An Unproductive Argument for Raising the Minimum Wage

Does a bad idea become a good one when you pair it with a fancy chart? The labor-backed Economic Policy Institute (EcPI) seems to think so. Recently, it rehashed the discredited idea of a minimum wage tied to economy-wide productivity, complete with a fancy chart to make the concept seem rational.  But it’s a comparison that makes zero economic sense, and only demonstrates how far labor-backed groups like EcPI will go in their quest to make new labor-cost mandates seem like a good thing.

Consider the red line in the chart below, which tracks gains in economic productivity over the last 20 years. This includes dramatic gains in technology-related industries like computers, software design, and telecommunications. (Think of the computer or cell phone you used 15 years ago versus the one you use today.) But the chart also shows that the productivity gains in an industry that actually hires people at the minimum wage (e.g. the food service industry) look far different. On net, productivity has increased just seven percent in the industry over the last 20 years. It’s not surprising: You can only bus a table, cook a hamburger, or serve a meal so fast.

Productivity Comparison Graph

What happens when mandated wages outstrip the value that  employees provide? One option is to increase prices. But especially in a tight economy, higher prices can mean lower sales. Instead, employers have to provide the same product in a less costly manner—in other words, with less service. At a restaurant, that might mean your server busses your table instead of a bus boy, or it could mean placing your order via a touchscreen computer rather than with a person.

The food industry will adjust to higher mandated labor costs if forced. But those adjustments mean fewer jobs for the very people earning an entry-level wage. To learn more about the flaws with linking the minimum wage to productivity or inflation, click here to read a recent Wall Street Journal op-ed. 

Newsflash: Entry-Level Jobs pay Entry-Level Wages

In conjunction with recent protests for a $15 minimum wage in the fast food industry, activist groups blogged and tweeted that “7 out of the top 10 lowest paying jobs” are in the food and hospitality industry. It’s far less shocking than it sounds.

Census Bureau data show that this industry is the largest employer of entry-level employees (defined as 16-24 year-olds without a high school diploma). One-third of the country’s entry-level employees receive their paycheck from a food or hospitality employer—no other industry comes close. Regarding restaurants specifically—which were the subject of so much ire in the weeks’ protests–five of the ten most popular entry-level occupations are food-service jobs.

130411_MinWage_TopTenEntryLevelJobs_2 (4)

Think of it this way: What if someone told you that the bulk of the country’s lower-paying jobs are concentrated in the same industry that the bulk of Americans receive early work experience? You’d probably say, “Duh!” These employees start at the bottom of the wage scale because they’re starting at the bottom of the career ladder. But they’re not stuck there: Two-thirds receive a raise in 1-12 months on the job.

Of course, you need job experience to receive a raise, and you can’t get experience without a job. Yet that’s exactly what will happen if the activists who misuse this information get their way on a $15 minimum wage.

Celebrity Chef: Keep Restaurant Labor Costs in Check, or Fail

In an episode of the Food Network’s TV show “Restaurant Impossible,” celebrity chef Robert Irvine visits a failing Mexican restaurant in New Hampshire. Irvine’s task is to advise the owners on how to better manage their restaurant to prevent it from going out of business. Upon inspection of the restaurant’s books, Irvine informed the owners that they “employ too many people who work too many hours” and there is “no way [the owners] could ever make a profit.”

It’s a concern not limited to this one restaurant. Labor costs consume roughly one-third of each sales dollar at restaurants. After accounting for other expenses, they’re typically left with three cents in profit per each sales dollar. Even a small fluctuation in labor costs can have a dramatic effect on a restaurant’s profitability—and thus its ability to expand, hire more employees, or even keep the employees it currently has.

It’s a lesson our elected representatives in Washington and elsewhere would do well to remember. Unfortunately, Irvine has a much better grasp on this simple business concept than some legislators, who seem to think that the restaurant industry can absorb as much as a 240 percent increase in the base wage paid to tipped employees (who already make an average of $13 an hour with tip income included).

Lawmakers who implement such minimum wage hikes force their hometown restaurants to either raise prices, or – if higher prices will mean decreased sales – provide the same product with less service.

As Irvine and his guests would surely understand, running a restaurant is hard enough as it is without contending with onerous government wage mandates.

Study Finds Reducing Tip Credits Means Fewer Hours for Tipped Employees

This study, from economists at Miami and Trinity Universities, uses two different government datasets to examine the impact of states reducing or eliminating their tip credit—a part of labor law that allows tipped employees to be paid a lower cash wage as long as they earn at least the minimum when tips are included.  Restaurants, which only keep about 3 cents in profit for each dollar in revenue, are faced with difficult choices when labor cost rises and the increases can’t be passed on to customers averse to higher prices. The authors find that each 10 percent increase in the base wage a tipped employee must be paid reduces their hours worked by about five percent, as restaurants either reduce the number of servers per shift or move toward customer self-service (i.e. technology that lets you pay at the table).

Read More: Tip Credits and Employment in the U.S Restaurant Industry