April 27, 2013 by Omar Passons
Two weeks ago I started writing about wage issues. Read the first post here. I snagged the photo above from a website’s movie night images (here) because I don’t want to lose sight of the importance of the topic. And because it’s possible to have an earnest conversation about the free market versus livable wage laws and still care about people. As a reminder, I’m not committed to one course of action or another and the whole point of this trip down minimum and livable wage lane is to evaluate the options, look at what happens in the real world based on the data and provide some thought about the future we in San Diego might want on this issue. I do have a couple biases that I will freely admit.
Bias #1: All things being equal, I do believe wages should be higher than they are at the bottom of the pay scale.
This is not to say I think we should use our local government to force those wages higher nor to say that we should leave it up to the free market to adequately determine what is best for the holistic economic health of the San Diego region. I don’t know the answer and I’m not even sure that there is just one answer.
Bias #2: The reason Cafe Moto (this link tells their very cool story, you should read it) coffee costs $2.75 cents at the Fig Tree in Hillcrest is because that is what I am willing to pay for it. And the reason I make the wage I do is because that is the price my employer was willing to pay and that I was willing to perform the work for.
My point is that I am sensitive to monkeying around with the market wily nily. It is a bias I start with and I am willing to own it. When you add prevailing wages to a construction job the cost of the construction goes up. This is not necessarily a bad thing. It might even be a good thing. But we shouldn’t pretend that’s not how it works. Maybe we want willing buyers of buildings to subsidize a certain standard of living for the people swinging the hammers (again, personally I don’t mind paying more). My point is just that we ought to have more explicit conversations about what we are doing, so I want to start with my own biases and you can take those with a grain of salt as you read the substance of this piece—which I have tried (though not that hard) to strip of the biases I described above.
Level-setting the numbers for a “livable wage”
Some groups in San Diego are advocating a livable wage ordinance, which is likely to be discussed by our City government soon-ish. This would be a law that requires certain types of hotels to pay their employees a minimum amount of money. Set aside whether you think the government should set wages or you think the market should do it. For now, let’s just understand the numbers.
I went to a presentation by A Better San Diego, which is a Union-based group who support this type of ordinance. Please don’t let that sway you either way, let’s just talk about the numbers they provided:
- $1.4 Billion in room revenue in 2012 (please see explanation of difference between ‘revenue’ and ‘profit’ below)
- 15,000 total hotel workers in San Diego County (based on American Community Survey)
- 8% of hotel workers in San Diego County receive food stamps (known in California as Calfresh, which by the way is $4.90/day for a single adult – I gave it a shot and wrote about it here)
- $9.74/hour is the average maid salary in San Diego County (includes more than hotel maids)
- $11.33/hour is average desk clerk wage (please see my note on issues with using “average” to do calculations below)
- $13.92/hour is what Center for Policy Initiatives calls a “self-sufficiency wage” in San Diego for a single adult with no children.
I put these numbers in the post so we’d have at least some understanding of the magnitude of the dollar amounts at issue. With a little math, you could figure out the cost to the hotel industry in the region pretty easily I bet. The difference between the wage the Center for Policy Initiatives (“CPI”) says the average single adult maid with no children needs to sustain a basic life and what they currently get is $4.18/hour. This number looks small (and may very well be small), but we are looking at the number in a vacuum. Also, there’s no honest way to have this conversation without understanding the employer costs, the required money that must be paid to investors (discussed below) and the profit received – not just revenue.
Exploring the “Self Sufficiency Wage”
CPI publishes information about what it calls a “self-sufficiency wage.” Here’s a link to their explanation of how they calculated it. I can’t tell from the chart how CPI arrived at the numbers that are included. On the one hand, the $13.92/hr number for a single adult doesn’t seem like that much money. On the other hand. A single adult with one child, according to the chart, needs to make almost $30/hour or $62,929 per year. According to this Housing Commission link, the median income in 2012 for San Diego was $75,900. The median is the midway point, which means half of San Diegans earn less than that and half earn more than that. It’s better than using the average because the average salary is easily skewed. For example, the average salary of the guy at McDonald’s and Tony Robbins is probably several million dollars per year, but that doesn’t really tell you much about the McDonald’s guy’s salary, right?
To put $62,929 in context, it’s more than brewers, most school teachers, most blue collar city employees and a whole lot of other people make. I’d want to push CPI on this one a little to try and better understand why they think it’s the right number to use. Can it really be possible that virtually every city hall staffer with a child is not making a self-sufficient wage? Or that none of the San Diego Unified bus drivers (salary link) with children make a self-sufficient wage? It’s a depressing thought, truly. So hopefully I’ll have a follow up post after a conversation with one of CPI’s researchers. Stay tuned.
I think it a reasonable proposition that we ought to want people to make enough money to fulfill basic human needs but not so much that we make it less desirable for people to want to make choices that improve their lot in life. I would not have sacrificed and drove a 1998 Ford POS until last year unless I had some reason to believe the decision would yield a better long term outcome. Still, sacrifice and hard work ought to be able to get you more in this town than more sacrifice and hard work.
