Restaurant Owners, Employees in Twin City Prepare for Inevitable Minimum Wage Hike

Combined Shape

The cost of doing business in the Twin Cities of Minneapolis and St. Paul is going up for the owners and operators of food and beverage services come July.

The minimum wage for “front of the house” workers in the industry will increase from $7.87 to $10.50 per hour effective July 1 in Minneapolis, and to $15 per hour in six years. St. Paul appears set to pass similar legislation soon.

Lawmakers who approved the minimum wage hikes say they are intended to ensure all food and beverage industry workers earn a sustainable, “living” wage. Whether that turns out to be the case is up for debate.

Some economists and policy analysts say minimum wage hikes are overdue and yield net benefits for workers, communities and society overall. Others contend that they will have exactly the opposite effect — raising the cost of operating a business and reducing jobs in the Minneapolis-St. Paul hospitality industry, the second largest economic sector in Minnesota and the U.S.

Watchdog.org spoke with policy analysts at The Center of the American Experiment and the Minnesota Restaurant Association, as well as Donna Bahs, chief operating officer of Parasole Holdings, which owns and operates a dozen food and beverage establishments in the Minneapolis-St. Paul area, to learn more.

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Parasole Holdings has three options when it comes to responding to and complying with higher minimum wages for wait and bar staff, Bahs said.

“We can lower quality; that’s not going to happen. We can change the menu, but we’re not going to do that either,” she said. “Three, we can raise prices accordingly, and that’s what we’re doing. We’ve been seeing minimum wage increases for several years now, and we have been raising prices as a result. We don’t want to lower quality and we don’t want to change the menu.”

Will jobs be lost and food and beverage services establishments suffer as a result of a minimum wage hike in Minneapolis and St. Paul? Economist John Phelan of the nonprofit, Minnesota-based Center of the American Experiment said of course they would.

Phelan said businesses also will suffer.

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“An employer won’t hire a worker at a wage above what that employer estimates the worker will add to revenues — their productivity,” he said.

“If they did, they’d be hiring the worker on the expectation of adding more to their costs (the wage) than their income, and a business that did this wouldn’t be in business very long. If politicians hike the wage by 55 percent — which is what is proposed in St. Paul — without a matching rise in worker productivity, it will cost the employer to hire the worker. They won’t do it. Economic theory is clear on this and so, in fact, is the balance of empirical evidence.”

Restaurant executives and managers may pass the higher cost of wages on to customers in various ways. They could add a separate, explicit service surcharge to customers’ bills, or they could make it opaque to the customer by rolling it into overall prices. Either way, both business owners and their employees stand to lose out, according to Phelan.

Parasole Holdings is rolling the higher minimum wages into the cost of the food and beverages served at its restaurants and other food and beverage establishments.

“We prefer to roll it out by including it in the price of food and drink rather than adding a separate surcharge to guests’ bills,” Bahs said in an interview.

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Generally speaking, restaurant wait and bar staff are nervous about minimum wage hikes, Bahs said.

“There is a tipping point. You might see automation replace workers in some of our restaurants, but not all of them,” she said. “Owners have to look at different ways of keeping prices down.”

Raising the state minimum wage for “front of the house” restaurant workers will likely have broad impacts on the industry, Bahs added. Kitchen staff members are generally paid at least the minimum wage and much higher in some cases, such as experienced chefs. With employment rates running high, the labor market is tight, and the minimum wage hike may prompt “back of the house” kitchen staff to demand raises, she said.

Restaurants typically operate on razor-thin profit margins, earning an average of four cents on every one dollar of revenue, Bahs pointed out, a fact that’s not generally appreciated.

“It’s difficult to retain good talent,” she said. “There will come a time when going out to eat will become too expensive, and people will go out to eat and drink less. When a cheeseburger costs $20, people will think twice about going out to a restaurant with a service charge.”

If, for example, a restaurant in St. Paul suddenly becomes more expensive, people will just go to nearby Woodbury instead, Phelan said.

“That is why we are seeing this campaign in St. Paul. After Minneapolis’ city council hobbled its own labor market with the $15 minimum wage, activists had to chase the jobs to St. Paul,” he said. “If the measure is passed there, they will have to chase them to Woodbury or Bloomington. To mask the harm done in Minneapolis, they will have to try and harm every jurisdiction,” Phelan added.

Minneapolis and St. Paul restaurant owners and operators will adjust in response to changes spanning many and varied aspects of doing business — higher labor costs among them, said Dan McElroy, president and CEO of Hospitality Minnesota, and executive vice president of the Minnesota Restaurant, Lodging, Resort & Campground Association.

“Many businesses, including restaurants, will become more efficient in the future, which may mean fewer jobs or different jobs over time,” McElroy told Watchdog.org. “Our members will respond to what guests want and to how they want to be served,”

McElroy pointed out that the market wage among organization members is already higher than the state minimum wage for most positions in most parts of the state.

“The biggest challenge is the impact of a wage hike that doesn’t recognize the importance of tips,” he added. “Tipped employees in Minneapolis earned an average of $28.51 an hour according to our last survey.”

As a trade association, the Minnesota Restaurant, Lodging, Resort & Campground Association leaves strategy and tactics up to each of its members, McElroy explained. That said, “we expect a great deal of experimentation with new service styles, including counter service and automated ordering,” he added. “No single idea will be adopted universally. What we call ‘service style’ won’t be the only changes that our members will consider in response to cost pressures and new customer preferences.”

A version of this article appeared on the Watchdog.org website.

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