift took place in the late 1990s, with the emergence of new labor-community coalitions focused on job quality.
As in many other cities, San Francisco's postwar urban redevelopment growth strategy provoked protests from affected local neighborhoods. A variety of San Francisco political histories (DeLeon 1992; Hartman 2002; Beitel 2003) describe the city's long tradition of active neighborhood-based organizing that sought to limit the city's economic growth. One strain of neighborhood activists wanted to stop development so as to preserve their neighborhoods' traditional character; a second sought to keep development from displacing low-income residents and gentrifying their community; and a third group, concerned with environmental issues, fought economic development in order to keep their communities from becoming swallowed up by high-rise buildings that would expand the size of the downtown area ("the Manhattanization of San Francisco"). By the mid-1980s, these organizations were able to wrest some concessions from the pro-growth coalition, such as increasing the supply of affordable housing through inclusionary zoning requirements for low-income housing as a condition of new development.
In this same period, the city's private sector labor organizations generally favored economic development projects proposed by city agencies and downtown interests. These unions, particularly those in construction and in the hospitality and tourism industry, sought to maintain collective bargaining rights and to increase the number of jobs for their members. Unions had the power to secure their interests without the support of community-based organizations, and their political support for development projects was not contingent on conditions that were advanced by those organizations. Indeed, the pro-growth business-labor coalition was repeatedly in conflict with neighborhood groups.
By the 1990s, the relationships among these groups began to shift substantially. As the economy shifted, service and public sector unions became the dominant players in the San Francisco Labor Council. Internal changes in a number of major San Francisco unions brought a more inclusive set of leaders into power (Wells 2002). Another key change occurred in 1996, when labor succeeded in getting the city to enact a law that placed labor-oriented conditions on economic development projects. This law required employer neutrality during unionization drives and labor peace on economic developmentprojects that involved city subsidies or city land. Their success with using essentially the same strategy that neighborhood organizations had already successfully adopted provided a new development model to labor organizations. Further, such conditions could be written into other contractor and development agreements.
Both community activists and labor then began to join together to use this strategy of placing a variety of conditions on development. Moreover, since they were not trying to stop development altogether, the community activists and labor organizationscould then begin to work together with some parts of the business community on policies that were of interest to all three parties. This pattern was especially evident in a number of explicit public-private bargains among developers, organized labor, and neighborhood groups, including legally binding community benefit agreements (Wolf-Powers 2010).
Changes in electoral law in this period also increased the strength of the neighborhood organizations. Since 2000, the San Francisco Board of Supervisors has been elected through district rather than citywide elections. With this shift a much more progressive electoral coalition began to dominate City Hall. Moreover, public financing of election campaigns began in 2002 for supervisors and for the mayor in 2006. Together, these reforms reduced the power of downtown real estate interests and increased the influence of labor, community organizations, and the city's many Democratic Party neighborhood clubs.
Finally, as a city and a county, San Francisco shares the legal powers of the two levels of government. This characteristic both broadens the reach of specific laws and allows for the passage of laws with a single act, whereas coordination among multiple jurisdictions would be required elsewhere.
3. The Possible Economic Effects of Pay and Benefit Mandates
Unlike the national Affordable Care Act, which establishes a mandate that individuals have health insurance, the mandates in San Francisco apply to employers.These employer mandates are of two types: one sets a floor on pay, and the other sets a floor on benefits. Economists have long considered that the two types of employer mandates may have differing labor market effects.
In the case of mandates concerning pay, the simplest labor market model of supply and demand suggests that an increase in the cost of labor will lead to less demand for labor. This model underlies the familiar "job killer" description applied to minimum wage policies. In the case of mandates concerning benefits, the same basic model suggests that employers and workers will adjust by reducing pay rather than employment. In this model, a mandate on health benefits leaves total compensation (pay plus benefits) unchanged and employment will not be reduced. For workers who are already paid at or near the minimum wage, pay cannot be reduced by the full amount of the cost of the mandates. As a result, the simple supply-and-demand theory predicts that benefits mandates for such low-wage workers will fall partly on their pay and part upon their employment levels.
Economists have revised the simple supply-and-demand model by adding important features that better account for the specific characteristics of labor markets. The most important of these features in low wage settings concern the costs of higher labor turnover, the positive effects of higher pay on worker productivity, and the possibility of passing on higher labor costs to consumers through higher prices. Each of these effects can mitigate or even eliminate the negative employment effects of a pay mandate and the negative pay effects of a benefit mandate. To discover whether there are negative effects then rests not on theoretical arguments but on careful empirical analysis.
In 1994 David Card and Alan Krueger published a groundbreaking study that changed how many economists view the minimum wage. Card and Krueger looked at employment in fast-food restaurants across the New Jersey and Pennsylvania border after New Jersey increased its state minimum wage. They found no measurable negative impact on employment. Dube, Lester, and Reich (2010, 2013) expanded the approach of Card and Krueger, comparing counties across every state border in the United States that had differences in the minimum wage over a sixteen-year period and reached the same conclusions.
