It's all downhill from here.

Photographer: David Paul Morris

Living Wage Gets Last Word in San Francisco

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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People who voted for San Francisco's new "living-wage law," which will eventually push the minimum wage to $15 an hour, were probably thinking about the needy workers who would find their budgets a little roomier after their paychecks got a boost. They probably weren't thinking about the demise of beloved local stores like Borderlands, a science-fiction bookstore that will close its doors by March 31.

This isn't a theatrical gesture by angry Republicans. It's just economics. The bookstore was barely squeaking by at the old wages; under the new law, it simply won't be able to afford to continue. "The change in minimum wage," they write, "will mean our payroll will increase roughly 39%. That increase will in turn bring up our total operating expenses by 18%. To make up for that expense, we would need to increase our sales by a minimum of 20%. We do not believe that is a realistic possibility for a bookstore in San Francisco at this time." So it's closing now rather than clinging on and waiting for the inevitable.

The owners, who seem to support the idea of a "living wage," are at pains to make clear that this is not a broad indictment of the ordinance.  Books, they say, are a special case:

Many businesses can make adjustments to allow for increased wages. The cafe side of Borderlands, for example, should have no difficulty at all. Viability is simply a matter of increasing prices. And, since all the other cafes in the city will be under the same pressure, all the prices will float upwards. But books are a special case because the price is set by the publisher and printed on the book. Furthermore, for years part of the challenge for brick-and-mortar bookstores is that companies like Amazon.com have made it difficult to get people to pay retail prices. So it is inconceivable to adjust our prices upwards to cover increased wages.

Of course, books are probably not the only special case. Other stores in San Francisco compete with the Internet, and they will have difficulty raising their prices. Most are probably not in such parlous shape as the independent bookstore industry, which has been in decline for decades. But some of them, too, will follow Borderlands to the grave.

We tend to talk about things like minimum-wage laws as if everyone will be affected similarly. In debate, we posit a mass of "minimum-wage workers" and a mass of "employers," then find congenial examples to stand in for these undifferentiated masses. But, of course, that's not how markets work. Effects don't get evenly distributed across the whole group; we see the biggest effects at the margins.

Some businesses will basically be unaffected by the new rules; they'll simply raise prices, the tech yuppies will pay more, and their workers will take more home in the pay packet. Other businesses will adjust by using less labor or taking fewer profits. Still others won't be able to adjust, and they will go out of business entirely. Some workers will get fatter paychecks and be better off, while others can't get a job or get enough hours and are worse off. You can't really aggregate all these occurrences into some neat "average benefit."

Which businesses will struggle or die? To know that, you have to know two things: what you compete with and how price-sensitive your customers are. A high-end cafe in a good location competes with other similarly situated cafes, all of which have to pay the same wages; they will probably just raise their prices. A cheap deli in a working-class neighborhood competes with eating at home (or packing a lunch), and their customers probably care a lot about spending another 20 percent on their sandwiches -- but they may be run by a family that isn't paying itself minimum wage anyway. A bookstore or chain retailer is competing with the Internet, and those in marginal businesses or marginal locations are prime candidates for closing up shop and firing their workforce.

In other words, the face of retail in San Francisco is likely to change: It will become more focused on wining and dining the affluent, less focused on providing physical goods to people with more modest incomes. On average, the number of stores may not even fall. But in specific, many will disappear.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net