Take a TIP Before They Vanish: New Minimum Wage Law

As A.K. mentioned in his earlier post, Seattle bumped up the minimum wage to $15 which has caused quite the firestorm in media.  Washington State previously had one of the highest minimum wages at $9.32/hour, much higher than the federal minimum wage of $7.25 which was last passed in 2009.

One interesting piece of this legislation is that ALL tipped and non-tipped workers will have to be paid $15/hour or more starting in 5 years! Waiters and waitresses, who approximately receive $2-$3/hour and tips to supplement their base minimum wage pay, will be included in the new law.

Minimum wage for tipped employees has been stagnate at  $2.13 since 1991, with federal legislation requiring that employers are supposed to make up the difference if tips do not equate to the legal minimum wage. Some workers will have employers boosting their wages when nights are slow (as required by law), whereas others make well over minimum wage on good nights. President Obama in his plan to change the federal minimum wage to $10.10 by 2015 also pushed for the tipped minimum wage to be 70% of the full wage. Congress has fought this legislation, but that does not mean states, like Washington, have not already started to enact these changes.

This leaves a few questions to ponder: Would people stop tipping with salaried waitresses and waiters? Will the quality of service at a restaurant decrease? Will food prices rise? Here are some potential issues that I see:

 

More Tasks Could be Automated Leading to Job Loss

Tasks like ordering could be automated to I-Pads on each table with a button to press when a server must be present for a specific question.  Bolt Burgers, in Washington D.C., already has a pretty impressive ordering system that is fully automated which allows you to choose from 25 potential toppings. However, automated tasks are also being brought to quality restaurants in Palo Alto, such as Calafia run by Rajat Suri.

“It costs about a dollar a day per table, it can even go lower depending on if you have sponsors involved because all the alcohol companies want to get involved,” Suri says. “For that, they get about $6 a day per tablet in increased sales. That’s extra desserts, appetizers, drinks. They get about another $5 in extra table turns. If you can fit in one more table per night, that’s worth a lot of money. And some restaurants, though not Calafia, get about $4, $5 extra because they choose to save labor.”

This restaurant device, called the Presto, was designed to engage younger generations who desire all things digital. With new minimum wage laws for tipped employees they may become a cheap alternative to hired labor.

presto_615

A Decrease In Hours and Quality of Food Service

Even without automated systems, jobs could be cut and workload increased at restaurants. If servers are still desired by consumers and restaurateurs cannot afford to pay 6 employees all $15/hour then perhaps only 2-3 workers will remain employed. As one restaurateur in Virginia stated, higher wages will “minimize the need for staff”.

With fewer servers, each server will take on more tables and service could slow down. The Boston Globe reports that “diners doled out some $40 billion in gratuities in 2012” which may shrink with a decline in service. Further, customers may not feel as compelled to make up for low wages with an increase in hourly pay to $15/hour.

 

Cost of Food Increases and Restaurant Expansion

As Alan Greenblatt points out, “Consumers can be sensitive to price changes” and when eating out, most meals cost more when they are waited on by servers. Nancy Laird, owner of a high-end restaurant in New Jersey, stated:

“If this minimum wage is raised, we will have to raise prices. We will of course meet some customer resistance and because of customer resistance we will have fewer revenues and thus fewer employees.”

Laird’s explains how a snowball effect that can happen. If consumers stop eating at restaurants due to an increase in prices, restaurants may lower prices to encourage food sales, but supplement the increased costs with lay-offs of servers.

A New Jersey businessman from the same article, whose company owns 40 Applebees and 7 other restaurants, said an increase in tipped server wages would be “devastating” and would force his company to reconsider expanding in New Jersey. “Labor costs are huge dollars to a restaurant operator”.

 

Less “Freebies” for All

In a city like San Francisco, where there is a large restaurant scene, restaurants are choosing to skimp on the extras such as nice tablecloths and bread and butter for consumers. When asked about the new laws increasing wages for servers in San Francisco one restaurateur stated:

“It’s very, very expensive to run any sort of restaurant in San Francisco,” says Patricia Unterman, a longtime restaurateur and food critic in the city. “The cost of doing business here, especially for labor-intensive operations like restaurants, almost doesn’t pencil out.”

There are fewer benefits for servers and employees who receive the increase in wages, too. SeaTac, which is a city in Washington that already has seen the $15/hour wage increase start at the beginning of the year, has employees less than pleased at the new law. Tim Worstall from Forbes writes about a conversation one had with a SeaTac employee:

‘“Are you happy with the $15 wage?” I asked the full-time cleaning lady.

“It sounds good, but it’s not good,” the woman said.

“Why?” I asked.

“I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added.

The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.

What else? I asked.

“I have to pay for parking,” she said.

I then asked the part-time waitress, who was part of the catering staff.

“Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.’

