Mar 25, 2015 - 5:15pm

Minimum Wage Increases Are a Disaster for Bay Area Restaurants


Senior Editor, Digital Content

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Diners at Bar Agricole in San Francisco, Ca.
Diners at Bar Agricole in San Francisco, Ca. Photo credit: Noah Berger/Bloomberg.

In the Wall Street Journal, Michael Saltsman of the Employment Policies Institute finds that minimum wage increases in Oakland and San Francisco are hurting the people they’re intended to help  [subscription required]:

Thanks to a quirk in California law that prohibits full-service restaurants from counting tips as income, other operators—who were forced to give their best-paid employees a raise—are rethinking their business model by eliminating tips as they raise prices.

Ironically, this change in compensation practices has reduced the take-home pay for some of the employees it was supposed to help: At the Oakland restaurant Homestead, the East Bay Express reported that servers are taking “a substantial pay cut,” earning a flat wage of $18 to $24 an hour and no tips instead of the $35 to $55 an hour they were accustomed to earning when tips were included.

Though higher prices are a risk that some businesses were able to take, others haven’t had the option. The San Francisco retailer Borderlands Books made national news in February when the owner announced that the city’s $15 minimum wage would put him out of business, in part because the prices of his products were already printed on the covers. (A unique customer fundraiser gave Borderlands a stay of execution until at least March of 2016.)

One block away from Borderlands, a fine-dining establishment called The Abbot’s Cellar—twice selected as one of the city’s top-100 restaurants—wasn’t so lucky. The forthcoming $15 minimum wage, combined with a series of factors like the city’s soaring rents, put the business over the edge and compelled its owners to close.

Minimum wage supporters imagine businesses are made of money and can absorb higher labor costs. What they don’t realize are the thin margins many of these businesses operate on.

Take restaurants. Financial information company, Sageworks, found that in 2013 (the most-recent data available) restaurants earned only five cents in profit for every dollar in revenue. And it was even less for restaurants in California and other western states--only four cents for every dollar in revenue.

When Oakland’s minimum wage rose 36% on March 1, labor costs skyrocketed with it. It’s no surprise that some of that city’s restaurants had to take drastic actions. The numbers don’t work.

It’s not that employers want to stiff their workers—good ones know that keeping quality workers are the key to success—it’s that the money that goes out as costs has to be less than the money that comes in as revenue or the businesses aren’t sustainable.

Wage increases must be based on sound business decisions, not through arbitrary government edicts that end up being counterproductive.

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.