Seattle Learns A Painful Minimum-Wage Lesson

minimum wage reuters

“Why Are So Many Seattle Restaurants Closing Lately?” wondered a headline at Seattle Magazine. Yes, that’s a real head-scratcher. Say, maybe the impending minimum-wage hike to $15 per hour has something to do with it!

We don’t get around to that little detail until 12 paragraphs into the story, at which point we learn the industry is freaking out:

Starting April 1, all businesses must begin to phase in the wage increase: Small employers have seven years to pay all employees at least $15 hourly; large employers (with 500 or more employees) have three.

Since the legislation was announced last summer, The Seattle Times and Eater have reported extensively on restaurant owners’ many concerns about how to compensate for the extra funds that will now be required for labor: They may need to raise menu prices, source poorer ingredients, reduce operating hours, reduce their labor and/or more.

Washington Restaurant Association’s Anton puts it this way: “It’s not a political problem; it’s a math problem.”

He estimates that a common budget breakdown among sustaining Seattle restaurants so far has been the following: 36 percent of funds are devoted to labor, 30 percent to food costs and 30 percent go to everything else (all other operational costs).  The remaining 4 percent has been the profit margin, and as a result, in a $700,000 restaurant, he estimates that the average restauranteur in Seattle has been making $28,000 a year.

With the minimum wage spike, however, he says that if restaurant owners made no changes, the labor cost in quick service restaurants would rise to 42 percent and in full service restaurants to 47 percent.

“Everyone is looking at the model right now, asking how do we do math?” he says. “Every operator I’m talking to is in panic mode, trying to figure out what the new world will look like.” Regarding amount of labor, at 14 employees, a Washington restaurant already averages three fewer workers than the national restaurant average (17 employees). Anton anticipates customers will definitely be tested with new menu prices and more. “Seattle is the first city in this thing and everyone’s watching, asking how is this going to change?”

So everybody’s in “panic mode” over this one rather obvious factor, but we’ll pretend the wave of restaurant closings is a complicated mystery with an infinite number of possible solutions.

One gruesome reality of the minimum wage is that, contrary to left-wing mythology about fat cat business tycoons paying their exploited workers peanuts, the low end of the employment scale tends to cover businesses running on very thin profit margins. As noted in Seattle Magazine, the area already had expensive labor, and was making do with fewer restaurant workers than the national average. A new surge in labor cost was the last straw for many of them.

Mandatory wage increases tend to wipe out entry-level jobs, which represent a considerable risk on the part of the employer. Hiring the young, the inexperienced, the long-term unemployed, and people with uncertain backgrounds is a far dicier proposition than reviewing a stack of extensive resumes from prospective employees with excellent reputations seeking well-compensated professional work.

The risk factor of low-wage employment is the first thing ignored by people who have no experience running a business when they rail against greedy businessmen who should pay more. It’s an intangible factor that doesn’t loom large in the imaginations of those who have never been obliged to put expensive capital in the hands of people they know very little about, and who don’t always regard low-wage jobs as positions of great responsibility.

One other thing to keep in mind about the minimum wage: it’s yet another regulation that hurts small, independent businesses considerably more than it hurts big corporations.

Besides having more financial depth to handle the increased labor cost – possibly with the hope of increased business volume and profits from higher prices after smaller competitors have been knocked out of the market – big companies can pursue alternatives to human labor that aren’t realistic for smaller operations. Big restaurants can look at various forms of automation, not just in the kitchen but in the dining room. Picturesque corner cafes and family eateries will have a harder time persuading their patrons to place orders through computer screens, instead of relying on human waiters and waitresses.

No doubt the Seattle restaurant industry will find a way to endure, in some altered form – fewer restaurants, fewer employees, higher prices, and so forth. That might not be a form everyone is truly happy with, including those who thought the government was about to legislate them a raise, but were instead reminded that the true minimum wage is, and always will be, zero.