 

Minimum wage laws, especially this particular law designated for servers, may have the right intent—to give workers more money, but in reality there are adverse effects that occur to offset or even outweigh any potential gain. Businesses do not just take money from top management and give it to waitresses and waiters. Instead, changes will occur in terms of employment numbers, quality of service, tips that customers willfully give, prices of food for customers, number of new restaurant job openings and amenities such as free parking or food during shifts. When a new legislation is enacted, the effect usually is less mild than imagined. There is a ripple effect that occurs that can leave workers worse off than the legislation originally intended.

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10 thoughts on “Take a TIP Before They Vanish: New Minimum Wage Law

  1. And the labor force has priced themselves right out of the job market… First the grocery stores and retailers found out they could use self-check-outs and employ maybe 1/3 of the cashiers they used to, and now the first restaurants in my town have started trying out touch-screen menus. 5 of 6 clicks at Jason’s Deli, swipe your card and your food is waiting for you. Touch screens don’t strike, picket, post idiot things on facebook or count towards your obamacare requirements.

    • Alex, I think you bring up a great point. Demanding wages and assuming that the market will reach equilibrium automatically is incorrect. There will be off-setting changes before equilibrium can be reached at a new price floor which is the minimum wage. My article touches upon this with more automation, fewer jobs, slower service and less benefits. Further, as you mentioned, automatic machines lead to less management headaches in most cases.

      A.K., I really liked your comment as well. The living wage or minimum wage concept has GREAT normative appeal… who doesn’t want to help the poor? Except it is not that simple. There are more efficient ways to help the poor that Congressmen, the President and citizens need to consider. Are these restaurant jobs occupations or just that, jobs? Who are the main workers of these jobs? Shouldn’t we address those concerns first and figure out alternative solutions that better get at the route of the problem (income mobility? income inequality?) Further, although this is also controversial, taking from the rich and giving money to the poor would have less labor market consequences (I can explain that in detail, if needed). Rather than trying to prop up low-skilled jobs arbitrarily, the cause of the problem should be examined more thoroughly than trying to come up with a ‘random’ solution.

      • Thanks! The major point that I try to get across to minimum wage proponents is that liquidity isn’t the same thing as wealth, and raising the minimum wage simply further decimalizes the value of an hour’s work at the expense of individuals on a fixed income to the benefit of none, and rather than attempting to force incomes to match the increase in inflation, a better policy would be to increase the value currency by implementing sound monetary policies.

  2. Hi, Alex:

    The concept of a living wage has normative appeal. I take issue with the idea that any job should pay such a wage without reference to any of the underlying reasons why some jobs are not likely to support such a wage. Many advocates of a universal minimum wage high enough for the worker to live independently assume that an entry level position in a low skill industry is supposed to support an adult person living with the full range of household expenses–an assumption I think unwarranted. I understand that many workers who occupy such jobs do so indefinitely, but I am not sure the answer to helping a worker who has professionally stagnated is to prop up the wage that one earns at such a job. These entry-level low-skilled positions should be a point of labor force entry (or supplemental income for those only partially “in the labor force”, e.g., secondary household earner, semi-retired, full-time student, etc.) rather than an ultimate professional destination. As I indicated in my post, there is a rough (and not universal) consensus among economists that minimum wage laws (especially those set well above the market-clearing wage rate) cause unemployment. The empirical debate is far from over though as to the comparative magnitudes of the costs and benefits of these policies.

    I think the other issue here is one of income mobility and the subset of the population which is persistently poor on a generational level. We debate how much income mobility there is in the U.S. and how it compares to similarly situated countries, but it is a fact that there is a subset of the population that persists in poverty (at least poverty by contemporary “advanced economy” terms, if not absolute terms) on a trans-generational level, especially among some ethnic minority groups. The question is what to do about them. What is the best way to help them? Those of us that oppose measures like the minimum wage must be equally vocal and articulate in advocating better ameliorative policies (I hate to use the word “solutions” in this context because it implies that we can declare war on poverty and defeat it once and for all, which I think naive. Was it not Jesus who said “The poor you will always have with you”?). Otherwise, we are rightly written off as simply heartless naysayers.

    Danielle, this was your comment. What say you?

    A.K.

    • I think part of the problems of today’s concept of a living wage is that so much of what is considered necessity today is, in fact, luxury. In fact a recent news article pointed out even with a $15 minimum wage that many luxuries, such as theatre tickets, gourmet coffees and electronics would still be out of reach in many US cities. Which brings us to the question: is it the responsibilities of employers to see that their workers are able to be entertained, drink lattes, have high-speed internet and mobile devices?

      A society of instant gratification has evolved into one in which people expect to land in the middle of the payscale on day one so that they will have access to all that the commercial world has to offer. In the end, this makes it more difficult for anyone to find that entry-level work in any field and makes them less inclined to better themselves when they already have all the diversions they could want at their finger-tips.

