Will Minimum Wage Hikes Kill Restaurant Jobs?
Chair, Franchise & Distribution Practice Group
by Barry Kurtz
818-907-3006
In 1981 “Video Killed the Radio Star” was the first music video MTV broadcast in the United States. The song was actually written a couple of years earlier, appeared on an album entitled The Age of Plastic by the Buggles, and raised questions regarding new technological advances in the music business.
Which brings us to the point:
Restaurant owners may be blindly reaching out to embrace technology, but at a high cost to humans, most notably their employees. Unfortunately, this move to team up with new tech isn’t entirely because of choice.
Rise of Restaurant Machines
On July 1st, employers in Los Angeles and in many other metro areas across the nation are required to raise minimum wages. The mandate is the result of numerous campaigns initiated by labor unions to improve the lives of low-wage workers, by raising hourly rates to $15 per hour.
The restaurant industry is struggling with such a drastic increase, even though the daunting $15 pill is mostly being swallowed in smaller bites – gradual increases over a period of five years in Los Angeles County, for example. So what’s the industry’s survival instinct response?
Many are being forced to cannibalize their work forces, by investing in machines to replace human workers.
Former McDonald’s CEO Ed Rensi described the situation in a guest column on restaurant tech published in Forbes Magazine last November:
In 2013, when the Fight for $15 was still in its growth stage, I and others warned that union demands for a much higher minimum wage would force businesses with small profit margins to replace full-service employees with costly investments in self-service alternatives. At the time, labor groups accused business owners of crying wolf. It turns out the wolf was real.
Economists at the University of Washington also find the minimum wage increase to be detrimental – they are claiming low-wage earners have actually lost $125 per month because of the city’s minimum wage hike. (Study published by the National Bureau of Economic Research – NBER Working Paper No. 23432.) The economists concluded Seattle’s wage increase of $11 per hour in 2015, and then to $13 per hour eight months later, had a negative impact on hours worked. Employers reduced labor costs by about nine percent.
Peer review for the University of Washington study is pending, and another study contradicts the economists’ conclusions.
Nation’s Restaurant News for example, cites the Washington study as well as another research project from the University of California at Berkeley’s Center on Wage and Employment Dynamics. Berkeley researchers found no loss for low-income earners in Seattle as a result of minimum wage increases.
It looks like we’ll have to rely on time to let us know which researchers submitted the more accurate findings. Either way though, we see the handwriting on the digital wall: quick serve and fast casual restaurants are buying or contemplating buying more computers and kiosks, beefing up websites and apps, and generally eliminating the human factor to the furthest extent possible.
But chew on this: Researchers at Harvard Business School conducted yet another study, this one centered in over 100 cities in the San Francisco Bay area. According to these authors, Bay Area cities saw 21 minimum wage hikes between 2008 and 2016. Which restaurants went bust because of these wage bumps? The lower quality restaurants with lower Yelp ratings seemed to be the ones most likely to close:
“Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).”
Based on this study, it appears restaurant owners may now either choose to close their doors or be forced to close their doors because of the increase in labor costs. Whether that decision to shut down is a result of having to devote financial resources to paying workers rather than making improvements to food, facilities or other areas – or some other factor – remains to be seen. The authors of this study say a purely causal relationship has not been determined.
But what recourse do restauranteurs have? When it comes to minimum wage increases already in place, we refer back to The Buggles:
“We can’t rewind, we’ve gone too far…”
Barry Kurtz is a State Bar of California Certified Specialist in Franchise & Distribution Law.