Minimum wage, restaurants, and seeing the whole system

Seattle is on course to raise the minimum wage within city limits, above the state’s minimum, which at $9.32/hr is already higher than the federal minimum but pretty clearly not enough for a decent standard of living here. The cause is popular enough that it seems almost certain that something will be done, so all the real arguing is about details.

The pro campaign is pushing for a new minimum of $15/hr, with no exceptions and few concessions. It’s not clear to me to what extent this is still an opening bid for negotiation, versus a final uncompromising position. On the contra side, big businesses are conspicuously absent from the conversation, while small business owners have been making a lot of noise about how terrified they are that this will drive them to close. I haven’t yet seen anyone propose that we do nothing, but the owners of many popular restaurants have gone on the record arguing for a range of concessions that would either amount to a special exemption for businesses exactly like them, or generally water down the rules in such a way that many peoples’ income would not increase. There are a lot of editorials along those lines from people whose establishments I love and wouldn’t want to lose. I’ll link to Tom Douglas’s letter because I think it’s the best reasoned, and the level of detail he goes into about their cost structure is helpful.

I do have some sympathy for the business owners here. Common threads through many of their complaints are that relatively few new businesses survive two years, the owners themselves often make less than minimum wage in those two years, and even long-lived stable restaurants often have tiny profit margins. I believe that they are coming from a place of sincere fear, and not simple greed. It is also true that a raised minimum wage which shuttered many businesses would be a spectacular own goal. But I also think they’re taking a problematically narrow view of what the new rules would do.

The simplest issue is that most of these figure out the cost impact as if they were paying everyone minimum wage today. If they really are, then that’s an embarrassing admission which would make me a stronger supporter of raising it. I can’t imagine they really are, if only because the market for hiring experienced cooks is too competitive, so in reality most of these editorials are inflating the impact of a raised minimum wage on their cost structure. Tom Douglas doesn’t seem to be making this particular mistake, but he did radically overestimate the cost to his business of providing sick days, along with most of his industry, so his estimates are still worth taking with a pinch of salt.

More important than this, most proprietors seem to be projecting as if they would suddenly have to raise their prices to pay staff $15/hr while their competition wouldn’t. Even if this would only cost a third as much as they assume, it’s easy to see how getting out of step with their competition would cost them a lot of business, but the whole point of legislating minimum standards like this is that they won’t have to do that. The whole industry will have to raise its prices at the same time, so they won’t leak customers to each other. It helps that the restaurant industry is intensely local—I suspect much more so than owners even realise—so each restaurant is mostly competing with its neighbours, under the same laws. Anchovies & Olives’ competition isn’t some Italian joint in Tacoma, it’s Spinasse a block away. If any of these businesses will be able to raise prices less than their competitors, it will be because they were paying staff better in the first place, and I’ll be happy to see those places rewarded.

Then there’s a subtler and harder to quantify effect, from the new customers that a reduction in poverty will create. Some of the better-argued complaints point out that raising prices will make their customers eat out less often, which I’m sure is true. I am right in that demographic which can afford fine dining for more than just special occasions, won’t be made any richer by a minimum wage increase, and is not so wealthy that we can be price-insensitive when choosing whether to eat at the Palace Kitchen, a cheap ramen shop or at home. But there’s a much larger demographic of people who can’t afford the luxury of dining out at all. The worst-paid of them will bring home 50% more money if we pass a $15 minimum wage, and even people currently earning $15/hr are likely to see some pay increase as their employers have to compete with minimum wage jobs. There is a lot of evidence that poorer people are much more likely to spend additional income than the already rich. While no-one on $15/hr is going to become a regular at Lark, I bet the number who can suddenly take their spouse somewhere nice for their anniversary outweighs all the people like me who have one less fancy dinner a year.

For all these reasons, I’m not at all worried about restaurants being driven out of business by a $15/hr minimum wage. I’m more concerned about other businesses, particularly retailers whose toughest competition comes from Amazon. Businesses like Elliott Bay Books are freaking out, and to my mind much more credibly than the restaurant industry (NB: the Nathan Jackson quoted in that article is a friend and former coworker who has been an influence on my thinking about this, even though I’m not as confident as him that it will all be OK). Their problem is that they either can’t raise prices because suppliers set the pricing, or if they can then they risk leaking sales to online competitors. On the other hand, do staffing costs make up anywhere near as large a share of a typical retailer’s expenses as a restaurant’s? I don’t have a good sense of how large this effect will really be.

The sector I’m most worried about is nonprofits. They pay poorly enough that a $15 minimum wage will add to their staffing costs, and staff wages are well over half of the total operating budget for a lot of worthwhile organisations. But the real problem will come from one of the sector’s serious structural weaknesses: the typical nonprofit is far too dependent on the surplus cash held by already-rich people for its funding. We don’t like to talk about this, but the nonprofit sector is kept afloat by the table scraps of the 1%, and anything even slightly redistributive—like a minimum wage hike that will make luxuries like dinner in a nice restaurant more expensive—leaves fewer scraps over to be donated. Another structural weakness is that an awful lot of nonprofits continually teeter on the edge of bankruptcy, and I could easily see a small shift in their income and expenses pushing some under and others out of town.

None of these worries are reasons to reject an urgently needed social justice reform like a minimum wage high enough to eat. Apart from anything else, there’s too much uncertainty here. A decade ago I would have been wishing for an economic model to predict the effects, but the past decade has discredited theoretical economics enough that whatever the model said would simply be dismissed by whichever side didn’t like it. The only way to settle the argument is empirically. There has been empirical work on cities with a higher minimum wage than the surrounding area, and on the effect over time of increasing the minimum wage, and it’s actually quite encouraging: minimum wage increases have so far caused barely any reduction in employment. That said, none of the jumps were as big as an instant change to $15/hr here would be, so we don’t have a perfect precedent to look at.

That leads me to the one concession I’m certain the minimum wage campaign should make. I am opposed to tip credits, and have serious reservations about industry or company size exemptions, but I am quite convinced that a minimum wage increase should be phased in over a few years. That way no individual jump will be bigger than the precedents which have been proven to be absorbable, if the fearmongers are right then we can stop the escalator before it does too much damage, and if they’re wrong then we’ll still get to $15/hr before too long.

This is too important not to try, and it’s too important to charge into without some mitigation of risk.

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