Washington, D.C., residents and officials were divided over their preference for Walmart’s promises of low prices—or demands for higher wages.

Washington, D.C., residents and officials were divided over their preference for Walmart’s promises of low prices—or demands for higher wages.

The living-wage issue is rife with complexities. On its face, it sounds both like a terrific idea and a terrible idea. On the positive side, who wouldn’t want to reward someone’s work with a wage and benefit structure that allows an individual or a family to live without government assistance, at least at a modest level? On the negative side, this is another government intrusion into business that does not factor in all the complexities affecting the bottom line. Of interest to the real estate community, of course, are the implications for land use. What effect does the minimum wage have on retailers and, in turn, their demand for real estate? The answers are important to anyone involved in creating thriving, walkable, multiuse urban centers where people can afford to live—and shop.

Municipalities around the country are debating the issue—and the implications for urban retail development are already taking shape. The council of Washington, D.C., recently passed a bill, subsequently vetoed by D.C. Mayor Vincent C. Gray, that would have raised the minimum wage that big-box retailers must pay their employees to $12.50 per hour for full-time workers, a 50 percent increase. As the measure was pending, Walmart threatened to pull out of projects in the District of Columbia. In its opposition to the proposed wage increase, the big-box retailer cited the number of jobs it creates, as well as the greater access it provides to high-quality lower-priced goods and groceries as major assets to the district. Other large retailers wrote open letters against the pay hike as proposed.

The living-wage debate is gaining traction around the country. In July, fast-food workers in at least ten cities from Seattle to St. Louis to D.C. staged one-day labor actions lobbying for higher pay. The retail, restaurant, entertainment, and hospitality industries are watching this development closely. Since so many of these fast-food outlets provide the anchors and vitality for successful urban districts, the real estate industry is tuned in as well.

Jobs

Are wage hikes, in fact, “job killers”? Since 1994, more than 200 cities have set living-wage laws that specify wage and, in some cases, benefits beyond the federal minimum of $7.25 per hour, and ten states have passed mandatory cost-of-living increases to the minimum wage. Among the states with higher minimum wages than the federal standard are Arizona, Colorado, Florida, Missouri, Montana, Nevada, Ohio, Oregon, Vermont, and Wisconsin. Particulars vary by state, but these states have recognized the income disparities and that the federal standard has not been raised since 2009. An employee who works full time (40 hours per week) earning minimum wage has an annual salary of just over $15,000. Most minimum-wage workers, however, are not full time and thus earn less than the federal poverty level.

In 2003, Santa Fe, New Mexico, adopted a living-wage standard of $8.50 an hour with regular cost–of-living increases. Since then, that hourly rate has grown to $10.20 an hour, or about $3 over the federal minimum. Santa Fe boasts an unemployment rate of 5.8 percent (July 2013), almost two points below the statewide New Mexico rate. Sante Fe has a reportedly thriving restaurant, hospitality, and retail sector. In 2003, San Francisco adopted a citywide minimum-wage law higher than the national standard. In 2007, a University of California study showed that restaurant growth was higher in the city than in the neighboring Bay Area communities, even after San Francisco adopted its new minimum-wage measure. So, at least based on these examples, it is unclear whether raising the minimum wage will reduce the number of available jobs.

Both San Francisco and Santa Fe are popular tourist destinations and have strong retail markets. But the data are unclear regarding what happens in cities with weaker retail markets. Those cities have been reluctant to push minimum-wage measures, arguing that any job is better than no job. However, solid academic research has consistently shown that the higher wage rate does not force layoffs. The Economic Policy Institute asserts that raising the minimum wage to $9 would actually increase jobs as it would pump $21 billion into the economy.

An urban Walmart under construction in Washington, D.C.

An urban Walmart under construction in Washington, D.C.

Local Reputation

From a public policy perspective, no community wants to be seen as antibusiness or anticompetitive. In November 2010, the Review of Economics and Statistics, published by MIT and edited by the Harvard Department of Economics, reported a study that compared adjacent communities where one state (Washington) raised the minimum wage and the other did not over the 1990–2006 period. The study found no difference between the localities based on the minimum wage.

Many issues affect the success of businesses, and raising the minimum wage by itself is not a determinant. One factor in business decision making is both availability of appropriate labor as well as wage rates. Of Interest, several retailers, including Costco and Stride Rite, are on record as supporting raising the minimum wage because they believe doing so improves employee retention and productivity. Also, many factors contribute to a community’s reputation for being friendly to business. These include ease of permitting and approvals, a lack of corruption, fairness of regulation and enforcement, and the ability of businesses to win subsidies when they require them. A community’s decision to raise the minimum wage must be looked at in the broader context of that community’s business receptivity.

Market Demand

Retailers increasingly cite population density as one of their highest criteria for selecting a location. Research on generation Y—most commonly defined as those people born between 1980 and 1999—including the work done by ULI, supports the idea that young people want to be close to a variety of shopping and entertainment venues, particularly if they are accessible by foot, bicycle, or transit. Much of the worst poverty in the country is now in rural areas with weak population growth and an aging population. The Colliers Report—published by Colliers, a real estate brokerage and consulting company—reports low retail vacancies and high retail demand in cities that are magnets for members of gen Y (also called echo boomers or millennials) such as San Francisco (retail vacancy at 3.8 percent) Miami/Dade County (4.8 percent), and Boston (6.5 percent).

There is no question that retailers these days face a host of challenges ranging from the internet to lower household incomes. But raising the minimum wage—if done in a fair and rational manner—may actually boost the revenues of retail and hospitality vendors by providing their customers with higher incomes and higher spending potential.

 

Costs

Proponents of the living wage offer two main arguments: higher wages reduce poverty subsidies like food-stamp payments and can raise people out of the lowest income category. Currently, an individual working full time at the minimum wage earns an income just at or below the federally designated poverty level of about $15,000 per year. Earlier this year, the Massachusetts Institute of Technology created and published a Living Wage Calculator that computes the minimum cost of living in all 50 states and major metropolitan counties. The calculator includes the main living expenses, including housing, transportation, medical care, child care, food, and “other.” A living wage was defined as an hourly pay scale sufficient to cover the aforementioned costs at a modest level. A poverty wage was calculated as the annual federal poverty rate for the local areas, converted to an hourly rate. The variations based on locality are striking: for one adult, a living wage ranges from $9.70 to $13.20 per hour. For a family with two adults and two children, a living wage adequate to maintain a modest standard of living is estimated at $20 to $24 per hour. At the current federal minimum wage, an individual working full time for the federal minimum wage falls below the federal poverty level in most communities.

The federal government sets subsidies based on household size; the MIT Living Wage Caluculator offers numbers that allow a comparison between the federal rates and what MIT calculates as necessary hourly wages for a very “modest” life.

Conclusions

After looking at impartial academic studies, one can conclude that raising the minimum wage is not the crucial factor in the success of a business; local market forces and demand are more important. In high-demand areas, increasing the minimum wage did not affect business success, and the local jurisdiction often continued to outdo its neighbors with lower wage scales. From a retail perspective, the old mantra of “location, location, location” still applies.

There is no question that retailers these days face a host of challenges ranging from the internet to lower household incomes. But raising the minimum wage—if done in a fair and rational manner—may actually boost the revenues of retail and hospitality vendors by providing their customers with higher incomes and higher spending potential.

Maureen McAvey is the ULI/Bucksbaum Family Chair for Retail.