Combined Report Living Wage Impacts

354 Pages·2011·5.67 MB·English

The Economic Impacts on New York City
of the Proposed Living Wage Mandate

Prepared By:
Charles River Associates:
Matthew Thompson
Marsha Courchane
Senior Consultants:
David Neumark
Timothy Riddiough
Anthony Yezer
Reviewer:
Daniel Hamermesh

Final Report
CRA Project No. D15863.00
Table of Contents
Executive summary ..................................................................................................................................... 1
Scope of project ........................................................................................................................................... 2
Part 1. Labor market impacts ................................................................................................................... 4
I. Labor market impacts – Overview and key findings ........................................................................ 4
A. Overview ...................................................................................................................................................... 4
B. Key findings ................................................................................................................................................. 6
II. Lessons from existing research on labor market impacts of living wages ........................................ 7
A. Overview and relation to the report’s labor market analysis ........................................................................ 7
B. Background on living wages ........................................................................................................................ 8
C. Labor market effects of living wages ........................................................................................................... 9
D. Summary of evidence from Neumark and Adams studies ......................................................................... 10
E. Criticism of the Neumark and Adams studies, and responses .................................................................... 14
i. Disemployment effects implausibly large .............................................................................................. 14
ii. Larger effects of business assistance than contractor-only laws ............................................................ 14
iii. Unsuitability of the Current Population Survey (CPS) data .................................................................. 21
iv. Inappropriate econometric methods ....................................................................................................... 22
v. Impact of living wages on poverty ......................................................................................................... 23
vi. Holzer’s (2008) review .......................................................................................................................... 26
F. Before-and-after studies of living wage laws in specific cities .................................................................. 26
i. San Francisco International Airport ....................................................................................................... 27
ii. Non-Profits in Detroit ............................................................................................................................ 28
iii. Contractors in Boston ............................................................................................................................ 29
iv. Covered and non-covered employers in Los Angeles ............................................................................ 30
v. Summary of city-specific studies ........................................................................................................... 31
G. Recent before-and-after studies of business assistance living wage laws .................................................. 32
H. Ex ante “impact studies” ............................................................................................................................ 38
i. Employment effects ............................................................................................................................... 38
ii. Family incomes and poverty .................................................................................................................. 40
iii. Government programs, marginal tax rates, and federal tax infusions .................................................... 41
III. Analysis of effects of living wage laws in other cities: data ....................................................... 48
A. Data sets ..................................................................................................................................................... 48
B. Geographic information: place of residence and place of work ................................................................. 48
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C. Geographic classifications in the CPS data ................................................................................................ 48
D. Analysis samples ........................................................................................................................................ 50
IV. Living wages in US cities ........................................................................................................... 61
A. Urban areas and cities included in the analysis .......................................................................................... 61
B. A larger set of US cities ............................................................................................................................. 62
C. Procedures for collection of data on living wages ...................................................................................... 63
D. Catalog of living wage laws ....................................................................................................................... 64
E. Description of coding of living wage laws’ characteristics ........................................................................ 64
F. Different types of mandated wage floors: living wages, minimum wages, and prevailing wages ............. 65
V. Empirical evidence on living wage mandates in other cities .......................................................... 85
A. Overview .................................................................................................................................................... 85
B. Wage and employment effects ................................................................................................................... 85
i. Baseline estimates and consequences of aggregation and extending the sample period ........................ 85
ii. Problems with aggregating the living wage variable to the CMSA level .............................................. 87
iii. Estimates without aggregation to CMSAs ............................................................................................. 88
iv. Estimates for higher-wage or higher-skill workers ................................................................................ 89
v. Estimates for different types of living wage laws .................................................................................. 90
C. Effects on low-income families .................................................................................................................. 91
VI. Projected effects of living wages in New York City ................................................................. 108
A. Overview .................................................................................................................................................. 108
B. The data .................................................................................................................................................... 108
i. American Community Survey data ...................................................................................................... 108
ii. Real property tax data .......................................................................................................................... 109
iii. Quarterly Census of Employment and Wages data .............................................................................. 109
C. Information on income-support and other programs for New York City residents .................................. 110
D. Methods .................................................................................................................................................... 111
i. Wages .................................................................................................................................................. 111
ii. Employment ......................................................................................................................................... 112
iii. Family incomes .................................................................................................................................... 113
iv. Assistance programs ............................................................................................................................ 113
v. Living wage law coverage ................................................................................................................... 114
vi. The timing of the effects of living wages ............................................................................................ 115
E. Simulated impacts for New York City residents ...................................................................................... 116
i. Covered based on any site receiving assistance ................................................................................... 116
ii. Covered based on sites receiving $100,000 or more of assistance in at least one year ........................ 121
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iii. Impacts on poverty .............................................................................................................................. 126
iv. Sites receiving $100,000 or more in assistance in at least one year ..................................................... 129
