Businesses Fight San Jose Wage Proposal

Posted by the Wall Street Journal Aug. 22, 2012.

By Bobby White

SAN JOSE—A voter initiative to raise this city’s minimum wage, set for the November ballot, has spurred a fight with small-business owners who say it could drive up costs and force layoffs.

The proposition, created by a group of San Jose State University students, would raise the city’s hourly minimum wage to $10 from the current $8 state requirement, and include yearly inflation adjustments. It is modeled on San Francisco’s 2003 minimum-wage ordinance, which is tied to the Consumer Price Index that since 2003 has raised the minimum wage by $3.49 to $10.24 an hour.

San Jose business leaders say the increase would drive businesses from the city.

“I don’t think the measure’s proponents understand the economic impact this will have on small and medium-sized businesses,” says Matt Mahood, president of the San Jose Chamber of Commerce. “Most of these guys are already struggling with the down economy and now this will compound their problems.”

Charlie Major, of Charlie’s Cheesecake Works, says the wage increase could make his bakery unprofitable.

Mr. Mahood says business owners won’t only have to pay more to their workers but also will see a 15% to 17% increase in their payroll taxes, since they are tied to the wage rate.

The proposition’s backers say the minimum-wage increase will help to pare the growing inequality in the city. “Costs in every major category have increased—energy, health care, education—and yet salaries for those making the bare minimum have remained stagnant,” says Alberto Perez, a recent sociology graduate from San Jose State who helped craft the measure.

The federal minimum wage is $7.25 an hour. States can set their own minimum above that. California’s is $8.00.

Few U.S. cities have established their own minimum wages. In addition to San Francisco, Santa Fe, N.M., has set its minimum at $10.29 and Washington, D.C., has a minimum of $8.25.

About 30 California cities require certain employers to pay a “living wage,” a minimum hourly pay for employees of companies that have been awarded government contracts or that operate in a certain industry. San Jose, for example, requires businesses contracting with the city to pay at least $13.59 an hour, or $14.84 if the employer doesn’t provide health insurance.

A 2007 study by the University of California, Berkeley, which analyzed the impact of San Francisco’s minimum wage on businesses, found that the city’s wage didn’t affect employment growth.

The study also said that job tenure increased for workers by about four months and that 6% of the work force moved from part-time to full-time jobs after the law’s enactment.

“The data just do not bear out any adverse effects on employment after a minimum-wage increase,” says Michael Reich, a UC economics professor who led the study.

Other academics, such as Suzanne Clain of Villanova School of Business, have argued that raising the minimum wage does lead to certain job losses. Ms. Clain says most proponents focus on minimum-wage employers like Wal-Mart Stores Inc. and McDonald’s Corp., which she says can absorb such increases.

“The small businesses in San Jose should be concerned,” she says. “I understand the popular idea but there is no denying the effects on costs for the small businesses there.”

The San Jose initiative began in October 2010, springing out of a sociology-class assignment in which students analyzed social problems in the Bay Area. The San Jose State students decided to challenge the city’s minimum wage after analyzing San Francisco’s increase and finding that Oregon, Washington and Nevada set higher minimums than California’s.

In 2011, the students decided to push for a ballot measure and raised about $6,000 to hire a pollster to see if such an initiative would be attractive to voters.

The pollster projected a 60% approval rating, and in November 2011, the students began collecting the more than 40,000 signatures needed to place the issue on the ballot. By January, they had gathered enough.

“While it has been portrayed as if we naively took this issue on without taking the time to study up, that is just wrong,” says Scott Myers-Lipton, a San Jose State sociology professor who manages the project. “The students have worked hard to be sure this is a viable and worthy issue to take up.”

Local merchants like Charlie Major say an increase in the minimum wage could hurt their business.

Mr. Major, who operates a bakery, Charlie’s Cheesecake Works, southeast of downtown, estimates the wage increase could boost his costs by about $7,500 annually, or about 3% of his yearly revenue.

Mr. Major has four employees whose hourly wages range from $9 to $10, based upon experience. He says he sympathizes with workers but that the increase could make his business unprofitable.

“I understand the moral argument but that does not negate the reality of how the math works out,” says Mr. Major, a single father of two who worked his way through college. “This is going to kill a lot of the mom and pops that operate in this city.”

Rich De La Rosa, president of De La Rosa Latin American Imports Inc., a retail business his family has operated for more than 70 years, says the additional annual cost for his six employees would be as much as $8,000 at his store, located in a shopping mall south of downtown.

Mr. De La Rosa says the current economic environment is the worst he has ever seen, resulting in stagnant sales.

“It’s going to be hard to keep my doors open if this [ballot measure] is approved,” he says.

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