Living Wages and Economic Performance: The San Francisco Airport Model

Michael Reich, Peter Halland Ken Jacobs

Summary and Main Findings

In response to low pay for workers and low service quality for taxpayers, about 100 local governmental entities in the United States have instituted living wage ordinances. Generally, these ordinances apply wage and benefits mandates for employees of contractors conducting services for a municipal government. Some of the ordinances also apply to employers who conduct business on government-owned property.

An innovative and far-reaching living wage ordinance has been implemented at San Francisco International Airport (SFO). Nearly two years before September 11, 2001, SFO adopted a Quality Standards Program (QSP), which was designed to improve safety and security at SFO as well as improve the conditions of the SFO labor market. The program went well beyond the FAA regulations in place at the time, establishing compensation, recruitment and training standards for a wide range of airport employees whose performance affects airport safety and security. Two additional policies in San Francisco in 2000 also restructured the labor market at SFO: a Labor Peace /Card Check Rule and a Minimum Compensation Ordinance (MCO), which places living wage mandates into airport leases and service contracts not covered by the QSP.

In this study we examine the determinants of low-wage labor markets at the airport, the scope of t he new policies at SFO, and the impacts of those policies on workers, employers, consumers and taxpayers, with special attention to the effects on airport safety and security. This study constitutes the first examination of the impacts of the policies. In this summary of our findings, we focus on the main findings of our study. The document that follows provides our full report.

To conduct the study, we carried out detailed surveys of airport employers and workers in the summer and fall of 2001, and we interviewed labor, management and airport officials. We also drew upon government documents and census datasets, the airport’s own security badge data, and FAA data on security at major U.S. airports.

1. Low pay in the SFO labor market

SFO, the fifth largest airport in the U.S., comprises a major multi-employer labor market with substantial pay inequality and a large proportion of low-wage workers.

Over 140 different private employers do business at SFO –approximately 60 airlines, 40 airline service firms and 40 passenger service concessions–with a workforce of nearly 30,000 people. Average pay growth in the air transportation industry has lagged other sectors, including even retail, since deregulation began in 1978. Nonetheless, as of 2002, many airport workers– including the public sector employees, the pilots, computer technicians, the flight attendants, and the large number of mechanics who work at the SFO United Air Lines service facility– are paid at rates near or well above the national average of a bout $15 per hour.

The remaining workforce at SFO consists of the ground-based, non-managerial workers, including: customer service and ramp workers, baggage handlers, screeners, cabin cleaners, and restaurant and retail workers. Most of the 11,000 workers in this group were paid less than $10 per hour.

Airline service contractors employed a substantial portion of the low-wage labor at SFO.

In the 1980s, the airlines increasingly contracted out services that used to be performed by direct airline employees. Employees of the airline service firms receive lower wages and benefits, receive less training and have fewer opportunities for advancement than direct airline employees. For example, average pay for airline service employees ranged from fifty-nine to seventy-three percent of pay for direct airline employees in the same job classifications.

Low pay at SFO became associated, as at other airports, with inadequate training and high turnover as well as lower service quality and low security standards.

Airport screeners illustrate this pattern. Prior to the QSP, pre-board screeners at SFO were paid very close to the minimum wage, received only a few hours of training, and had turnover rates of about 80 percent. Turnover among screeners at 19 major airport s averaged 110 percent.

2. The proposed policy solutions

The new policies cover a wide spectrum of employees at SFO.

The QSP covered all employees who work in secure areas of the airport. The MCO will eventually cover most of the remaining employees. In contrast, living wage ordinances in other localities cover a very small segment of the local labor market.

The new policies set standards for pay and benefits as well as enhanced training.

The QSP established a minimum pay standard of $10 per hour plus full benefits, or $11.25 without. It also established a 40 hours of training standard.

3. The impacts on workers

The Quality Standards Program and other living wage policies had a large impact on pay at SFO.

Over 9,700 low-wage workers at SFO received substantial pay increases after the QSP was implemented. The direct beneficiaries of the QSP and MCO included 5,400 workers who had previously earned less than the mandated $10 an hour. Entry -level pay for these directly-covered workers rose by an average of 33 percent after the policies went into effect.

The QSP had a broad impact on the low-wage airport labor market, reaching beyond those firms directly mandated to increase pay.

Firms raised pay for low-wage occupations not covered by the QSP to compete for workers at SFO. We estimate that this spillover from the program resulted in additional pay increases of at least ten percent for 2,550 workers who were not directly covered by the QSP or MCO (but are among the 11,000 ground-based non-managerial work force).

The pay increases were most marked among the lowest paid airline service workers, including security screeners, baggage handlers, fuel agents, customer service agents, ramp workers and cabin cleaners.

While 55 percent of the ground-based non-managerial workforce was paid less than $10 an hour before the QSP, only 4.9 percent were paid less than $10 after the QSP. Security screeners, who averaged $13,400 a year with no benefits prior to the QSP, earned $20,800 plus full benefits by January 2001, which amounts to a 55 percent increase in pay, and a 75 percent increase in total compensation. These increases substantially reduced the pay differentials between direct airline workers and service contract workers in the same jobs.

