Minimum Wage Increases May Not Be As Great As We're Led to Think

by Dylan Givens

According to the National Restaurant Association, the restaurant business is the nation’s second-largest private-sector employer, and holds a larger amount of minimum-wage workers than any industry. Additionally, half of all restaurants shut down within their first year and food prices are frequently unstable. It’s safe to say the industry is

delicate, but how will San Francisco’s minimum wage increase to $15 impact on its city’s restaurants?

Melanie Lazaro, a senior at the University of San Francisco and employee at Benihana recently spoke with me about the fear she has of losing her job due the upcoming increase. “Our manager just let go of like three people last week, so I’m kind of freaking out. I didn’t even think wage increases could affect us since Benihana’s so popular you know?” She continues, “Something must be going on if they’re getting rid of people though. Hopefully it all works out… for me at least.”.

Source: U.S. Department of Labor

Since 2009, the federal minimum wage has been set at a rate that allows full-time employees to live roughly $3,000 under the federal poverty line. While congressional action hasn’t been taken yet, more than half of the country has minimum wages exceeding the federal level. Recent hikes have proven to be tricky however, as many worry an increase in minimum wages means the closure of many restaurants and small businesses, as well as an increase in unemployment. “The classic concern is this: restaurant owners will have to spend more on labor, decreasing their profits and putting their business in jeopardy. In order to survive, they will be forced to either lay off workers — decreasing jobs — or increase their menu prices” (American Restaurant Supply).

When asked about the effect of wage increases on his restaurants, Eric Leitstein, CEO & founder of OMG Hospitality Group told me there aren’t any, “drastic changes, at least not for me.” Leitstein is the owner of multiple San Diego based restaurants and bars including Union Kitchen & Tap, Backyard, and Pacific Beach Alehouse.

Source: California Beaches

“Since my company is a little bigger I’m not affected as much as others when wages go up… The main change for me usually revolves around labor costs or menu prices. I had to increase the prices on my menu a couple times, which usually decreases the gratuity people give, but beyond that I’m able to manage.” Lower gratuities may not affect him, but they definitely affect his employees. He continues to note that “Even though [he pays his] a little bit above minimum wage, a lot of them still rely on tips which is the case at almost any restaurant. You can’t really live on minimum wage alone in our area… Even if you had two jobs, you’d probably have to work close to seven days a week.”

Though Leitstein has been fortunate enough to avoid minimum wage’s impact, a wage hike always hurts someone, somewhere. A recent study by Dara Lee Luca at Mathematica Policy Research, and Michael Luca at Harvard Business School helps clarify who. It shows that minimum wage does in fact cause restaurants to close, however the restaurants that close are typically those consumers seem to like less than others beforehand. The study analyzes 10 years of rating and closure data from over 30,000 San Francisco Bay Area restaurants, ultimately finding that “a 10% increase in minimum wage corresponds to a roughly 7% increase in restaurant shut downs” (American Restaurant Supply).

By comparing Yelp closure rates to user ratings, the Lucas’ data also finds that for every dollar minimum wage increases, the chances of a 3.5-star restaurant closing rises by 14 percent. The Lucas’ study notes that “The impact of minimum wage depends on whether a restaurant is already close to the margin of exit,” which most with lower Yelp reviews already are. These restaurants are, “disproportionately driven out of business by increases to the minimum wage,” as was the case with North Beach, San Francisco favorite — Panta Rei.

The Heritage Foundation’s James Sherk writes, “While raising the minimum wage sounds compassionate, it will probably hurt the very workers its advocates want to help.” The mention that a wage increase could potentially kill jobs is very dangerous for advocates; Sadly for them, this loss is a reality.

In a panel discussion with former Obama advisor Alan Krueger, the chief economist for the Service Employees International Union, Mark Levinson, asks what the criterion for setting minimum wage should be — one that produces the least amount of job loss, or one that maintains the minimum standard of living in the U.S. "To me," Levinson said, "the best setting would be somewhere in the middle, but when it comes down to it minimum wages should be made according to livable needs. Though minimum wage does reduce poverty, it only produces an income gain of 2.8% to those below the poverty line. If the current ‘no job loss’ system still places full-time workers $3,000 beneath the poverty line, there’s no point in focusing our attention on it."

Washington Post columnist, Lydia Depillis, sites the idea that complaining about job losses are hypocritical, seeing that our country tolerated them when we outlawed child labor, and continues to tolerate them when negotiating trade deals. Economists figure both “might weaken employment in some industries, while benefiting the economy overall.

“Why shouldn’t we in fact accept job loss? What’s so bad about getting rid of crappy jobs, forcing employers to upgrade, and have a serious program to compensate anyone who is in the slightest way harmed by that?”

-New School Economist, David Howell

New School economist, David Howell poses the question, “Why shouldn’t we in fact accept job loss?” As I further my research, I'm starting to wonder the same thing. If it means better living conditions for those that are able to find work, why wouldn’t we try a system that focuses less on job-loss and more on livable incomes? Powell's idea for a program that compensates those harmed resembles the Trade Adjustment Assistance Program, which assists people who’ve lost their jobs due to international trade deals, “the savings created by all the welfare benefits that won’t have to be doled out to people who are now making more money could be re-invested in vocational training, subsidized jobs, and direct income supports for those who can’t find work.”

After doing doing a little math, I found that a small increase in federal minimum wages from $7.25 to around $9 would be enough to at least place full-time employees above the poverty line. That still doesn’t account for changes in inflation however. Michael Levinson, the chief economist for the Service Employees International Union, argues that “If nobody knows what will happen if wages rise above where they’ve been historically, then it’s surely worth finding out — especially if it would help millions of Americans make a living in the process.” Like everything in politics, it’s simple, but it’s not simple.

For more on minimum wage's livability, check out "What Life Is Like on $7.25 Per Hour" by L.A. Times writer, Jenny Jarvie.