A few basics
Profit is not the same thing as Revenue. A good way to think about it is to consider your personal paycheck. If your paycheck says you are paid $1,000 before taxes, this is the same thing as your Revenue. After you take out taxes—and really all the things you pay in life like groceries and gas and car note and going to Tiger!Tiger! in North Park and so forth—you have your Profit. Sea World might make $100,000,000 (a totally made up number, by the way) in Revenue but that’s before it pays all its employees and vendors and maintenance and all that other stuff that allows you to get to the Profit. So when you hear people talk about how much money some company made, be sure to find out if that money is Revenue or Profit.
Second, some choices have hidden costs that aren’t obvious and sometimes aren’t paid by the employer. If you pay me minimum wage and I have to work two jobs to support my two children, that means I won’t have time to go to the doctor when I need to. I don’t mind the hard work, but when the sickness becomes more serious and I have to go to an emergency room and don’t have the money to pay, that cost is absorbed by everyone who pays taxes in the community, not just my employer. This is called a negative externality. It is just something that is a byproduct of my low-wage job but isn’t covered in the cost of that job. I am not saying who should pay for that hidden cost, just pointing it out (I have theories about how to properly cover that cost, but that’s not the point just now).
Investment 101 – An important truth that people ignore
When people invest money the reality is that they have choices. And most people—from the wealthy to my wife and I to anyone who is fortunate to have the opportunity to invest—will choose the option that pays them the most money. Or they’ll choose the safest option that makes sure they don’t lose too much even if it doesn’t pay the most money. What they will not do is pay more for a risky investment than a safe one. So getting people to invest in owning a hotel requires that you give them more money than getting people to invest in a toilet paper company would. Here’s an example to make the point.
This photo came from a cool site (here) and is mostly included to break up the text and remind me of good food.
Lou vs Sara – an investment parable
Let’s start with a basic scenario. I give you $1000 (lucky you) that you have to invest. I give you two options.
Option #1 is to invest that money in your friend “Janky Lou”, who wants to start a shop selling pizza and coffee and he’s going to open across the street from Café Calabria (which is known for, you guessed it, making great pizza and great coffee). Janky Lou will give you your $1,000 back plus another $500 in six months. Not a bad return. Janky Lou, despite his name, is a very responsible guy but you know the statistics on how often new restaurants fail. But you’ve had Lou’s product and you think he can compete.
Option #2 is to invest that money in your friend “Smart Sara”, who runs the most successful bank in San Diego that has been in business for 20 years. She’ll use the money to expand her business a bit doing bicycle delivery of deposit slips to shut-in customers. She also promises to give you your $1000 back plus another $500 and also in six months time.
Question: with whom are you more likely to place your money?
Better Question: If Lou’s business seemed too risky, is there an additional amount of money that Lou could offer you that would make investing in his pizza business your preferred alternative?
Best Question: Is there a minimum amount of money Lou (or Sara) would need to offer you to make it worth your while to invest that money?
The Real Point of ‘Lou vs Sara’
When someone wants to build and operate a new hotel they raise the money from investors. Let’s say I get five couples together and instead of each buying our own individual houses we pool those down payments and after 5 years of saving we have $200,000 to invest between us. As the last several years have shown, investing in hotels is not exactly a sure thing. So we could invest in a new hotel project or we could invest in a mutual fund that pays us 5% each year for our money and has been paying 5% each year for the last fifty years. The next sentence is the most important one.
There is no reason for us to ever consider investing our pooled life savings in a hotel project if it didn’t pay better than 5%.
Why would we do something risky with our money if we could do something safe with it and still make the same extra cash? The answer, of course, is that we wouldn’t. And neither will anyone else.
Applying ‘Lou vs Sara’ to the Real World
If I want to convince my group of friends above to use their money to help me own and operate a hotel project, I need to offer them more money than they can get somewhere else. This isn’t some immoral pox on humanity. My friends have children who will need shoes and protractors and iPads and college or trade school tuition money. My friends will want to retire some day and not be a drain on their kids when they do it. So it is perfectly reasonable for them to say no thanks to the risk of losing everything unless I can make them so much more money that the risk of losing it is worth the possibility of paying for their kids’ education (or whatever they might do with the money).
If my friends want at least 10% for giving me their money to own and operate my hotel project, I now know how much I have to make for the project to even be possible. The money I can pay them depends on how much money I pay everybody else and how much revenue I make from hotel guests. No matter how much I value my employees, paying them is an expense. As a result, as I start to turn back to the actual wage conversation, the issue we fail to address is whether there are investors who will accept whatever lower percent of money is necessary to pay the hotel staff a higher wage. And if there are no such investors, what alternatives do we have?
Taking stock of where we are
So far, I’ve covered some basic arguments in favor of a law that increases either a minimum wage or pays a livable wage. I’ve given some data about what one group sees as a livable wage in San Diego. And I’ve provided some thoughts on core concepts like “revenue vs profit” and “negative externalities” and “investment basics” that seem to get ignored or demonized when having this conversation. In the next post I’ll turn my attention to the classic arguments against a livable wage and then follow that with information about what we have actually seen from cities who use either laws or the private sector to raise wages. Thanks for reading