v. Assistance programs ............................................................................................................................ 131
Part 2. Economic development impacts ............................................................................................... 136
VII. Economic development impacts: overview and key findings .................................................. 136
VIII. Description of living wage mandates in other cities ................................................................. 138
A. The (limited) literature ............................................................................................................................. 138
B. Economic incentives for development ..................................................................................................... 139
i. Tax incentives ...................................................................................................................................... 139
ii. Tax increment financing (TIF)............................................................................................................. 139
iii. Direct lending and bond programs ....................................................................................................... 140
C. Comparator city development incentives ................................................................................................. 140
i. Cleveland, OH ..................................................................................................................................... 142
ii. Des Moines, IA .................................................................................................................................... 143
iii. Detroit, MI ........................................................................................................................................... 144
iv. Hartford, CT ........................................................................................................................................ 144
v. Lansing, MI ......................................................................................................................................... 145
vi. Los Angeles, CA .................................................................................................................................. 146
vii. Madison, WI .................................................................................................................................... 147
viii. Minneapolis, MN............................................................................................................................. 148
ix. Oakland, CA ........................................................................................................................................ 148
x. Philadelphia, PA .................................................................................................................................. 149
xi. Rochester, NY ...................................................................................................................................... 150
xii. San Antonio, TX .............................................................................................................................. 150
xiii. San Diego, CA ................................................................................................................................. 151
xiv. San Jose, CA ................................................................................................................................... 152
xv. Sarasota, FL ..................................................................................................................................... 152
xvi. St. Louis, MO .................................................................................................................................. 152
xvii. St. Paul, MN .................................................................................................................................... 153
xviii. Toledo, OH ...................................................................................................................................... 154
xix. Washington, DC .............................................................................................................................. 155
IX. Summary of living wage mandates in other cities .................................................................... 155
X. A theoretical model of the impact of the proposed living wage ordinance on development in New
York City .............................................................................................................................................. 164
A. Perspective on alternative reactions to the living wage proposal ............................................................. 164
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i. Loss of debt financing.......................................................................................................................... 164
ii. Change in tenant mix ........................................................................................................................... 165
iii. Increased equity financing ................................................................................................................... 166
B. Effects of property tax rates on value and revenue .................................................................................. 166
C. Lessons from the local economic development literature ........................................................................ 169
D. Real estate investment and the current NYC economic development program ....................................... 171
E. Modeling the development decision without tax relief or subsidy ........................................................... 172
F. Modeling the incremental effects of current incentives on development decisions ................................. 173
G. Modeling the effects on real estate development of changes due to the living wage proposal ................ 174
H. Solving for optimal I and α with a living wage proposal ......................................................................... 177
I. Special effects of the proposal on financing cost ..................................................................................... 178
J. Estimating effects of the proposal on the relative number, type, and location of new real estate
development projects ........................................................................................................................................ 179
K. Understanding differential effects of the living wage proposal on the spatial pattern and type of real estate
investment ......................................................................................................................................................... 180
XI. Developer surveys ..................................................................................................................... 184
XII. Pro formas ................................................................................................................................. 185
A. Model calibration ..................................................................................................................................... 185
B. Key drivers ............................................................................................................................................... 190
C. Pro forma summary tables ....................................................................................................................... 191
D. Summary of pro forma and robustness results ......................................................................................... 195
XIII. Robustness summary................................................................................................................. 200
XIV. Employment impacts............................................................................................................. 204
XV. Summary and conclusions – real estate impacts ....................................................................... 207
A. Real estate development implications for employment ............................................................................ 209
B. A tradeoff between benefits and costs ...................................................................................................... 210
C. Location of investment and job creation .................................................................................................. 211
XVI. References ............................................................................................................................. 213
XVII. Data sources .......................................................................................................................... 220
Appendix I. Supplemental wage and employment tables ................................................................... 222
Appendix II. Combined maps ............................................................................................................... 257
Appendix III. Developer survey ............................................................................................................ 268
Appendix IV. Summary statistics ......................................................................................................... 273
Appendix V. Pro forma assumptions ................................................................................................... 283
Appendix VI. Robustness tables and distributions (break even rents) ............................................. 296
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Appendix VII. Employment estimates ................................................................................................. 316
Appendix VIII. Participants in research process ................................................................................ 318
Endnotes .................................................................................................................................................. 319

