How will Minimum Wage Increases Actually Affect the Restaurant Industry?

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Minimum wage is increasing in various parts of the country, and it’s not unreasonable to assume that more and more areas will follow suite. Understandably so, this change is of particular concern for restaurant owners, who employee 10% of the US workforce.

The classic concern is this: restaurant owners will have to spend more on labor, decreasing their profits and putting their business in jeopardy. In order to survive, they will be forced to either lay off workers- decreasing jobs- or increase their menu prices, making their restaurant less accessible to the lower and middle classes.

On the other side, proponents for a higher minimum wage advance that the increased wages will give consumers more buying power and put more money in the economy, compensating for the loss of profits from increased labor costs. Further, they believe that paying employees a living wage takes priority over growth within the industry.

Well who’s right? In our increasingly polarized country, it’s extremely hard to tell. There are multiple studies on the matter that yield conflicting results, and a lot of the same opinions being repeated over and over again with a lack of a satisfying amount of evidence on both sides.

Let’s look at three interesting and recently conducted studies on the matter.

UC Berkeley Study:

Researchers at the University of California, Berkeley looked at how Seattle’s recent minimum wage (which is currently $13 and on its way to $15 by 2021) increases affected employment and wages. This study is particularly relevant to us because it looked specifically at the food service industry for data.

Their results showed that wages increased while employment remained the same. If this study is to be trusted, one would conclude that minimum wage increases up to $13 does not have a substantial impact on restaurant employment.

Critics of the study claim that its particular emphasis on the food service industry doesn’t paint a full picture of the effects of the law. In our case, however, we are solely interested in the law’s effects on food service.

The city of Seattle passed a law 3 years ago that will gradually increase the minimum wage to $15 by 2021

University of Washington Study:

University of Washington researchers did a similar study on Seattle, only they looked at more than just the food service industry and got vastly different results. They found that the increase resulted in a significant decrease in working hours for low wage earners.

They found that hours worked in low-wage jobs dropped by around 9%, which was a drop big enough for there to be more overall money lost than money gained from the increase in wages. This means that there are not only less jobs, but workers are on average earning less money and putting less in the economy. According to this study, an increase to a $13 minimum wage has a devastating impact on low-wage workers.

Critics of this study think that it ignores other factors within Seattle’s changing economy. Since Seattle has seen the arrival of Amazon and other companies, there has been an influx of high wage jobs and living prices have skyrocketed. They argue that these are more likely reasons for a decrease in low wage working hours. This may explain why the UC Berkeley study, which only measured the restaurant industry (which hires mainly low-wage workers), didn’t notice this shift.

Luca Study (aka the Yelp Study):

One study by the husband and wife team of Dara Lee Luca of Mathematic Policy Research and Michael Luca of Harvard Business School looked at effects of minimum wage hikes on restaurants in the San Francisco Bay Area (where there have been a number of increases a bit less intense than Seattle) . Rather than looking at wages or employment, they looked at the frequency in which restaurants shut down after the increase, and then examined them in light of their ratings on Yelp.

They found that increases in minimum wage did affect the overall shut down rate of restaurants. According to their data, a 10% increase in minimum wage corresponds to around a 7% increase in restaurant shut downs.

Interestingly, they found that a restaurant’s Yelp rating also significantly affected the likelihood of a restaurant shutting down after the wage increases. While low-rated restaurants were more likely to shut down, high rated restaurants were hardly affected. Restaurants with a rating of 3.5 stars, for example, saw their likelihood of shutting down increase by 14% for every dollar increase in minimum wage, while restaurants with a 5-star rating saw no increase at all and those with 4 stars see a very modest one.

Though an imperfect measure, a Yelp rating is a pretty good signifier of restaurant quality. This study suggests that quality restaurants are fairly safe while those lagging behind will be hit hard by future minimum wage increases.

What does this mean for the future of the restaurant industry?

Though it remains unclear exactly how wages, employment and shut-downs will be influenced by increases in minimum wage, there’s no doubt that it will have a tangible effect on the industry. In the case that they have a substantial effect on the industries growth, what will that mean for the common restaurant?

Luckily, the restaurant industry has a lot of great things going for it right now, and so it’s actually not impossible that these things may cancel out whatever impact minimum wage increases have. For one, the restaurant industry has consistently seen higher annual job growth than the rest of the economy (which has still seen consistent growth since the 2008 recession), and although 2017 has seen slightly slower growth than last year, there’s still a projected increase of 1.6 million jobs over the next 10 years.

Further, there is an increasing consumer demand for dining out. A growing economy is giving households breathing room, consumers consistently report wishing they would go to restaurants more frequently, and consumer spending habits have shifted more towards buying experiences over material items in the last few handful of years.

Undoubtedly an increased minimum wage is going to be rough for some businesses, and some might shut down. For the most part, however, the restaurant industry is healthy and growing, and should be able face the changes without too much chaos.

That being said, if you’re a restaurant owner in a major city, it may help you down the road to start preparing for the changes.

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