Chicago's Approach to Big Boxes

Chicago's Approach to Big Boxes-BECKER

The City Council of Chicago recently passed an ordinance that makes Chicago the largest city in the United States to impose special wage and fringe benefit requirements for "big box" retailers. The ordinance requires that beginning next July, companies with more than $1 billion in annual sales and having stores in Chicago with at least 90,000 square feet of space will have to pay Chicago employees a minimum of $9.25 an hour in wages and $1.50 an hour in fringe benefits, such as health insurance. By 2010 these will rise to $10 an hour in wages and $3 an hour in benefits. These minimums far exceed Illinois' minimum wage of $6.50 per hours. About 40 existing stores in the city would be affected.

The ordinance was supported by 35 out of 49 alderman on the Council despite the vehement opposition of Mayor Richard Daley, who in the past could dictate the Council's policies. The mayor is right to be opposed, for it is indeed a bad ordinance, and will hurt the very groups, African-Americans and other poor or lower middle class individuals, that supporters claim would be helped.

The ordinance will raise the cost of using low skilled labor in Chicago by Wal-Mart, Target, Home Depot, and other big retailers with mega stores. Even without it, large cities are not attractive to mega retailers because space for large stores and for the parking they require is much more expensive in cities than in suburbs and smaller towns. These big box stores are much more common in suburbs of large cities than in the cities themselves partly for this reason, and partly because many suburban communities offer tax and other financial subsidies to these stores in order to induce them to locate there.

Even if retailers with mega stores were trying to cater at least in part to the Chicago market, this ordinance makes them more likely to open up in suburbs that could be reached by some Chicagoans as well as by those living in the suburbs. Large retailers that continue to operate in Chicago will reduce their use of low skilled workers by replacing some of them by more skilled employees, and by machinery and other capital. Retailers will also try to avoid being covered by the ordinance by reducing their space to just below 90,000 square feet.

In a city like Chicago the burden from these responses to the ordinance will fall disproportionately on African Americans and Latinos since fewer jobs will be available to workers in the city with less education and lower skills. In addition, prices in Chicago of items sold relatively cheaply by stores like Wal-Mart and Target will rise because fewer of these stores will open in the city. The mega stores that remain will raise their prices because their costs will go up. Since city customers of these stores are mainly families with modest incomes who seek low prices rather than elaborate service, they more than the affluent classes will be hurt by the rise in prices and reduced availability of big box outlets.

Who would favor such a bad ordinance that will harm the very groups it is claimed to help? Support for the ordinance from more conventional supermarket chains and clothing stores is easy to understand since the mega stores drain away customers and force prices down. The absence of opposition from low-income consumers who shop at these stores is not surprising since they are not well organized to exert political pressure on the City Council.

The strong backing of the ordinance by Chicago unions is also to be expected. Unions always favor increases in minimum wages, even when as in this case the minimum only apply to some employers. Any increase in the minimum wage would raise the demand for unionized skilled workers who would substitute for the less skilled employees displaced by the minimum.

Unions have an additional reason to try to raise the costs of big box companies like Wal-Mart's since these companies do not have unions, and aggressively oppose them. Higher costs forced on non-union companies reduce the competition they offer to unionized companies. Perhaps of even greater importance, this ordinance helps demonstrate that unions have the political clout that can make operations more costly and difficult for large non-union retailers. To ward off further discriminatory ordinances, these companies could be forced to adopt a more favorable stance toward unionization of their employees.

It is more difficult to understand the aggressive support of the Chicago ordinance by most African-American members of the Council and other leaders of the African-American community. However, it should be noted that some of those who represent predominantly African-American communities voted against the ordinance, including Leslie Hairston who represents the 5th Ward (where I live). Not only will fewer jobs be available for African-Americans, but also the prices they pay for food, clothing, and many other retail goods would go up.

One explanation for why most African-American leaders support the ordinance is that they are politically allied with unions and possibly other groups that benefit from this ordinance. These leaders may recognize that their constituents will generally be harmed by the ordinance, but in return for taking this hit they expect the support of unions on issues like more generous Medicaid support that help low income families.

Clearly, this ordinance might raise serious Federal constitutional issues because of its discriminatory treatment of large retailers. Since to my knowledge the City Council has not offered any plausible reason for basing the ordinance on square footage of floor space, it is likely to be considered a violation of equal protection of the laws.

Still, ordinances like this one are dangerous not only because of their direct harmful effects, but also because they encourage future legislation that could apply similar and additional requirements to stores like McDonald's and other smaller stores. It also encourages interferences in other markets, such as the proposal now before the Chicago Council that would require residential developers to include a certain percentage of "affordable" housing units in their developments. So Mayor Daley is right to oppose this ordinance and he should veto it, even if the veto will be over ridden.