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Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’ – Publications – AEI

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AEI Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’ From an op-ed in today’s Wall Street Journal by Alabama-based restaurant owner Larry Fox titled “The Minimum Wage Will Put Me Out of Business: My employees already make an hour with tips. A new bill will force me to fire them all“: Want to earn a living wage in Alabama? Try working in a full-service restaurant. I’m a restaurant franchisee with nine locations throughout Alabama and Florida, and my tipped employees report an hourly wage between and , inclusive of base pay and gratuities. That’s more than the living wage for a single adult in Alabama, as calculated by the Massachusetts Institute of Technology. Unfortunately, some well-meaning members of Congress are

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Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’

Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’ - Publications – AEI

From an op-ed in today’s Wall Street Journal by Alabama-based restaurant owner Larry Fox titled “The $15 Minimum Wage Will Put Me Out of Business: My employees already make $22 an hour with tips. A new bill will force me to fire them all“:

Want to earn a living wage in Alabama? Try working in a full-service restaurant. I’m a restaurant franchisee with nine locations throughout Alabama and Florida, and my tipped employees report an hourly wage between $18 and $28, inclusive of base pay and gratuities. That’s more than the living wage for a single adult in Alabama, as calculated by the Massachusetts Institute of Technology.

Unfortunately, some well-meaning members of Congress are trying to pass a minimum-wage bill that would destroy my business model. Tipped employees are currently paid a lower base wage and are legally guaranteed to earn at least the minimum wage with tips included. My employees average roughly three times the relevant minimum wage when tips are accounted for.

But Rep. Terri Sewell (D., Ala.) has introduced one of several bills that would upend this system. Under her bill, employees would have to earn at least the minimum wage before tips. A handful of states—Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington—have adopted this approach. Were it to take effect in Alabama, it would represent as much as a 600% increase in the hourly cost of paying a tipped employee to work for me. In pursuit of a “living wage,” Ms. Sewell could cause my employees to lose their incomes entirely by forcing me to shut down my business.

Despite the widespread popularity of restaurants the public has surprisingly little understanding of how the business works. At my restaurants we sell a six-piece plate of chicken wings for $10. Customers typically assume we keep $6 or $7 in profit from that sale. In fact, our profit on that six-piece is closer to 50 cents, after accounting for food and labor costs, rent, overhead and other expenses.

My employees actually make more money from a sale than I do. I earn 5% on each customer check, while they earn 20% or more of the check in tip income. If that doesn’t seem shocking to you, consider this: labor costs are about a third of a restaurant’s budget. Now, imagine if a household expense that takes up a third of your income—maybe a mortgage payment or rent—increased by 600%. You’d probably be panicking. So am I.

MP: To see what might happen to restaurant jobs in states like Alabama if the minimum wage increases to $15 an hour and if the tip credit is eliminated, the chart above shows shows some of the fallout in New York City for jobs at full-service restaurants. The significant loss of food jobs in the Big Apple over the last few years are partly at least, if not mostly, a direct result of the negative impact of the $15 an hour minimum wage law that went into effect on December 31, 2018. The increase to $15 an hour at the end of last year followed three annual $2 an hour increases starting at the end of 2016 that increased the city’s minimum wage by 67% from $9 an hour in 2016 to $15 an hour at the end of last year.

Based on employment data released yesterday by the Bureau of Labor Statistics, jobs at New York City full-service restaurants fell by 4,000 from last May, or by 11 jobs lost every day over the last year. The job losses in New York City over the last few years have been much worse than during the Great Recession, and even slightly worse than the loss of food service jobs during the 2001 recession and the devastating effects of the 9/11 terrorist attacks that year. New York City could be the “canary in the coal mine” that predicts what happens when politicians force significantly higher labor costs on restaurant owners that put restaurant jobs at great risk as well as jeopardizing the financial profitability and long term viability of restaurants.

We hear a lot about the living wages of unskilled, low skilled and limit-experienced workers, but what about the “living profitability” of small business owners and restaurateurs like Mr. Fox who may not survive a 600% increase in their labor costs?

Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’
Mark Perry

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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