By Bruce Nissen
 Center for Labor Research and Studies
 Florida International University
 Phone: 305-348-2371
 Fax: 305-348-2241
 e-mail: nissenb@fiu.edu
 

I.  Living Wage Ordinances and the Proposed Ordinance for Miami-Dade County

    The Community Coalition for a Living Wage, a coalition composed of numerous community, labor, civil rights and church groups, has proposed that Miami-Dade County pass an ordinance requiring the county and all service contractors (and licensees) of the county who hire locally to pay wages above the poverty level for a family of four, and to provide health care insurance to all employees.  The specific requirements of the ordinance are:

*Pay must be at least $8.56/hour  (10% above the 1997 poverty level) This wage would be
  indexed for inflation in following years, thereby keeping its value in relation to poverty levels

*Health care insurance must also be provided, at the rate of $1.25/hour, or the equivalent
  in wages must be provided so that employees can purchase insurance themselves

    Living wage ordinances have been passed in over 15 cities and counties throughout the United States, including large cities like Baltimore, Boston, Chicago, Los Angeles, Milwaukee, and various counties.  The characteristics of the ordinances differ somewhat, but all aim to ensure that public monies are not used to subsidize or create working poverty, i.e. poverty despite full time work.

II.  Theoretical Arguments About Living Wage Ordinances

    Arguments concerning living wage ordinances are similar to those concerning minimum wage legislation.  Proponents argue that the lowest waged workers cannot get an adequate income without government assistance in the form of a "wage floor"; that the wealth of the country is being more unevenly and inequitably divided; that "living wages" are supportive of strong families; that workers gain greater self sufficiency; that the government gains because of lowered need for social services; that communities gain through increased consumer spending in the community; and even employers gain through higher morale and efficiency with lower turnover of employees.

    Opponents often rely on the ideological belief that the market should be the ultimate determinant of economic distribution; they see any deviation from a strictly "free market" approach as creating distortions and inefficiencies.  Beyond purely ideological arguments, they argue that a living wage ordinance will cost the government too much; that it will likely lead to unemployment; that administrative costs will be huge; that competition for county contracts will decrease; and that the "wrong signal" will be sent to the business community, discouraging investment in the area.

III.  Previous Research on Living Wage Ordinances

    Only two studies have examined the "after-the-fact" impact of a living wage ordinance.  Both examined Baltimore, the first city to pass a living wage ordinance in 1994.  The Baltimore ordinance mandated wages of at least $6.10/hour for all employees of city contractors, with the wage rising in steps to $7.70/hour by January 1999.

     The first study was conducted by the Preamble Center in Washington D.C. in 1996; it examined the impact after one year in operation.  The study found evidence supporting nearly all of the claims of proponents, and was unable to find any of the negative consequences predicted by opponents.  Main findings were:

* The real cost of city contracts actually decreased after the ordinance went into effect.  For the average contract (weighted by its share in the sample), this decline was statistically significant.

* Of companies interviewed that held contracts before and after enactment of the law, none reported reducing staffing levels in response to the higher wage requirements.

* The cost to taxpayers of compliance has been minimal, with the city allocating about 17 cents per person annually for this purpose.

* The average number of bids per contract declined from 1994 to 1995, but this decline was not statistically significant, nor did it affect the competitiveness of the bidding process as manifested in actual contract costs.

* There is no evidence that businesses have responded negatively to the passage of the ordinance.  In fact, the value of business investment in the City of Baltimore actually increased substantially in the year after passage of the law.

    The second study was conducted by the Economic Policy Institute; it examined the impact after two years of operation.  The overall conclusions were similar to those of the previous study:

* The living wage ordinance has had positive effects on a relatively small number of workers in Baltimore without significant financial cost to the City.

* Due to the prevalence of part-time and seasonal work, however, living wages do not always amount to living incomes.  Greater consideration must be given to increasing and stabilizing hours worked.

* The small financial impact on the city suggests that living wages could be paid more generally in the private and non-profit sectors with a relatively low impact on costs and competitiveness.

* Evidence suggests that higher wages and hours improve the stability and reliability of the workforce.

* Non-compliance in terms of paying the living wage and/or providing adequate payroll documentation remains a significant problem, affecting the impact of the living wage ordinance and our ability to analyze that impact.

* The benefits of the living wage may be threatened by the effects of welfare reform.
 These two studies provide strong evidence that the more ideological arguments against a living wage ordinance are not well founded.  However, the wage increases called for in the proposed Miami-Dade ordinance are larger than those obtained in the Baltimore case.  A study of the likely impact on Miami-Dade is warranted, to determine if differences might lead to less positive results in Miami.