Labor economists' expanded models offer important insights that help to explain what happened in San Francisco. First, workers are not widgets. If you pay more for a hammer, the quality of the hammer does not change. In contrast, paying workers more can change their work performance. It can change their attitude about their job, how hard they work, and their ability to make it to the job on time. Second, low-wage labor markets have high levels of frictional unemployment. Turnover levels are high as workers leave jobs for wage gains or may be unable to stay in their jobs due to poverty-related problems, such as difficulties with transportation, child care, or health. This effect suggests that rather than kill jobs, increases in minimum wages kill job vacancies, leaving employment unchanged.
Firms can absorb higher labor costs through other means as well. They can pass on some of the increased costs to consumers through higher prices, earn lower profits, or reduce managerial salaries. There could be a combination of all these effects (Schmitt 2013). Indexing the minimum wage, as is done in San Francisco, allows workers' wages to keep up with the cost of living and avoids the larger wage shocks to employers that come from more intermittent adjustments.
4. The Aggregate Effects of San Francisco's Nexus of Mandates
San Francisco's new labor standards policies have brought substantial improvements in compensation and access to health care to thousands of low-wage workers and their families. Mandated minimum compensation costs for a large employer in 2013 were $13.31: $10.55 in minimum wage; $2.33 in mandated health allocation; and one hour of paid sick leave for every thirty hours worked, or an extra 43 cents per hour. However, employers in San Francisco in effect face a somewhat lower minimum compensation cost on average, both because not all the health care security ordinance money is claimed and because not all paid sick leave hours are used. Taking into account these two adjustments, the average actual minimum compensation cost that an employer faced in 2013 was $12.83 for firms with one hundred or more employees, $12.13 for midsized firms, and $10.65 for firms with few than twenty employees not subject to the Health Care Security Ordinance.
Given these average actual minimum compensation costs, in 2013 minimum wage workers in San Francisco received wages and benefits worth 33 to 60 percent more, on average, than minimum wage workers in the rest of California and 47 to 77 percent more than minimum wage workers under the federal minimum wage. Figure 1.3 shows minimum compensation standards across jurisdictions, including the range of minimum compensation in San Francisco, from minimum wage only to minimum wage with the full monetary value of paid sick leave and mandated health allocation.
Effects of the Mandates on Low-Paid Workers
In section 2 we discussed evidence indicating that economic prosperity in San Francisco also generated increased upper-half inequality-as shown by the growing gap between mean and median household incomes. A similar increase in inequality occurred in the bottom half of the income distribution. We use a common measure of lower-half inequality: the 50:10 wage ratio, which is the median hourly wage divided by the hourly wage at the 10th percentile. The 10th percentile wage is highly correlated with the minimum wage. While the median wage was increasing dramatically in the 1980s and 1990s, the real minimum wage in California fell substantially until it regained some of its lost ground with state and federal minimum wage increases in 1996-98. The minimum wage is highly correlated with wages at the 10th percentile, It follows that the 50-10 ratio was increasing during this period.
While the median wage is not affected by San Francisco's mandates, the 10th percentile wage definitely is. As figure 1.4 shows, the 10th percentile wage jumped in 2004, when the city's minimum wage was increased from $6.75 to $8.50, and then has remained constant in real dollars, reflecting how indexing of the city's minimum wage protects workers from real wage cuts because of inflation.
In contrast, as figure 1.4 shows, the 10th percentile wage did not increase in San Francisco's surrounding counties but instead declined after the onset of the Great Recession. This difference in wage patterns suggests that the mandate had positive and persisting effects on low-paid San Francisco workers. However, this impact was not sufficient to prevent a further widening of the 50-10 gap.
What about the effects of the mandate on employment? Contrary to arguments that minimum wage increases kill jobs, these policies do not appear to have reduced private employment in the city (fig. 1.5). Employment trends in San Francisco during this period of policy change were similar to those in the rest of the Bay Area, with the recessions in 2001 and 2008-9 playing a much more obvious role both in San Francisco and throughout the region. From the first quarter of 2004, when the minimum wage ordinance went into effect, to the first quarter of 2011, overall private employment grew by 5.6 percent in San Francisco and 3.0 percent in Santa Clara County and fell by 4.4 percent overall in other counties of the Bay Area.
These general trends are robust when analyzing employment trends for food service workers, who are more likely to be directly affected by minimum wage laws. Within the relatively low-wage bar and restaurant industry there are no obvious employment effects (fig. 1.6). From the first quarter of 2004 to the first quarter of 2011, employment in food services and drinking places grew by 17.7 percent in San Francisco, faster than either the other counties of the Bay Area (13.2 percent growth) or Santa Clara County (13.1 percent growth). San Francisco's patterns again mimic those of surrounding counties and are virtually indistinguishable from neighboring counties.
