Restaurant Closing Time

Sometimes, notwithstanding our wishes and hopes, we just can’t change or escape the basic laws of economics.  California restaurants are learning this lesson — one that so many other businesses have learned in so many other settings for so many years.

A number of California communities, including San Francisco, have decided that they should legislate substantial increases to the minimum wage, so that the minimum wage will reach $15 — a number that was picked not through the guidance of the invisible hand of supply and demand, but because it sounds goods when politicians promise it.  Basic laws of economics will tell you that if you increase the costs for a business, the business has only a few options:  either absorb the increase by cutting costs in other areas (or accepting lower profits), or increase their prices to make up for the extra costs, or recognize that you just can’t make the economics of the business work and close your doors.  In California, a number of restaurants have decided that the latter route is the only viable option.

o-restaurant-worker-facebookIn the Bay Area, at least 60 restaurants have closed since September, and as a result a number of line cooks, car valets, dishwashers, table bussers, and waiters — the people who were supposed to be helped by the $15 minimum wage initiatives, incidentally — have lost their jobs.  These results in the San Francisco area, where wages for starting workers are higher than in less affluent parts of the state, are leaving some Californians who aren’t living in economic dreamland wondering what the effects will be when a statewide minimum wage takes effect and inland areas, which already have higher unemployment numbers and where starting pay is correspondingly lower, are affected.

This restaurant closing effect shouldn’t be a surprise.  Many restaurants run on very thin margins as it is, trying to find that magic balance between quality food and reasonable prices and cool ambiance that diners are looking for.  They don’t have big profit margins that can simply absorb higher wages.  If minimum-wage legislation substantially increases their costs, most restaurants just don’t have the option of jacking up their prices because they know they are going to lose their more cost-sensitive patrons.  And there really aren’t many other areas in which restaurants can make up for increased labor costs.  Tinker with the quality of the food, or the ingredients, or the portion size, and you’ll likely end up losing your more discriminating patrons — and many restauranteurs who are passionate about food probably wouldn’t want to change how they prepare dishes, anyway.  So the logical option, unfortunately, is closing.

In short, the five-star joints, where there is less price sensitivity and where the wages may already be higher, will survive, but many of the more basic restaurants will struggle and close.  The cause-and-effect relationship is so predictable that a recent academic study found that every $1 hike in the minimum wage brings a 14 percent increase in the likelihood that a 3.5-star restaurant on Yelp! will close its doors.

The people who are advocating for large increases in the minimum wage no doubt are well-intentioned, but their efforts ultimately are misguided because you simply cannot ignore, or legislate away, the laws of economics.   How many times do we have to see this play before people start getting the plot?

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Robots, Jobs, And The Minimum Wage

In his campaign for President, Vermont Senator Bernie Sanders has called for raising the minimum wage significantly, to make it a “living wage,” and in many places local governments have raised the minimum wage.  The argument for such raises is that if we just increased the minimum wage, people working at those minimum wage jobs would earn more money, could provide better for their families, and might actually spend more of their pay and help the economy.  In short, the country as a whole would be better off.

These arguments seem to defy basic rules of economics and normal human experience.  We know from our own lives that the cost of something matters.  How many people shop without looking at the price tag?  We also know from our own experience that if something becomes too expensive, we will try to do without that costly item.  So the notion that you can raise the cost of anything without any negative reaction or consequences seems both naive and outlandish.  The across-the-board minimum wage hike arguments presuppose that those who employ minimum wage workers — who are, by definition, the most unskilled, untrained, fungible people in the national workforce — have an endless supply of money and will simply accept a minimum wage hike without taking any steps to account for their increased costs.  If you know anyone who has worked as a manager of a fast-food restaurant, you know that assumption is fantasyland.

hqdefaultSome municipalities have increased the minimum wage anyway.  So, how is it working?  While the data is preliminary, it seems to show what any rational person would suspect — that minimum wage increases affect hiring.  A recent economic research study by the Federal Reserve Bank of San Francisco concluded that “the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.”  The study adds that “allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession.”  And more recent data from the U.S. Department of Labor suggests that hiring slowed in those locations where the minimum wage was increased.