IV.  Likely Costs of a Living Wage Ordinance in Miami-Dade

     A. Costs to County Contractors

    Approximately 266 "service" contracts with the county would be affected by the ordinance.  Yearly costs of these contracts were calculated, and the contracts were classified according to federal classification numbers (SIC numbers) for different industries.  Approximate numbers of workers on each contract were calculated, using the annual cost of each contract and federal data for local employment in the industry per every $100,000 worth of business.  1990 Census data wage levels for the county were updated to 1997 levels by inflating (or occasionally deflating) wages according to local county wage level changes for that industry between the 1989 levels in 1990 Census data and 1997.

    Approximately 2983 workers were employed on affected contracts.  1269, (42.5%) earned less than the poverty level of $7.78/hour.  And 1448, (48.5%) were below the $8.56/hour wage level designated in the ordinance.  Of the 1448 who would receive wage increases were the ordinance passed, 74% are either temporary help or security guards (609 temporary help; 464 security guards).  Adding janitors, auto-related carwash or repair or tire and towing personnel, lawn care, catering, and dry cleaning or uniform rental or shoe and clothing repair workers brings the percentage up to 92% (115 janitors; 41 in the auto body repair or carwash or tire work or towing industries; 42 in lawn care or landscaping; 39 in catering; and 23 in the dry cleaning or uniform rental or shoe and clothing repair industries).  Thus seven categories of workers comprise 1333 out of 1448, or 92% of all workers obtaining raises.

    Costs to the contractors were calculated by adding direct labor costs, payroll tax increases (at 11.75% of direct labor costs), "compliance costs" needed to prepare payroll data to prove compliance, and health insurance costs for insurance provided to previously uninsured employees.  Total costs to the contractors come to approximately $5.73 million.  Since the average length of contracts is three years, the costs would phase in over a three year period, or approximately $1.91 million per year.

     B.  Costs to the County as an Employer

    County payroll data were obtained as of July 1998.  They showed that the county had 508 full time workers earning less than $8.56/hour, and only 165 earning less than the poverty wage of $7.78/hour.  All full time workers had health insurance.  Compared to county contractors, the county is thus a "model employer" paying substantially better than contractors, and providing more full health care coverage.  Total county costs for full time workers (direct labor costs plus payroll taxes) would go up $934,835 as a result of passage of the ordinance.

     However, the county has considerably more part time workers earning less than $8.56/hour: 1283.  According to county employee relations department estimates, 80% of these have no health care coverage.  Therefore, the county would encounter greater cost increases to comply with the ordinance for its part time employees.  Costs here approximate $3.46 million.  Adding the costs for full time and part time employees, it is estimated that county payroll costs would rise approximately $4.4 million over 1997 levels if the ordinance were to pass.

   C.  Combined Costs to Both County Contractors and the County

    Adding the increased first year costs to contractors and to the county, one arrives at approximately $6.3 million added labor costs from passage of the ordinance.  This figure provides an "upper limit" of what the first year costs could be to the county budget from the ordinance's passage.

     D.  Net Impact on the County Budget: "Worst Case", "Most Likely Case", and "Best Case"
            Scenarios

    The 'worst case" costs to the county budget are given above: $6.3 million in the first year, followed by $1.91 million in each of the following two years.

    After passage of a living wage ordinance, county contractors should become the "Cadillac"firms in their industries.  With their high wages and health care coverage, they should attract and keep the best workers, have the most productive workforce, and deliver the highest quality of services.  Because of resulting efficiency gains accompanying the ordinance (due to increased morale, lower turnover, lower absenteeism, etc.), the worst case costs are unrealistically high.  While it is impossible to predict precisely the magnitude of an efficiency gain, it is clear that it would be there.  Estimating efficiency gains very conservatively, this study assumes only that county contractors whose increased costs were less than 1% of their contract amount would experience no net cost increases and would not pass on increased costs to the county.  (These are designated "low impact" contractors.)  Those experiencing cost increases between 1% and 10% are assumed to pass on half of their cost increases.  (These are "medium impact" contractors.)  Those experiencing cost increases over 10% of their contract amount are assumed to pass through all of their increased labor costs.  (These are "high impact" contractors.)  Approximately 113 contracts with 27% of the business are low impact; about 150 contracts with 73% of the business are medium impact; and 3 contracts with 2/10 of 1% of the business are high impact.

