Jan. 11, 2016

Restaurant industry unharmed by modest minimum wage hikes

Michael Lynn
Lynn
Christopher Boone
Boone

In the past 20 years, whenever federal, state or local laws have modestly raised minimum wages, the U.S. restaurant industry has opposed them. Restaurateurs say higher wages force them to cut staff and jack up prices to offset reduced revenue, which in turn makes their customers unhappy, slashes profits and even puts their restaurants’ survival in jeopardy.

Now a new study finds that modest increases to the minimum wage have not had those negative effects. The boosts have had neither a large nor reliable impact on the number of restaurants or employees, even when restaurants have raised prices directly in response to wages increases, the authors said.

“There is no doubt that restaurateurs face higher expenses as a result of minimum wage increases, but if restaurants are raising prices to compensate, those increases do not appear to decrease demand or profitability enough to sizably or reliably decrease either the number of restaurants or the number of employees,” said co-author Michael Lynn, the Burton M. Sack ’61 Professor in Food and Beverage Management and professor of consumer behavior and marketing at the School of Hotel Administration (SHA). Lynn co-wrote the piece with Christopher Boone ’05, M.S. ’09, assistant professor of employment relations, human resources and law at SHA.

The study, “Have Minimum Wage Increases Hurt the Restaurant Industry? The Evidence Says No!”, appears in SHA’s Center for Hospitality Research Reports.

The research takes a look at the impace of federal and state minimum wage laws, which let employers count part of tipped employees’ (reported) tips toward the minimum wage (called a “tip allocation”), resulting in different minimum wages for tipped and non-tipped workers.

But state tip allocations vary, and some states do not allow any tip allocation at all. So, the effective minimum wages for tipped and non-tipped workers, as well as the differences between tipped and non-tipped minimum wages, differ considerably from state to state. In 2015, for example, the federal minimum wage was $2.13 for tipped workers and $7.25 for non-tipped workers. However, the New York state minimum wage was $7.50 for tipped workers and $8.75 for non-tipped workers, and the California state minimum wage was $9.00 for tipped and non-tipped workers alike.

And changes in state and federal minimum wage laws have affected tipped and non-tipped minimum wages differently. While the federal tipped minimum wage has remained the same since 1991, the federal non-tipped minimum has increased five times since then. Similar differences in changes to the tipped and non-tipped minimum wages have occurred at the state level.

Boone and Lynn used that diversity in minimum wages to study the links between different levels of minimum wage and various employment outcomes. They reviewed studies that looked at how raising the minimum wage affected restaurant workers’ level of employment, work hours and incomes, as well as employment flows, consumer prices and firm profitability and survival. They also analyzed the effects of both types of minimum wages on worker income and employment and the number of restaurants in the United States, using data from the U.S. Department of Labor.

They caution that their conclusions apply only to the mostly modest minimum wage increases implemented between 1995 and 2014. Much larger increases, like the $15 minimum wage recently enacted in Los Angeles, San Francisco and Seattle and contemplated elsewhere (including New York), may have more substantial negative effects on the industry.

“The industry may be justified in opposing immediate, large hikes in the minimum wages, but data do not support opposition to all minimum wage increases,” said Lynn, who paid his way through school by waiting tables and tending bar.

Added Boone, “While we don’t see strong impacts on employment, we do find consistent evidence that raising the minimum wage increases the total earnings of the restaurant workforce. Restaurants are likely to see some benefits as well, since better compensated employees tend to be happier, more productive and less likely to quit their jobs. So we think the restaurant industry should support reasonable increases in the regular and tipped minimum wages.”