October 18, 2013

With Mayor Vincent Gray’s veto of the Large Retailer Accountability Act, the D.C. Council has moved on to its next bad idea: dramatically increasing the District’s minimum wage.

Though several council members have offered proposals, the worst piece of legislation is sponsored by Vincent Orange (D-At Large) and would hike the base wage for tipped employees by over 200 percent. Orange’s bill would result in one of three consequences for the District’s table-service restaurants: a steep increase in prices; a dramatic drop in employment; or closed doors for those businesses unable to adapt.

The minimum wage in the District is currently $8.25 an hour, and it applies equally to both tipped and non-tipped employees. Employees who receive tip income — such as wait staff or bartenders — can be paid a lower base wage of $2.77 an hour as long as their total combined pay is at least the D.C. minimum. The difference between the two is called the “tip credit.”

Although the employer covers the difference if the employee falls short of $8.25 an hour, this isn’t typically an issue: The average hourly wage for tipped employees tops $13 an hour, according to an Employment Policies Institute analysis of Census Bureau data, and top earners bring in $24 an hour or more.

The tip credit thus represents a compromise that’s favorable to employees and employers: Employees receive take-home pay that’s far above the minimum wage, and employers are able to maintain narrow profit margins.

Orange’s proposal would undo this balancing act. It doesn’t just seek to tinker around the edges of this happy status quo; it would wipe out the profitability of many of the District’s full-service restaurants.

Take independently owned full-service restaurants, which are helping revive once-troubled areas such as the 14th Street corridor between Logan Circle and Columbia Heights. According to Deloitte’s Restaurant Industry Operations Report, a typical restaurant in this category puts 34 cents of each sales dollar toward salaries and wages, keeping roughly three cents of each dollar in profit after all expenses have been paid. So, if the restaurant does $1 million in sales, that’s $340,000 in labor costs and $30,000 in profit.

Orange proposes roughly tripling the base wage for tipped employees over a four-year period, to $8.75 an hour. Even if we conservatively assume that total labor costs at this restaurant increase by only 80 percent, that wipes out the restaurant’s profit nine times over.

Restaurants in other cities and states that have passed such laws demonstrate the potential unintended consequences. In Washington state, where the base wage for tipped employees is similar to the amount in Orange’s proposal, Seattle Weekly reports that busser positions — a gateway to a higher-paid job on the wait staff — are being phased out in favor of servers bussing their own tables. Servers also handle more tables, meaning fewer employees per shift and less service for customers.

Similar changes are occurring nationally in response to wage and health-care legislation. The national chain Chili’s has opted to drop its bussers and has installed technology in the kitchen that reduces the need for staff. Last month, Chili’s announced that all 823 of its corporately owned locations would be installing table-based computer ordering devices, further reducing the need for wait staff.

These real-life examples ­haven’t stopped proponents from arguing that mandating a higher minimum wage wouldn’t reduce employment in the restaurant industry or anywhere else. A recent commentary on this page even argued that such a policy would stimulate the District’s economy. But such claims rely on faulty economic models that assume any minimum-wage increase — even, say, a $25 minimum hourly wage — is a net positive for the economy. The vast majority of credible economic research from the past 20 years, as summarized by economists at the Federal Reserve and the University of California at Irvine, confirms that even smaller minimum-wage increases have consequences for the least-skilled job seekers.

If Orange gets his way, these consequences may soon be appearing at a restaurant near you. After all, were business owners able to simply raise prices to cover higher wages without a negative effect on sales, they already would have. Instead, some restaurants will adopt computer technology that reduces the need for staff by as much as one-third. Others will find ways to do more with less, including relying on self-service. In any case, today’s highly paid tipped positions will be a thing of the past.

The writer is research director at the Employment Policies Institute, which receives funding from restaurants, among other sources.