    From this it is calculated that contractors will pass on approximately 37% of their increased labor  costs, or $701 thousand per year.  Again estimating very conservatively that the county will receive no efficiency gains from pay increases to its own employees, the $701 can be added to the county's increased direct labor costs of $4.4 million per year, resulting in likely increases to the county budget of $5.1 million for the first year.  In the second and third years, increased costs would be only $701 thousand per year, as contracts expired and new ones were negotiated.

     Yet these estimated costs are too high, because they are calculated from 1997 wage levels for county contractors and 1998 wage levels for the county.  Since the ordinance would not take effect until 1999, costs must be calculated from likely 1999 wage levels.  Assuming that wages will go up 2.5% per year, labor costs to county contractors and the county will already have risen $341,342 and $452,719 respectively.  Thus wage increases from passage of the ordinance will be $794,061 less than calculated previously.  This means a "most likely" first year cost to the county of $4.31 million the first year (1999) and approximately $360 thousand in each of the next two years (2000 and 2001).

    A "best case" scenario assumes that the county will make progress in eliminating waste and "padding" in county contracts.  Given the large sums of money given to highly paid lobbyists and an unfortunate history of corruption and cost overruns in county contracts, there clearly is room for millions of dollars in savings if such waste can be contained.  The county is already making progress in this direction, banning lobbying of county staff during the time it is weighing proposals.  Even minimal success in containing corruption and waste should save between $5-10 million per year.  Thus, the cost of this ordinance could be nothing if it could be combined with efforts to eliminate waste.  It would simply mean the transfer of money from the pockets of highly paid lobbyists and politically connected contractors to the pockets of some of the county's lowest waged workers.

Thus the possible net costs to the county's budget are as follows:
 

WORST CASE
$5.5 million 1st year
$1.5 million 2nd year
$1.5 million 3rd year

MOST LIKELY CASE
$4.3 million 1st year
$360 thousand 2nd year
$360 thousand 3rd year

BEST CASE
$0    1st year
$0     2nd year
$0     3rd year

    The actual impact will probably be the amounts listed as "most likely" above.  More optimistically, the amount will fluctuate between that and the "best case" figures if the county succeeds in curbing waste and cost overruns in county contracts.
 
 

V.  LIKELY BENEFITS OF A LIVING WAGE ORDINANCE IN MIAMI-DADE COUNTY

    There are at least three possible beneficiaries from passage of a living wage ordinance.  First, of course, there are the workers and their families who would benefit from pay increases and health insurance.  Second are the affected employers: the county contractors and the county, which benefit from increases in morale, lower turnover, etc. from the higher wage.  And third are the taxpayers and citizens of Miami-Dade County, who benefit through decreased taxpayer-supported subsidies to maintain workers, their families, and their health.  The local economy also benefits due to increased spending in the local communities.

      A.  Benefits to affected workers and their families

    Three thousand two hundred thirty nine workers and their families would gain directly from passage of the ordinance.  Benefits were calculated by picking a "typical", or average, employee working for a county contractor but earning below the poverty level wage ($7.78/hour).  This average worker earned $6.77/hour.  Assuming the employee is the only wage earner in the family, and assuming a family of either two, three, or four, their family after-tax earnings (income plus private health care) will rise markedly: 43% (from $12.1 thousand to $17.4 thousand) for a family of two, 43% (from $12.5 thousand to $17.8 thousand) for a family of three, and 46% (from $12.5 to $18.2 thousand) for a family of four.

    They also benefit from being "weaned" from dependence on government assistance: the "hidden subsidy" from food stamps, the county public health trust, and the federal Earned Income Tax Credit (EITC) drops greatly (from 37% of their total earnings to 19% in the case of a family of four).  Since more of their income comes from their own employment, they benefit in numerous ways: in self esteem, in morale, in attitude, etc.  They further benefit from higher spending power, access to better health care, and higher earned income.  On top of these obvious gains, less apparent ones such as greater credit-worthiness for bank loans and other forms of credit increase.  Families will be better able to purchase homes, automobiles, a higher education for their children, etc.

    The higher incomes and greater self  reliance should result in stronger and more stable family structures.  Gains in self-esteem and dignity are also apparent from the Baltimore studies; the same should be true in Miami-Dade County.

