The Dems’ 220 percent mistake

Original Article:

  • Author: Michael Saltsman

  • Publication Date: August 2012

  • Newspaper: Pittsburgh Tribune-Review

  • Topics: Minimum Wage

President Obama and Mitt Romney keep sparring over who has the best plan to stimulate the economy. Now, more than 100 House Democrats have offered a plan of their own: Raise the federal minimum wage by 35 percent and raise the minimum wage for employees who earn tip income (e.g. restaurant servers) by 220 percent.

Those familiar with the research on the minimum wage would chuckle at the concept that raising it — a policy proven to reduce employment — is an effective way to jump-start the economy. But the most harmful part of this proposal is the change to the tipped wage, which would cause a devastating loss of hours and employment for tipped employees and hasten their employers’ move toward self-service alternatives.

The current federal minimum wage for employees who earn additional tip income is $2.13 an hour; in Pennsylvania, it’s set a bit higher at $2.83. That doesn’t mean these employees earn less than the minimum wage, however — their hourly wage with tips included must still equal at least the full federal minimum wage of $7.25. (The difference between the two is called the tip credit.)

Fortunately for tipped employees, their additional earnings typically put them far above the minimum. According to Census Bureau data, the average wage of a tipped restaurant employee is $11.82 an hour, more than 60 percent higher than the federal minimum and the near-equivalent of a “living wage” for two adults in the city of Pittsburgh. Top earners bring in $24 an hour or higher in tip income.

According to a study from economists David Macpherson (Trinity University) and William Even (Miami University), each 10 percent increase in the tipped minimum wage over the last 20 years has reduced tipped employee hours by more than 5 percent. In Pennsylvania, they estimate that this latest piece of legislation would eliminate the equivalent of 20,214 full-time tipped jobs.

The economics aren’t hard to understand: A typical full-service restaurant has a profit margin of about 3 percent. That means it keeps 3 cents of each dollar in revenue. The rest goes to cover expenses like food and labor costs.

When those labor costs rise as a result of a government mandate and can’t be passed on to price-sensitive customers, the business owner is forced to do more with less — that is, less customer service.

Labor-backed activist groups like the National Employment Law Project (NELP) have done their best to obscure these difficult business realities, claiming a majority of lower-wage employees are employed by big, profitable corporations that can afford the 220 percent wage hike. What the NELP report omits is that many of the brands they hold up for scorn — like IHOP and Denny’s — are operated almost entirely by franchisees. The profits and compensation practices of the parent company have nothing to do with those of a small franchisee who owns one or two restaurants.

If House Democrats have their way on the tipped minimum wage, some employers will embrace the “service charge” compensation model of their Western European counterparts; others will move further toward pay-at-the-table technology. But this much is certain: Highly-paid tipped employment will be a thing of the past.