The Unappetizing Effect of Minimum-Wage Hikes
Author: Michael Saltsman
Publication Date: March 2015
Newspaper: Wall Street Journal
Topics: Minimum Wage
Last fall, voters in the Bay Area cities of San Francisco and Oakland followed Seattle’s lead and approved costly new minimum-wage mandates ($15 an hour and $12.25 an hour, respectively) for most businesses in the city boundaries. Now the bills have begun arriving, and some businesses can’t pay them.
The consequences of minimum-wage increases, at the historical levels studied in the U.S., are well known to labor economists. A summary of the research published last year by the Institute for the Study of Labor, and authored by University of California-Irvine economist David Neumark, found that each 10% hike in the minimum wage on the state and federal level has caused a 1% to 2% drop in youth employment. Similarly, researchers at the Federal Reserve Bank of Chicago found an increase in fast-food prices associated with the same wage change.
Given the scope and schedule of these new minimum-wage increases, the impact on prices and employment may be even steeper this time. The current federal minimum wage is $7.25, half of what San Francisco’s wage floor will be set at by 2018 after a series of increases that begin in May. Nationally, Congress phased in the last 40% increase to $7.25 over a three-year period; in Oakland, an almost-identical 36% increase happened overnight on March 1.
Businesses’ first line of defense against these labor-cost increases is an offsetting increase in prices. The magnitude is staggering: In Oakland, local restaurants are raising prices by as much as 20%, with the San Francisco Chronicle reporting that “some of the city’s top restaurateurs fear they will lose customers to higher prices.” Thanks to a quirk in California law that prohibits full-service restaurants from counting tips as income, other operators—who were forced to give their best-paid employees a raise—are rethinking their business model by eliminating tips as they raise prices.
Ironically, this change in compensation practices has reduced the take-home pay for some of the employees it was supposed to help: At the Oakland restaurant Homestead, the East Bay Express reported that servers are taking “a substantial pay cut,” earning a flat wage of $18 to $24 an hour and no tips instead of the $35 to $55 an hour they were accustomed to earning when tips were included.
Though higher prices are a risk that some businesses were able to take, others haven’t had the option. The San Francisco retailer Borderlands Books made national news in February when the owner announced that the city’s $15 minimum wage would put him out of business, in part because the prices of his products were already printed on the covers. (A unique customer fundraiser gave Borderlands a stay of execution until at least March of 2016.)
One block away from Borderlands, a fine-dining establishment called The Abbot’s Cellar—twice selected as one of the city’s top-100 restaurants—wasn’t so lucky. The forthcoming $15 minimum wage, combined with a series of factors like the city’s soaring rents, put the business over the edge and compelled its owners to close. One of the partners told me the restaurant had no ability to absorb the added cost, and neither a miraculous increase in sales volume nor higher prices were viable options.
These aren’t isolated anecdotes. In the city’s popular SoMa neighborhood, a vegetarian diner called The Source closed in January, again citing the higher minimum wage as a factor. Back across the Bay in Oakland, the Chronicle reported that some of the city’s businesses have been similarly affected. According to a board member of the Oakland Chinatown Chamber of Commerce, 10 restaurants or grocery stores opted to permanently close this year alone as a partial consequence of the wage hike. Even the Salvation Army’s child-care facility is “scrambling to find ways to keep the doors open” in response to labor cost increases, according to the organization’s county coordinator.
Faced with convincing evidence of the policy’s failures, you’d think advocates would be chastened or apologetic. You’d be wrong: Ken Jacobs, who runs the University of California-Berkeley’s labor-backed Center for Labor Research and Education, chalked up possible consequences of new mandates to labor-market “churn.” Research that Mr. Jacobs co-authored predicted that the Bay Area hikes would be mostly cost-free. At a forum earlier this month where dozens of Oakland business owners fretted about their viability, representatives of Lift Up Oakland—the labor union-backed coalition that advocated for the wage hike—were not in attendance.
It’s probably too late to save other Oakland and San Francisco businesses. But it’s not too late for cities like New York and Los Angeles to heed the evidence before following their footsteps.