Someone I know had posted a link about a fast food CEO who said that higher business growth followed minimum wage hikes in California. According to KQED, Bill Phelps, chief executive of Wetzel’s Pretzels, which has more than 100 outlets in the state, was “shocked” when business rose after a wage increase.
“My overall sales were something like 15 percent ahead after the first minimum wage bump, and now they’re about 12 percent ahead this year,” Mike Jacobs, an owner of a Wetzel’s Pretzels franchise, told KQED. “It isn’t because I’m such a great manager or smart guy, but the buying public has more money in their pocket.”
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My Forbes colleague Tim Worstall and I have had a running disagreement as to whether increasing minimum wage has a negative effect on the number of restaurant jobs. The sector is important in understanding income inequality and work in general because it is a source of many low-wage jobs.
My argument has been that the increase in minimum wage hasn’t had any apparent effect, according to data available from the St. Louis Federal Reserve Bank.
Tim and Mark Perry at the American Enterprise Institute have differed with me with the following argument:
Not that there’s going to be a wiping out of employment opportunities, nor that the economy of Seattle is going to become a howling wasteland. Rather, that less human labor will be employed at $15 an hour than would have been employed if the minimum wage had not risen to that amount.
Fair enough claim, and I can assure Tim that, yes, I did understand his point when he originally made it. I also agree with something he wrote at some point (it may have been in a comment on one of my posts) that if labor costs (which are a significant portion of overall expenses) rise, one of three things (or a combination of them) can happen:
- Profits drop.
- Restaurants raise their prices.
- Operators and owners can try to make do with less labor.
Some individual restaurants in some areas, specifically San Francisco, have had problems with dropping profits and the question of whether they can stay in business. Consider that anecdotal counterpoint to the opening of this post.
The problem is that food service is a pretty complex business and the trade-offs can be confusing. Restaurateurs may eat the loss of profits and keep plugging along or, as some have claimed, more money in the pockets of people can result in more business, which can more than offset the increase in labor costs and lead to higher profits. Or you can cut labor and find that profits drop because you don’t have enough staff on duty to satisfy patrons and get them to return. Restaurants might raise their prices and find the additional amount doesn’t discourage business — or perhaps it does. That’s why the assertion that higher minimum wages will necessarily lower employment growth in this sector becomes a complicated assertion.
So, it’s back to the data from the St. Louis Fed, spanning from about January 1990 through September 2016, now that we have about a year of information to examine:
You can claim that growth would have been higher without the addition. You could further say that restaurants in the Seattle metropolitan statistical area (a government-defined regional regional grouping of closely tied cities and environs) haven’t grown as fast as the rest of the state.
However, looking at the graph, it seems that the pattern of growth hasn’t really changed since the Great Recession. Growth happens at about the same overall pace, with some ups and down, as you would expect in any real-world data. When recessions his, growth turns negative and jobs are lost.
Why would growth suddenly be faster than normal if the minimum wage didn’t rise? It could be that there are factors, but they would need to be identified and accounted for, not treated as a nebulous cloud that bulwarks a simplified theory of how economics should behave. Economics should look to be a science, not a collection of religious sects.
Conservatives and liberals have all depended on theories of what should happen and rarely taken time to consider whether reality supports or undercuts their positions. My take is that if you raise the minimum wage some businesses at least will be hurt. Many may do fine. Or they may not.
So, you can’t suddenly raise the minimum wage to $15 an hour everywhere and think that areas will not feel an impact. Some parts of the country might be fine. Some, where prevailing costs of living, wages, and business incomes are considerably lower very well will not.
Much of public policy focuses on averages rather than more nuanced applications — an argument for a more local or even state approach than national, as conservatives argue. But you need experimentation, and the move by states to prevent cities from doing that, as is happening in some parts of the country, is equally problematic.
In the case of Seattle, restaurant jobs have continued to grow in general at the pace they had for years. Maybe it’s because people continue to have more money to spend and they’re willing to. Perhaps it’s a growing population or a greater number of restaurants opening that creates a greater demand for labor, whether the region can ultimately sustain that number or not.
The new $15 minimum wage level went into effect on January 1. It may be that some months from now we will be able to look back and see a palpable impact on the existing — not some theoretical and unmeasurable possibility — rate of job growth in the restaurant area. And if there is a drop, it may be because of the minimum wage. It might be because rents are too high (another big problem for many restaurant owners) or because the industry reached a saturation point for the area. All sides of the fractious political divide must realize that having more people working and less government aid is good, that there are economic realities that may not work the way they expect (or prefer), and that real solutions for real situations are necessary.
But, until more data is available, it looks like a higher minimum wage, at least at the $13 level in Seattle, hasn’t hurt the continued historical availability of restaurant work.