5. Lessons for Urban and National Policy
San Francisco's policies offer important lessons for the rest of the country. With the exception of the Health Care Security Ordinance, none of the policies are unique to San Francisco. Some were implemented first in San Francisco; many were not. What is unique is the broad mix of policies and the extent of their reach. San Francisco's experience suggests that cities, states, and the federal government could do much more to protect labor standards without negatively affecting employment.
San Francisco's Equal Benefits Ordinance has been widely replicated; nineteen other cities have passed similar laws, as did the state of California (table 1.3). More than 130 cities, counties, and university campuses have living wage policies, as does the state of Maryland. The Federal Service Contract Act serves a similar function on a federal level, requiring contractors to pay prevailing wage for contracted service. Community Benefits Agreements are becoming a part of the development landscape in many major urban areas.
In 2013 eighteen states had minimum wage policies above the federal wage minimum wage. Citywide minimum wage policies are also in effect in Albuquerque and Santa Fe, New Mexico, San Jose, California, and Washington DC. Connecticut, Washington DC, Milwaukee, Portland, Oregon, New York City, and Seattle all have passed paid sick leave laws (although Milwaukee's was overturned by the state). While San Francisco's Health Care Security Ordinance takes a unique approach to setting health spending standards, Hawaii and Massachusetts also have employer requirements as part of their health reform laws, as does the Affordable Care Act nationally. Research on the employment effects of these laws echoes the results found in the research on San Francisco.
An argument can be made that labor standards policies work best at the state or federal level because they create a common set of rules for businesses and a level playing field between jurisdictions. This logic already underlies federal preemption policy in the National Labor Relations Act and the Employee Retirement Insurance Security Act. At the same time, the Fair Labor Standards Act permits states to go beyond its standards. While federal policy may establish the floor, it does not establish a ceiling. While state and local governments must adhere to federal standards, they may go beyond those standards to reflect local conditions.
The ability of local jurisdictions to set wage standards depends on state law. California specifically permits cities and counties to establish minimum wage standards. Local wage policies can provide a useful adjustment for the cost of living in a specific geographic area or can be tailored to address conditions in specific industries, as with living wage laws. The failure of Congress to pass majority verification for union recognition at the federal level, the low level and lack of indexing for the federal minimum wage, and the ongoing political stalemate in Washington on economic policy are likely to place greater attention again on state and local governments as places for action to address poverty and economic inequality. The San Francisco experience thus provides an important case study on what is possible at the local level.
To be sure, we would not argue that mandates will work well everywhere. Limiting inequality-producing growth or mandates to make prosperity broader based are not so important when a city is not growing and is not prosperous.
Moreover, provisions in some laws could encourage distortions that hurt economic efficiency. For example, in the Affordable Care Act an employer with fifty full-time employees who does not pay the mandated cost of health benefits is penalized for every worker working over thirty hours per week. This creates a cliff that may encourage employers to adjust work hours to keep greater numbers of workers employed under thirty hours. In San Francisco, the "pay" penalty in the play or pay design is scaled to the number of hours a person works, for those working eight hours or more per week, so there is no cliff on work hours. It does, however, include cliffs for numbers of employees at twenty and one hundred.
The reach of San Francisco's mandates is high when it is measured in absolute terms against other areas and against wage levels in restaurants, retail, and other low-wage industries. But its reach is not high compared to the median wage in San Francisco. Indeed, the ratio of the minimum wage to the median wage is .39 in San Francisco, identical to the comparable ratio for the United States as a whole. San Francisco thus could be said to have been quite conservative in its mandates, adjusting for local conditions and cautious not to risk negative employment effects.
6. Overview of the Book
The book is divided into three parts. Part 1 takes up the pay mandates, part 2 takes up the benefit mandates, and part 3 examines the conditions that make the mandates work. Each of the chapters in the first two parts examines the impacts of San Francisco's policies with a focus on workers and firms. In doing so, they address how San Francisco was able to improve labor standards without creating any measurable negative effects on employment levels.
Many of the chapters are based on research papers that use state-of-the-art statistical methods and that have appeared in refereed scholarly journals. The authors have revised their studies to make the findings accessible to a broader audience, to bring them up to date, and to include a discussion of the extent to which the policies they discuss were subsequently adopted elsewhere.
Part 1: The Pay Mandates
In chapter 2, "Labor Market Impacts of San Francisco's Minimum Wage," Arindrajit Dube, Suresh Naidu, and Michael Reich discuss their study of San Francisco's minimum wage policy. Their data come from their survey of restaurants in San Francisco and surrounding areas before and nine months after implementation of the citywide minimum wage ordinance. The authors found a small but not statistically significant increase in employment in affected restaurants compared to their control group. The length of employee tenure increased in limited service restaurants by an average of 3.5 months, as did the share of employees working full time. Restaurants in San Francisco raised prices 2.8 percent more than the control group during the same time period.
