While the federal minimum wage has not changed in six years, dozens of states have hiked the base pay above that $7.25 an hour level, drawing opposition from industry groups including the National Restaurant Association (NRA), which argues that increased labor costs result in job reductions, price hikes or both.
“Many restaurateurs would be forced to limit hiring, increase prices, cut employee hours or implement a combination of all three to pay for the wage increase,” the association states in an issue brief on its website.
But that argument is refuted in research released this week by the Center for Hospitality Research at Cornell University’s School of Hotel Administration (SHA), which found that federal and state minimum wage increases over the past 20 years have not resulted in fewer restaurants or lower employment.
“We evaluated the effects of minimum wage increases for both regular and tipped restaurant employees, and we did this for both full-service and limited-service restaurants,” said Michael Lynn, a food and beverage management professor at SHA. “We recognize that wage increases usually require restaurants to increase their prices or trim their service, but we could not find any consistent effect on overall industry employment or on the number of restaurants operating.”
Twenty states hiked their minimum wage at the start of the year, and more will be making the move in 2016. The federal minimum wage for eligible tipped workers is $2.13, unchanged since 1991. In New York, the minimum wage for tipped restaurant workers is rising 50 percent, to $7.50 from $5 an hour on Dec. 31. Minimum hourly pay in California is $9 for both tipped and non-tipped workers, and is slated to rise to 10 bucks in 2016.
The movement in many states to raise the minimum wage was cited as a major factor for Joe’s Crab Shack, a national chain, for doing away with gratuities at 18 of its more than 130 restaurants in 30 states in August, with the company paying servers, hosts and bartenders a higher, fixed hourly wages.
“The no-tipping service model gets us above the fray with regards to the increased minimum wage conversations that seemed to be happening all over the country,” Ray Blanchette, CEO of Ignite Restaurants (IRG), which runs Joe’s Crab Shack and Brick House Tavern & Tap, recently told analysts on an earnings call. “This gets us way out in front of it.”
While minimum-wage hikes “almost certainly necessitate changes in restaurant prices or operations, those changes do not appear to dramatically affect overall demand or industry size,” the Cornell researchers wrote in their report. “Further, while there is strong evidence that increases in the minimum wage reduce turnover, and good reason to believe that it may increase employee productivity as well.”
A Joe’s Crab Shack restaurant in Indianapolis illustrates the point. The company eliminated tips, increased menu prices about 12 percent and hiked wages for servers, who now make about $14 an hour. The result: “Overall, we’re seeing better guest traffic, sales, better retention,” David Catalano, chief operating officer at Ignite Restaurants, told CBS MoneyWatch in November.
“Most of the state wage increases are being phased in over time, so I’d expect the impact to be similar to what we’ve seen in the past: no big effects on employment, along with a clear increase in workers’ total earnings,” said Christopher Boone, an assistant professor at SHA, in a news release. “But these results don’t tell us what the impact of a sudden large increase would be.”