I’m sure the minimum wage hike advocates will dispute the data, or argue in the alternative that the better earnings by the employed more than compensate for any job loss that might have occurred.  Such arguments seem to me to be both misguided — wouldn’t we rather have more people working, and taking that first step up the job progress ladder? — and short-sighted.  If employers of minimum wage workers are cost-sensitive, as the data is indicating, they’ll look for other ways to avoid paying wages that are too high as a result of governmental fiat.  As the Washington Post has reported, one option that is being explored is increased reliance on machinery and robotics in places like fast-food restaurants, which already have seen declines in worker employment.

Let’s not kid ourselves.  Hiking the minimum wage is no panacea, and we don’t live in a fairyland where employers have endless supplies of money.  Don’t be surprised if, in a few months or years, you don’t see that teenager behind the counter at your favorite fast food restaurant and are served your burger by Robbie the Robot instead.

Part-Time Problem

Richard has another really good piece in the Chicago Tribune today. This one is about the significant increase in part-time workers in Illinois.  The link is http://www.chicagotribune.com/business/ct-involuntary-parttime-0808-biz-20140808-story.html.

It’s hard to argue that the economy has rebounded fully when so many willing, able workers want to find full-time work, but can’t. Those of us who are fortunate to have full-time work can’t fully appreciate the angst of not knowing what might be in your next paycheck.

How do we help these people realize the American Dream?  The only emploment-related proposal being addressed is raising the minimum wage, but that’s no panacea. A raise in the minimum wage isn’t going to help these people — it will just cause their employers, who are trying to hold on themselves, to be even more grudging in allocating hours to the people at the bottom of the economic ladder.

Raise The Minimum Wage?

This week I received an email from U.S. Senator Sherrod Brown, of Ohio, about the federal minimum wage, which currently is $7.25.

Senator Brown supports raising the minimum wage for several reasons.  First, a minimum-wage worker would earn $14,500, which does not allow families to make ends meet and would put a family of four below the poverty line.  Second, the minimum wage hasn’t been raised since 2007.  Third, 30 million people are paid the minimum wage, and Senator Brown describes them as hard-working people who “bring in the same paycheck year after year” while the price of other goods increases.  Fourth, Ohio and other states have slightly higher minimum wage rates.  Finally, he says a raise is a “good, common-sense idea” because “[t]he more money in people’s pockets, the more they’ll spend.”

I don’t buy the arguments.  By definition, the minimum wage is reserved for low-skill, entry-level jobs — the kind high school kids get as their first work experience.  Workers then move up the scale as they gain experience and skills.  I’m skeptical there are many families of four whose income is wholly dependent upon one minimum-wage worker, or that such people are paid the minimum wage “year after year.”  Even if those families exist, we shouldn’t build federal economic policy around such outliers.  The fact that the minimum wage hasn’t been raised since 2007 also means nothing.  Since 2007, America has been mired in a brutally long recession, and unemployment still remains far too high.  There’s nothing in our economic performance since 2007 that supports raising the minimum wage.  To the contrary, with employers already skittish about the economy and nervous about hiring — particularly given the still-uncertain impact of the Affordable Care Act — the likely effect of raising the minimum wage will be to discourage hiring.  In short, far from putting money in people’s pockets, raising the minimum wage is likely to make it even harder for kids to find that first job and to leave more people unemployed.

If Ohio and other states want to require employers to pay a bit more, that’s fine — but it doesn’t mean the federal wage must follow suit.  If the stronger economies and hiring patterns in some states warrant higher rates, let the state governments that are more familiar with local conditions make that decision.  We don’t need edicts by the faraway federal government to control every aspect of our economy.

I think raising the minimum wage right now is a bad idea.