     B.  Benefits for Firms Contracting with the County

    As noted earlier, firms contracting with the county are likely to experience efficiency gains from paying above average wages to their employees, should the ordinance pass.  The research on the Baltimore ordinance presented evidence to that effect.  While it is impossible to precisely predict the magnitude of the effect, it has been considerable in the past.  Henry Ford's well known policy of almost doubling the wages of his workers in the early 20th Century resulted in well documented decreases in absenteeism and turnover, thus decreasing training and "break-in" costs.

    Some companies already practice the "high wage" route to competitiveness.  Passage of the ordinance would create a "level playing field" for them on the wage front; thus ensuring that competition occurred over the level and quality of services.

     C.  Benefits to Citizens and Taxpayers in Miami-Dade County

    Taxpayers benefit through the decrease in the subsidy they must pay through their taxes to keep low wage workers and their families alive and somewhat healthy.  A very rough estimate of this study is that taxpayers would save approximately $3,000 per family for a "typical" low wage family, and over $4,300 for a low wage family of four.

     Using a relatively schematic and rudimentary methodology, this study shows that close to 80% (almost $5 million of the total $6.3 million increased labor costs) could potentially be saved to taxpayers through reduction of government subsidies to poor families.  Because of methodological imprecision, this is possibly an overstatement, but it is an indication of the rough magnitude of savings when low wage workers become more self-dependent through higher wages.  Most of the savings accrue to the taxpayers through the federal government, and secondarily the state government, since these are the governmental units taking primary responsibility for health and welfare needs of low income people.

    Miami-Dade residents and taxpayers also benefit in numerous small ways that are impossible to quantify precisely.  Increased purchasing power of the affected workers means more money  flowing through the local community, creating a "multiplier" effect.  Transfers of health care from emergency room crisis treatment to regular health care, any increased ownership of homes and automobiles, any reductions in crime due to lessened poverty, and the like, will "ripple" back to the community in positive ways through numerous channels.  However, none of this can be quantified easily, and therefore no calculations are attempted in this study.

VI.  SUMMARY AND CONCLUSIONS

    Using conservative assumptions which may overstate the actual costs to the county, this study determines that the first year cost (in 1999) from passage of the living wage ordinance would be about $4.3 million, while the second and third year costs would be about $360,000 per year.  This is a total of about $5 million over a three year period.  With a more optimistic view of the county's ability to begin controlling undue influence by lobbyists and artificially inflated contracts, the cost could be reduced to nothing.  A worst case scenario, using 1999 wages and assuming that the ordinance would do nothing but raise costs, would place the final cost at approximately  $5.5 million for the first year and perhaps $1.5 million in each of the two following years.

    The benefits of a living wage ordinance have been enumerated above.  In a variety of ways the affected workers and their families, the county contractors, and the citizens and taxpayers of the county would benefit.  Whether the benefits are worth the most likely $5 million dollar price tag over a three year period is a political question which the county commissioners will have to decide.  Given the large benefits and the rather small price tag, the ordinance appears to have a great deal of merit.  In the happiest of all outcomes, it could be entirely cost free, were it simply connected with efforts to curb waste apparent in the past granting of contracts.  In this circumstance it could be seen as a transfer of wealth from the pockets of high paid lobbyists and wealthy politically connected contractors to the pockets of some of the lowest waged workers in South Florida, a very beneficial outcome.

     It can also be stated that the ideologically inspired arguments against a living wage ordinance appear to have little substance when measured against empirical outcomes.  The research on the Baltimore living wage ordinance demonstrates that the various arguments purporting to show that the very people the ordinance intends to help will actually be harmed have little substance.  Likewise, the belief that a living wage ordinance will frighten away potential investors appears to have little merit, given the booming state of Baltimore's economy after the ordinance's passage compared to its poor state before.  (This of course does not mean that passage of the ordinance was responsible for Baltimore's turnaround; only that there is little evidence that the ordinance provided a "wrong signal" which scared away potential investors.)

    The arguments for and against a living wage ordinance which are based on the more factual issues such as costs and benefits are more pertinent to the question of whether such an ordinance would be good for Miami-Dade County.  This report has supplied evidence to help answer questions about such factual issues.   Costs to Miami-Dade citizens and taxpayers are extremely small because they already pay a substantial "hidden subsidy" to maintain the lives of low wage workers and their families through federal and state measures.  Costs to the county could be as low as nothing, if the county could get control of waste and inefficiency.  Without such measures the $4.3 million cost for the first year (1999) is equal to between 1/10 and 2/10 of 1% of the county's $2.75 billion operating budget.  The $360,000 cost in each of the next two years is less than 1/10 of that: between 1/100 and 2/100 of 1% of the operating budget.