All workers in QSP-covered jobs now receive a package of health benefits and paid days off or an extra $1.25 per hour. Yet many non-covered workers still receive no effective health benefits.

Approximately 2,000 workers in firms that did not previously offer employer-paid health benefits are now receiving the wage premium or the full QSP-mandated benefits package. Additional workers gained access to health benefits as firms eased eligibility requirements and reduced the employee share of out of pocket expenses. Seventy percent of QSP-covered firms– accounting for 75 percent of the workers covered by the QSP–chose to provide health benefits and paid days off over increasing wages by an additional $1.25 an hour.

4. Costs of the Quality Standards Program

The cost of the QSP and living wage ordinance to airlines and airport travelers amounted to about $1.42 per passenger.

The direct cost of the QSP to employers consists of increased wages, payroll taxes, health benefits, paid time off and training costs. These costs approximate $42.7 million a year. Including the spillover effects to other workers and employers at SFO adds $14.9 million to employers’ costs. The total cost amounts to 0.7 percent of the fare revenue received at SFO in one year. If the airlines passed these costs directly to the customers, the cost increase would average $1.42 per airline passenger. This cost estimate does not take into account any savings from increased productivity and other employer savings.

5. Adjustments that reduced business costs and improved service quality

Following implementation of the QSP, workers and firms adjusted their behavior in ways that reduced its costs.

Employee turnover rates fell dramatically.

Turnover fell by an average of 34 percent among all surveyed firms and 60 percent among firms that experienced average wage increases of 10 percent or more. The greatest reduction in turnover occurred among airport security screeners, from 94.7 percent a year in April 2000 to 18.7 percent fifteen months later, an 80 perc ent decrease. Cabin cleaning firms reported a 44 percent reduction in turnover, and ramp workers a 25 percent reduction.

Reduced turnover saved employers $ 6.6 million per year.

Every time an average worker has to be replaced employers pay about $4,275 in turnover costs. The turnover reductions therefore saved employers $ 6.6 million each year.

Employees improved overall work effort and performance.

Significant percentages of employees covered by the QSP reported that they are working harder at their jobs (44 percent), that more skills are required of them (50 percent), and that the pace of work increased after the implementation of the new rules (37 percent).

Average job performance by QSP-covered workers improved substantially. One-third of all SFO employers, accounting for over half of all employees, reported improved overall job performance among workers covered by the QSP. The proportion of employers who reported improvements in employee morale was 47 percent, decreases in employee grievances (45 percent), decreases in employee disciplinary issues (44 percent), and decreases in absenteeism (29 percent). In each category most of the remaining employers reported no change; few employers reported any deterioration in performance.

The QSP mandates increased worker training, which helped improve worker performance. By increasing pay, the QSP also made training more desirable to employers.

Twenty-five percent of QSP-covered employers increased the training programs they were providing their workforce. Among non-QSP firms, the comparable figure was eleven percent. None of the firms reported a decrease in training.

Service levels improved, as did indicators of security.

The benefits of the QSP for airport customers include higher security and improved quality of service. Almost half (45 percent) of all employers reported that customer service improved; only 3 percent thought it had worsened. Our analysis of FAA data for 19 large airports found that lower turnover is associated with higher rates of detection of security breaches.

The labor-management environment improved at SFO following implementation of the policies.

The new policies reduced employee grievances and employer-initiated disciplinary cases and improved employee morale. The policies also minimized disruptions during labor organizing campaigns. Following implementation of the policies, 2,400 workers gained union representation in 21 airport firms with no significant disruptions of business.

6. Level and composition of employment

Employment levels did not decline as a result of the QSP.

Employment in QSP-covered jobs in the airline and airline service firms grew by up to 15 percent between 1998 and 2001. The observed expansion in employment occurred despite the fact that the effects of the recession on airport activity were apparent by the beginning of 2001. Employment at SFO began to decline only after the sharp drop in airport activity subsequent to September 11.

The composition of the workforce did not change significantly with the QSP.

We find some evidence of small displacement effects as a result of the program. The QSP allowed employers to hire screeners with slightly more education, although increased training mandates and worker protections ensured that few incumbent workers were displaced. While the overall proportion of women to men in the SFO workforce did not change, the QSP did result in more hiring of men than women in certain low-wage occupations. There is no evidence of changes in hiring patterns by age and race.

7. SFO as a model

The Quality Standards Program constitutes a model for improving airport safety and security. Security at airports should involve all the workers with access to the tarmac, aircraft and baggage areas. By raising pay and standards even before September 11, and for most airport workers, not just the screeners, SFO set the national pace in improving security and safety.

SFO remains an innovative laboratory – the FAA has selected the airport for a pilot program that retains contract screener status rather than federalizing the screener workforce.