By Michael Saltsman
Michael Saltsman is research director of the Employment Policies Institute, which describes itself as "a nonprofit research organization dedicated to studying public policy issues surrounding employment growth."
It's a new year and a new Legislature in Minnesota, and the ruling DFL Party has arrived in St. Paul with no shortage of well-intentioned proposals. Chief among them is a plan to raise the state's minimum wage 30 percent to $9.38 from its current $7.25.
While it's similar to a number of other wage bills introduced this year, the impact in Minnesota would be unique. Minnesota is one of seven states that does not permit employers to count the tips earned by restaurant employees as income. As a consequence, the base wage for tipped employees is already 240 percent above the federal level. The DFL proposal would widen this gap, and link it to inflation, causing it to grow most years thereafter.
This proposal might appeal to the DFL's base, but it would be devastating for the state's restaurants.
The empirical research regarding the impact of wage mandates at full-service restaurants is clear: Economists from Miami and Trinity Universities analyzed two decades of government data and found that each 10 percent increase in the tipped employee base wage reduces their hours worked by roughly 5 percent. But straightforward evidence like this often gets lost in a battle of the studies, where both sides of the debate claim to have the research on their side.
Local businesses in Minnesota can help provide context — businesses like the River Oasis Cafe, a diner in Stillwater. Purchased five years ago by Craig Beemer, the cafe has 17 employees and annual sales just over the threshold the state uses to distinguish a "small" from a "large" business.
Beemer doesn't feel like a large business. Even on busy weekend mornings, he has just seven people on the floor — four servers, two cooks and one dishwasher. Last year, as the owner of the business, he estimates his income was only about 20 percent higher than the top-earning employee on his wait staff.
Running the numbers on the proposed increase in the minimum wage, Beemer estimates an increase in labor costs of more than $20,000. Labor costs, however, already eat up 31 percent of his sales revenue, and food costs consume another 34 percent. After paying rent and other expenses, Beemer's profit margin — the amount the business keeps from each sales dollar — is 2.8 percent.
If the minimum wage were increased from $7.25 to $9.38 per hour, Beemer said, "I don't think it's possible to operate my business profitably without making significant changes to our business model." With his prices already raised to the upper limit of what he believes his customers will pay, Beemer said, changing his business to a "fast casual" model, where customers place their order at the counter, may be the only way to operate profitably.
The servers who used to wait on customers — the servers whom the DFL wants to help with this hike — would unfortunately be out of work.
For Beemer, it's a surprise is that this legislation exists in the first place. His servers currently earn $18-$22 an hour on average, which means they're earning between $11 and $15 an hour in tip income alone. In other words, these are not minimum-wage employees — yet current law in Minnesota treats them as if they were.
Why would policymakers legislate a $2.13 an hour raise for employees already making $18-$22 per hour? Beemer's not sure, and he's convinced that legislators are "not considering all the facts." Indeed, another consequence of the proposed wage increase is that it will affect his ability to pay dishwashers (who make $8-$10 per hour) and cooks (who make $12-$15 per hour).
Before rushing to pass this bill, Beemer said, he hopes senators or representatives will consider the negative impact that an increase in the minimum wage will have on everyone who works in the restaurant industry. He's hoping that economic common sense prevails.
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