The conclusions set forth herein are based on independent research. The views expressed herein are the views and
opinions of the author and do not reflect or represent the views of Charles River Associates or any of the
organizations with which the author is affiliated. Any opinion expressed herein shall not amount to any form of
guarantee that the author or Charles River Associates has determined or predicted future events or circumstances,
and no such reliance may be inferred or implied. The author and Charles River Associates accept no duty of care or
liability of any kind whatsoever to any party, and no responsibility for damages, if any, suffered by any party as a
result of decisions made, or not made, or actions taken, or not taken, based on this paper. Detailed information about
Charles River Associates, a registered trade name of CRA International, Inc., is available at www.crai.com.
Copyright 2011 Charles River Associates
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Executive summary

Charles River Associates (CRA) studied the impact of the living wage mandate proposed in New York
City (NYC) (Int. 251-2010). We compiled comprehensive information on living wage laws in other
cities, updated analyses to 2009, and simulated the impacts for NYC of the adoption of a typical living
wage mandate which included coverage of recipients of business (financial) assistance from NYC. Our
report includes two primary sections: the first presents our model simulations on the impact of the
proposed mandate on real estate development in New York City. The second documents our findings for
direct effects on wages, employment, poverty, and income assistance programs.
We conclude that the employment losses that could result from a decline in real estate investment in
response to the living wage mandate are significant and differ throughout the Boroughs. These losses
impact employees at all wage levels. Specifically:
■ The costs of complying with the wage mandates, and the impacts on future development, are highest for
development projects located outside of Manhattan. Even though the value of financial assistance
typically is higher for projects located outside of Manhattan, this is not sufficient to outweigh the added
costs.

■ Our estimates suggest that approximately 33 percent of retail projects located in the Outer Boroughs,
compared to approximately 24 percent of office projects located in Manhattan, would not proceed under
current economic conditions as a result of the costs imposed by living wage mandates.

■ The lower level of commercial development is associated with approximately 33 thousand jobs per year
(at all levels of compensation), based on employment in 2006-2008 at sites with at least $100,000 in
assistance in at least one year.

■ The simulated direct labor market effects on NYC workers earning less than $10 per hour should be
interpreted as labor market and household income effects from the enactment of a “typical” business
assistance living wage mandate that is found in other cities where living wage laws have been enacted.
The results are as follows:

■ Among workers earning less than $10 per hour citywide, the wage mandates would subtract or add $0.01
to $0.02 to average wages once employment losses are taken into account. Depending on the breadth of
coverage, between 6,000 and 13,000 NYC residents would not be employed as a result of the enactment
of living wage mandates. Between 1 percent (34,000) and 2 percent (62,000) of workers would receive
average wage gains ranging from $1.65 to $1.67 per hour.

■ Using the NYC poverty threshold published by the NYC Center for Economic Opportunity (CEO) in their
March 2011 working paper (using just the thresholds and not the poverty metric calculated by the CEO),
the simulations suggest that the wage mandates would decrease the fraction of households in poverty by
between 0.01 and 0.02 percentage points. At the same time, the employment losses increase the fraction
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of households in extreme poverty (with earnings less than half of the NYC CEO poverty line) by between
0.05 and 0.12 percentage points.
Overall, the results show that while the number of workers receiving wage increases is higher than the
number of workers experiencing job losses, the aggregate effect on the distribution of income is
negligible. In other words, the simulations suggest that a living wage mandate should be understood as a
redistributive policy where income losses for low-skill workers due to lower employment offset the
income gains to low-skill workers due to higher wages. For this proposed legislation there are wider
effects due to reduced real estate development and lost job opportunities at all levels.
Scope of project