      As for the war on poverty, I’ve read that if all of the money each year spent on the war on poverty were simply handed out to people, everyone in the country would be raised above the poverty-line. Of course that would lead to the same cost inflation that currently affects higher education every time the government at any level introduces new scholarship programs.

      Anyway, awhile back I wrote a parable of sorts to explain the mechanics of the Minimum Wage and what it means to the value of the dollar which you may find amusing. http://cirsova.wordpress.com/2013/12/16/gp-xp-and-the-minimum-wage/

      • You bring up all valid points. What $15/hr ‘minimum wage’ can buy in goods is considered a luxury in many countries. You are also correct that if we want to help the poor, taking money from the rich and handing it to the poor is more efficient than programs that interfere with competitive markets. I mentioned this a bit in the comment to A.K… but perhaps, I should post more on what this would entail.

        I checked out your blog and I like the analogy you make. Essentially we are inflating the price (or in your example, the value in minutes each $1 of labor is worth). Although, I would add that the real losers are ALL consumers. Here’s why: if minimum wage workers are making $15 for the same amount of work (McDonald’s employees), those previously making $15/hr for $15/hr of work (let’s say construction workers, for example)will demand hire wages. After all, they previously were working harder to deserve that money and find it unfair to work harder and receive the same amount of money as a McDonald’s employee. Construction workers will demand a wage or just choose to work for McDonald’s since it is less physically demanding. McDonald’s will then hire the more skilled, more productive employees from the construction jobs and let go what would have been the min. wage workers. Minimum wage workers lose out in this case. Further, we can assume that construction firms will want to stay in business and will start paying their employees $20/hr. However, how do they make up for their cost increase? They increase the price of construction jobs to consumers—now to get a new roof it costs $12,000 rather than $11,000, let’s say. The homeowner now has to dish out more money and has noticed that prices have increased not just in construction projects, but at grocery stores as well. The homeowner, who works at a bank, demands more money to maintain the same quality of living as before, since goods now cost more…. etc. etc. This is a ripple effect that occurs and it ends up hurting ALL consumers and businessowners. This inflationary outcome that happens when wages are raised does hurt fixed-income recipients, as well as savers, as you mentioned. However, it will also hurt all consumers or the minimum wage workers it was intended to help!

      • In my mind, one of the only solutions to stop the dollar from spiraling completely out of control is to:

        1. First stop printing money, physically and digitally, for a period of time; there is already too much liquidity in the US economy for a healthy currency. That they even had to debase copper coinage is indicative of this.
        2. Rein in public spending, as the debt is one of the biggest drivers wanton creation of new liquidity.
        3. As a safeguard, reintroduce silver coinage, and, after a grace period, phase out base-metal coinage as legal tender. This last step would have to come much later, after the currency has stabilized significantly, but would act as a safeguard against future inflation. Prior to the 20th century debasement of US currency, the US dollar actually appreciated in value and there was no inflation.

  3. While there is no consensus on the subject, most work has found minimal employment losses to minimum wage increases. However, a 67% increase would make these minimal losses larger, simply for the magnitude of the change.

    We know that the 90-50 wage gap is increasing, while the 50-10 wage gap is compressing. We know that technological change is rapidly phasing out the median job; larger and larger minimum wages will only accelerate this trend. So, arguments that the minimum wage will lead to technological employment loss simply mean, in my mind, that we are accelerating a natural trend (somewhat similar to “global warming”, and an acceleration of a natural trend).

    Conversely, we know that the minimum wage does not effectively target the truly poor; those who suffer from low inter-generational mobility. There are 2 ways to effectively target them:

    1. EITC; if we are concerned about people staying out of the labor force, this is the way to go.

    2. Guaranteed minimum income; if we aren’t concerned about the extensive margin of the labor market, this is effective. You can operate it as part of an EITC or a more traditional negative income tax. It’s able to be targeted much more broadly AND can be conditioned on factors that make it much more appealing to achieve what we want.

    There is a significant problem in the labor market; residual wage and income inequality (inequality based on observables) is on an upward trend. How much is due to ability, how much is due to failing labor market institutions, and how much is due to inequality of opportunity is debatable. Coupled with decades-long stagnation of the median income, and you have a problem in a service-oriented economy; families can’t afford necessities (transportation, child care costs, food). It’s going to get a hell of a lot worse before it gets better.

    • Also, I forgot, it depends on the structure of the labor market where the minimum wage is enacted that will determine the magnitude of employment losses.

      In labor markets where firms have market power (more monopsony than competition), the dis-employment effects of minimum wages will be small and, in some cases, a minimum wage can RAISE employment levels.

      Closer to competition, and you get the traditional Principles framework, where disemployment effects are much larger.

  4. Pingback: Wage Rate Regulation at Different Scales | Economics & Institutions

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