How L.A. garment district shows promise and peril of higher minimum wage

While there hasn’t been the anticipated mass exodus in states that have embraced minimum wage hikes, the rising cost of labor has presented difficulties for business owners in industries like apparel.

When California raised its minimum wage to $9 an hour in 2014, Art Rahbar was happy to comply. With 75 employees in his garment manufacturing company, Mr. Rahbar says he knows many of his workers personally and understands how a higher wage would benefit their families.

“I am in favor of a minimum wage hike,” he says. “I love my workers. Without them I wouldn’t be here.”

Still, Rahbar worries.

Over the past three years, as the state minimum wage rose to $10 and then $10.50, his company, 9B Apparel, saw profit margins shrink by 10 percent. With another wage hike coming in July to Los Angeles – where the march to $15 an hour is even faster than California’s – Rahbar wonders if he’ll have to cut workers, or manage to stay in business.

“When it hits $15 an hour, I don’t know what my actual costs will be,” he says. A little more than half his workers make minimum wage. “I want to stay in California, my life is here. But is it still sensible to be in this business?”

While there hasn’t been the mass exodus that some critics predicted in states that have embraced minimum wage hikes, the rising cost of labor has presented difficulties for business owners like Rahbar. Industries like apparel, which rely heavily on minimum wage workers, have seen some businesses cut or outsource labor or relocate to cheaper areas, some economists say.

But just as true, others note, is that workers at the bottom of the income ladder are struggling more than ever to make ends meet, even with full-time jobs.

19 states raise minimum wage

Raising wages is a key part of improving those workers’ lives, they say. The 19 states kicking off 2017 with minimum wage increases demonstrate the growing support behind the effort – even among conservative states like Arizona, where politicians are traditionally less convinced of its benefits.

These contrasting realities together suggest a need for a more nuanced approach to minimum wage, observers say. Depicting the issue as binary – the worker versus the business owner – hinders rather than helps the creation of “applicable, manageable, and meaningful” solutions for all stakeholders involved, says Nick Vyas, an assistant professor at the University of Southern California Marshall School of Business.

“The equation of looking at [minimum] wage and cost of doing business as opposing factors needs to be changed,” he says. “I would argue there is a healthy balance … where companies are able to sustain and support their workers and still be profitable and gain the market share.”

When the first wave of wage hikes came to California, Rahbar responded by tightening operations, cutting overtime, and speeding up production. That year, he says, he kept all his workers on payroll.

When the minimum wage went up to $10 two years later, Rahbar says the company lost some customers and profit, and raised the price of its products. He did, however, manage to dodge layoffs again.

He’s less confident he can avoid letting people go when the next wave of raises go into effect. But efforts like his suggest that there are ways to compromise, Professor Vyas says.

Cutting unnecessary costs along the supply chain, as Rahbar did, is one way. Leveraging product quality is another: Many farmers across the country, for instance, have succeeded in marketing their produce as local and organic, Vyas says.

The same goes for companies like General Electric, which in the past year has brought thousands of jobs back into the US. The reshoring of light manufacturing jobs is largely due to market forces such as rising labor and shipping costs abroad. But it has also been a boon to the brand. Manufacturing its products in the US means the company can deliver them to American consumers more quickly while benefiting from the draw of the “made in America” label.

“There is a tremendous demand, for instance, in emerging markets where people would pay additional price to consume quality products [that are] made in the USA,” Vyas says. “We have to look at old models of business in a different way than we have done for the last 20, 30 years.”

To be sure, that's easier said than done in an era of deeply partisan politics and a shrinking middle class, and on the eve of a presidency that has already divided the nation.

“Some things get too polarized, and it’s hard to come to any kind of solution,” says Christine Cooper, vice president of the Institute of Applied Economics at the nonprofit Los Angeles Economic Development Corporation (LAEDC). “We have to find a way to make our residents and neighbors have livable lives,” but “at the same time, businesses really have to face the reality of their cost structure and profit margins.”

L.A.'s garment industry

As wages have risen and trade agreements opened foreign labor to the US, the city’s garment industry – once a center for “made in America” apparel – has changed dramatically. Between 2005 and 2015, wages rose by about 17 percent (adjusting for inflation) in the county, the Los Angeles Times reports. During the same period, the average number of apparel manufacturing workers in the area dropped from 61,800 to 42,000, according to Bureau of Labor Statistics data.

American Apparel, which for years fought to keep production in the region by marketing its garments as “sweatshop-free,” declared bankruptcy for the second time in November. Other major companies, among them staples of California cool like Guess Jeans, True Religion, and 7 For All Mankind, now source most of their products overseas. The majority of the companies that produce garments in Los Angeles today are those that rely on getting high-end products as quickly as possible to clients or consumers – like Rahbar’s 9B Apparel.

“It’s Econ 101: If the cost of labor in any industry becomes out of line with where the rest of the market is at, then it’s going to have a hard time being sustained,” says Craig Johnson, president of Customer Growth Partners, a market research group in Connecticut.

At the same time, advocates of increasing the minimum wage say that the cost of living in the Los Angeles metro area – where one-bedroom rentals average $2,300 a month – means that anything less than $15 an hour is unacceptable. “If anything, it’s a modest demand,” notes the LA Fight For $15 website.

René Godoy, who makes just above the state minimum wage at $11 an hour, says he makes ends meet by splitting a $1,200, one-bedroom apartment with a roommate who sleeps on the couch.

“It's livable; the bills get paid,” says Mr. Godoy, who ships and receives fabrics and garments for 9B Apparel and has worked for the company for two years. “But I'd like to be a little more comfortable.” He's not totally convinced that a $15 minimum wage is the answer to rising food, rent, and gas prices. If his expenses rise along with his wages, he's not sure he'll be better off in the long run. That said, he adds, “More money is always a good idea.”

Such realities make it easy to see minimum wage as part of a simple, two-sided debate. 

“Both sides I think take the position that if you subscribe to one idea, you reject the other,” Vyas says. “We need to have this debate in a little bit more holistic way, not just in terms of, ‘The only way I can become profitable is by not paying people.’ ”