California’s cautionary tale for New York restaurants
Author: Michael Saltsman
Publication Date: February 2018
Newspaper: Crain's New York Business
Topics: Living Wage
A proposal from Gov. Andrew Cuomo to eliminate New York’s tip credit has worried restaurateurs, who are already reeling from recent wage hikes. Cuomo counsel Alphonso David recently dismissed these concerns by pointing west. “California, as an example, does not have a tipped wage, and the sky didn’t fall,” he said at a Crain’s forum.
David might want to take a closer look at the data. For many California restaurants and their employees, the sky has indeed fallen.
For those unacquainted with restaurant jargon, here’s a primer. In most states, wait staff can reach the minimum wage through a combination of tips and a lower base wage paid by the employer. If the two income sources don’t equal at least the legal minimum, employers must make up the difference.
Census data suggest this isn’t a problem. Tipped restaurant servers and bartenders report average earnings of $17.24 an hour statewide and closer to $20 in New York City. (A New York City Hospitality Alliance survey put the figure closer to $25.) The poverty rate for tipped restaurant employees in New York is roughly 2 percentage points lower than for other nonmanagerial restaurant jobs.
California is an exception: It doesn’t count tips toward its minimum wage, which is at or near $15 an hour, depending on the locality. This is problematic for full-service restaurants with profit margins in the low single digits. As the minimum wage rises, they must give raises to tipped employees who already earn far more than the minimum.
To absorb this cost, they raise prices or trim staff. In 2016 the San Francisco Chronicle identified labor costs as the biggest reason it was so expensive to dine out in that city. But not all businesses can offset their costs through higher prices. The most recent evidence on this point comes from economists at Harvard Business School and Mathematica Policy Research using data from Yelp. In San Francisco each $1 increase in the minimum wage was found to increase the rate of closure for median-rated (3.5-star) restaurants by 14%. That was consistent with a national 2014 study in the Southern Economic Journal linking a rising tipped minimum wage to a decline in restaurant employment.
These consequences have also hit home here, where Cuomo engineered a significant increase in the state’s tipped wage—starting with a 50% jump at the end of 2015. Census employment data from 2016 is now available, and it’s not pretty. New York’s full-service restaurant employment growth, which for years averaged 4%, fell to 1.3% in 2016, when the state lost 273 full-service restaurants. The city’s usual restaurant employment growth of 6% to 7% was cut to barely 1%. (Stories documenting this can be found at facesof15.com.)
Some restaurateurs have responded with no-tipping models, where higher menu prices replace tips to fund a higher flat wage for servers. Not surprisingly many servers hate being turned from highly tipped professionals into minimum-wage employees. Famed restaurateur Danny Meyer reported losing up to 40% of his staff upon adopting a no-tipping policy.
New York’s recent decisions on wage hikes were based on political calculations, not economic ones. If the administration takes an honest look at the data, it will see that California’s experience—not to mention New York’s—does not bode well for the governor’s tip-credit proposal.