CRA was retained by the New York City Economic Development Corporation (NYCEDC) to undertake a
comprehensive review and analysis of the economic impacts of living wage mandates. We were asked to
examine the economic impact these living wage laws have had on labor markets and real estate
development in other cities where the laws have been implemented, as well as the potential economic
impact of the proposed living wage legislation on New York City (NYC) residents and NYC real estate
development.
The scope of CRA’s research was concentrated on five broad areas established in consultation with
NYCEDC staff:
1) A review of the existing research on the impacts of living wage laws on labor market and real estate
development outcomes, including a review of “before-and-after” studies and “impact” studies. This
review provides perhaps the most comprehensive and current summary of research on living wages to
date;
2) A review and catalog of living wage laws currently in effect in other US cities. This review provides a
comprehensive view of the breadth and depth of living wage adoption across the US and, in particular,
highlights the wide variation in types of living wage legislation (or ordinances) and the extent of
coverage;
3) An analysis of the impacts observed from implementation of living wage laws in other US cities. This
analysis provides a baseline against which to assess the impacts of “typical” living wage legislative
changes;
4) The development of a model to estimate the impacts of the living wage law on real estate investment
and development and the associated impacts on employment. This model utilizes specifics of the
proposed living wage legislation and the New York real estate markets; and
5) A simulation of the impacts of the proposed living wage on labor market outcomes and real estate
development. This simulation combines the preceding elements and allows for an assessment of the
likely impacts on employment, wages, and economic development investment levels.
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For the project, CRA enlisted leading scholars in the fields of labor and real estate economics. The team
responsible for the research included CRA Vice Presidents Dr. Marsha Courchane and Dr. Matthew
Thompson, Dr. David Neumark (Professor, University of California-Irvine), Dr. Timothy Riddiough
(Professor, University of Wisconsin-Madison), and Dr. Anthony Yezer (Professor, George Washington
University). Dr. Neumark is a leading researcher in labor economics and has done some of the pioneering
work on the labor market and poverty impacts of living wage laws. Dr. Riddiough is a past Chair of the
Real Estate and Urban Land Economics department at the University of Wisconsin-Madison and the
incoming President of the American Real Estate and Urban Economics Association. Dr. Yezer is the
Director of the Center for Economic Research at George Washington University and is one of the leading
researchers in regional and urban economics. The team also solicited the participation of Dr. Daniel
Hamermesh (Professor, University of Texas-Austin) to review the labor economics part of the report. Dr.
Hamermesh is a Fellow of the Econometric Society, a research associate of the National Bureau of
Economic Research, and a past President of the Society of Labor Economists. He authored Labor
Demand, The Economics of Work and Pay, and a wide array of articles in labor economics. Dr.
Riddiough, in addition to consulting throughout the process, also acts as reviewer of the final report, with
an emphasis on the real estate section.
One important component of this research is the specific living wage mandate proposed for New York
City. In particular, the draft legislation informs the determination of the parameters under which the
simulations are conducted, and this affects the measurement of the impacts on city residents and real
estate development investment. The analyses here were developed based on Int. No. 251-2010, a
proposed administrative code amendment to local law. In the NYC-specific proposal, the mandate
includes coverage for recipients of “financial assistance.” In other studies and other cities this is usually
referred to as a “business assistance living wage” mandate.
Recently, an amendment was made to the proposed law (as Int. No. 251-A) that would exempt from
coverage certain otherwise-covered employers, including small businesses with less than $1 million in
annual revenue, projects with more than 75 percent of residential housing units classified as affordable
housing, and non-profits. Because it would not affect a developer’s decision whether or not to move
forward with a project, these changes would not impact the analysis of real estate development and the
conclusions which flow from that analysis. The omission of affordable housing investments and not-for-
profit employee coverage had already been factored into the models.
To the extent that this proposal would reduce the number of workers potentially subject to the living wage
legislation, fewer low-wage individuals would be expected to receive the higher living wage rate and
fewer low-wage individuals would be expected to experience job loss. The impact of the revised
proposed law should be interpreted in context of the “higher” coverage and “lower” coverage alternatives
detailed below.

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