California businesses at the breaking point due to minimum wage hikes
Author: Michael Saltsman
Publication Date: December 2019
Newspaper: Orange County Register
California’s minimum wage rises to $13 an hour on Jan. 1, and a number of its localities now have wage rates above $15 an hour.
Labor groups promised that $15 would be an economic boon for the state, while then-Gov. Jerry Brown worried that “economically, the minimum wage may not make sense.” The state’s experience with rapidly rising wage rates show the former governor was right to be concerned.
Consider the impact on the state’s full-service restaurant industry, which faces a double-whammy when the wage floor rises. California is one of a handful of states that doesn’t count tips towards an employee’s income; even if a server earns $300 on a Friday night, an effective wage rate of $60 an hour, his employer can’t count one cent of it towards the minimum wage requirement.
Restaurant owners are forced to give a raise to top-earning employees who take home far more than the minimum, with few options to offset the cost.
Paul Fraga, who announced he’s closing Sacramento diner Original Perry’s after more than 50 years in business, explained the dynamic. “For every dollar that [minimum wage] goes up, it costs me around $40,000…I can’t raise menu prices fast enough to compensate [for] that.” He added: “If they could sign a waiver, 99 percent of my servers would be against a minimum wage increase…”
Fraga isn’t alone in feeling the pinch from a rising minimum wage. Another affordably-priced option in town, the beloved Greek restaurant Opa! Opa!, announced that after 14 years in business it would be shuttering its doors. The owner said that since he first opened, prices have increased over 50 percent as a result of burdensome mandates placed on him by the state. Now, fourteen employees are left jobless right before the holidays.
These aren’t just anecdotes. Census Bureau data suggests the state’s restaurant owners have reacted to scaled-up wage costs by scaling back on hiring. In Los Angeles County, for instance, year-over-year full-service employment growth topped seven percent as recently as 2012; it’s fallen every year since then, and dipped below one percent in 2018. In Orange County, growth last year was near-zero.
A similar trend is seen statewide, with sub-one percent growth replacing five percent growth from as recently as 2013. In San Francisco County, stagnant growth turned negative last year, with the city losing nearly 1,000 restaurant jobs. A study published by Harvard University Business School and Mathematica examined the impacts of wage increases in the San Francisco Bay Area. The results were startling. The research found that each one dollar increase to the minimum wage resulted in a 14 percent increase in the likelihood that a 3.5 star (the median rating) restaurant would be forced to close.
Another study, recently released by my organization, found that in states like California with a high minimum wage for tipped employees, full-service restaurants hired 18 percent fewer tipped workers as a share of the workforce. In practice, that means full-service restaurants embrace self-service alternatives where the customer provides much of the service themselves. (The New York Times chronicled a trend in San Francisco of fine-dining restaurants adopting elements of fast-food style service models.)
Will California legislators wise up? Don’t hold your breath.
The state’s Future of Work Commission, which was assembled by the governor to examine future workplace challenges for employers and employees, is stacked with some of the very parties responsible for those challenges. SEIU president Mary Kay Henry, who co-chairs the governor’s commission, has overseen more than $100 million in spending on the Fight for $15, a policy that has forced countless employers to replace human employees with automated alternatives. Another commission member, labor activist Saru Jayaraman, has encouraged other states to follow California’s failed payment model for tipped employees. She’s been opposed in that goal by thousand of tipped servers, who understand the consequences for their own bottom line should their states make California’s mistake.
Gov. Newsom boasts that California is setting an example for the rest of the country to follow. He’s right; the state is showing the rest of the country why a $15 minimum wage is a bad idea.