In chapter 3, "Liftoff: Raising Wages at San Francisco Airport," Peter Hall, Ken Jacobs, and Michael Reich examine the impact of living wage policies at San Francisco International Airport. They find that the program had a sharp and immediate impact on employee turnover and job performance. Fifteen months after the policy went into effect, turnover had fallen by one-third among all firms and by 60 percent among the firms with the greatest share of affected workers. Annual turnover of security screeners fell 80 percent. Sizable numbers of employers reported higher morale, fewer grievances, fewer absences, and better customer service. Employees reported that they were working harder, that more skills were required of them on the job, and that the pace of work had increased.
In chapter 4, "Living Wage and Home Care Workers," Candace Howes argues that San Francisco set the standard for job quality in consumer-directed home care services, one of the fastest growing occupations in the country. She provides an overview of the long-term care industry and examines how San Francisco's mandates affected home care workers in the city. She finds that the policy led to a sharp and persisting drop in turnover among home care workers. Howes also examines how the San Francisco model has diffused in the rest of California and in other states.
Part 2: The Benefit Mandates
Chapter 5, "Health Spending Requirements in San Francisco," by Carrie Colla, William Dow, and Arindrajit Dube, discusses the impacts of San Francisco's 2006 health care reform law. From the evidence thus far, employers have largely opted to leave their current benefit programs intact, and there is substantial demand for the city program for workers who do not have health coverage. A number of restaurants have adapted to the ordinance by adding surcharges to the cost of dining, ranging from one dollar an entrée to 5 percent of the bill. The authors find little measurable impact on employment or earnings in the sectors most affected by the law.
Christy Mallory and Brad Sears discuss the Equal Benefits Ordinance in chapter 6, "Requiring Equal Benefits for Domestic Partners." They evaluate the implementation and enforcement of the law in San Francisco and twenty other jurisdictions that have replicated the policy and consider the potential for a presidential executive order requiring federal contractors to offer domestic partner benefits. They find widespread compliance and few complaints by contractors. They also find that the policies have not been disruptive to the contracting process, either for contractors or for governments, while providing benefits to both parties.
Employer fears concerning paid sick leave focus on the costs: whether workers will treat it as additional paid vacation time that can be disruptive to firm performance because employees are not required to provide advance notice when they will be using it. However, as Vicky Lovell reports in chapter 7, "Universal Paid Sick Leave," most workers treat paid sick leave as insurance-something they want to use only when they really need it; workers report using only a quarter of their available sick days. Lovell finds that two of five San Francisco workers benefited directly from the ordinance and employers have been surprisingly positive.
Part 3: Making the Mandates Work
In chapter 8, "Enforcement of Labor Standards," Miranda Dietz, Donna Levitt, and Ellen Love discuss the best practices that have emerged in San Francisco to enforce the mandates analyzed in the previous chapters. In 2000 San Francisco established the Office of Labor Standards Enforcement (OLSE) to oversee enforcement of the city's prevailing wage laws for construction and living wage law. The office has since been expanded and given enforcement responsibilities over many of the laws discussed in this volume. OLSE proposes regulations, sends out notifications to employers about changes in the laws, investigates worker complaints, and conducts audits of city contractors. The city also contracts with a group of local community-based organizations to educate workers about their rights under the laws. This group includes organizations working in the Chinese and Latino communities, where language can be a barrier to enforcement.
In chapter 9, "Labor Policy and Local Economic Development," Miriam Wells provides a detailed history of the Employee Signature Authorization Ordinance and its impacts, placing it in the context of weakening federal labor laws and the prior history of neighborhood activism in the city. While many scholars rightly focus on how globalization reduces federal protections for labor rights, Wells demonstrates how local actors have turned successfully to municipal-level activism to gain more effective worker protections.
In chapter 10, "Community Benefit Agreements and Economic Development at Hunters Point Shipyard," Ken Jacobs discusses the emergence of new proactive coalitions around a comprehensive approach to urban economic development that includes affordable housing, workforce development, and strong labor standards. Community Benefit Agreements provide an important tool to local actors to engage in the economic development process. In contrast to the highly contentious political battle over the original living wage law in San Francisco, the labor standards provisions in the Hunters Point Shipyard Community Benefits Agreements were agreed to quietly and with little fanfare. This contrast suggests how much such policies have become normalized by businesses in San Francisco.
Finally, in an afterword, we look forward to prospects for the future of these policies beyond San Francisco.
We are grateful to Miranda Dietz and Jared Park for their assistance in preparing this chapter.
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