California’s Mandatory Minimum Wage-Hikes Are Starting To Backfire

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According to a recent study conducted by the University of California Riverside, California’s minimum wage hikes have slowed job growth among restaurant workers. 

The golden state instituted a series of minimum wage hikes – set to reach $15 by 2022, or 50% over 2012 levels, according to Forbes

“Data analysis suggests that while the restaurant industry in California has grown significantly as the minimum wage has increased, employment in the industry has grown more slowly than it would have without minimum wage hikes,” according to the study. “The slower employment is nevertheless real for those workers who may have found a career in the industry.”

Some of the findings: 

  • The model suggests that there would be 30,000 fewer jobs in the industry from 2017 – 2022 as a result of the higher minimum wage. 
  • The impact of the minimum wage hike is greater in lower income communities than higher income communities, presumably because restaurants in high-income areas can pass on the additional costs to customers more easily.
  • If the U.S. economy were to slip into a recession this year, we would expect the industry to lose about 8,000 more jobs than it otherwise would have because of the higher minimum wage.
  • The higher minimum wage has consequences for the types of workers employed in the industry. Specifically, we see a decline in the employment share of low-skilled workers, disabled workers and part-time workers in the sector.

“The minimum wage increases could have major ramifications for California restaurants and more broadly, the state’s economy,” says Phil Kafarakis – President of the  Specialty Food Association and former Chief Innovation & Member Advancement Officer at the National Restaurant Association. 

“There are some 1.83 million restaurant jobs in the state (National Restaurant Association) that represent about 11% of California’s employment base. Given that labor is one of the restaurant industry’s biggest costs, there’s a real danger that the higher minimum wage will stifle job growth, currently projected at 9% through 2020 and adding 164,000 new jobs.” 

Moreover, according to Forbes, Kafarakis sees “the implications to California reach beyond restaurant tables given that for every dollar spent in table-service restaurants provides a $2.03 impact to state revenue compared to the same dollar spent in limited-service outlets, that contribute $1.75 to state revenue per dollar spent.”

To be fair, minimum wage hikes aren’t the only challenge the California restaurant Industry is facing these days. “For Quick Service Restaurants (QSRs), labor challenges have been brewing for some time,” says Corey Chafin, a principal in global strategy and management firm A.T. Kearney. “Though minimum wage hikes only deepen these challenges, it is not their sole challenge. Low unemployment has created cutthroat “labor wars” as QSRs compete to maintain a full workforce amongst a shrinking pool of available labor. (Just this week one QSR announced a partnership with AARP in an effort to hire older workers.).”

The problem, of course, is a strong economy, which gives workers more job options. “As individual workers have more options, restaurant turnover remains high and subsequently operational risks are plentiful from ensuring consistent service levels, product quality, and food safety.” –Forbes

What is the solution? According to Chafin – robots and other technological improvements

“Battling these headwinds requires QSRs to adopt a long-term view to reduce labor reliance through technology. Kiosk ordering, kitchen automation, central prep, smarter scheduling, and automated delivery are in various phases of the R&D cycle and expected to ease labor risks in the years ahead.”

The pressure to replace technology with labor will differ across industry segments. “Near-term wage hikes may shift where QSRs prioritize the roll-out of these labor optimization programs,” adds Chafin. “Notably, delivery-based QSRs (e.g., pizza) will face higher long-term pressures from wage hikes than brick and mortar QSRs due to limited options to automate delivery; these QSRs can be expected to trim operations where automated delivery remains uncertain and wage increases extinguish favorable profitability.” –Forbes

As the report’s authors conclude, “This report reveals that the worst effects of minimum wage increases can be hidden in the context of a strong economy, but will be felt more intensely in the event of an economic downturn. Minimum wages should be set relative to local incomes, and there should be a specific exemption for tipped employees. In both cases it can reduce the impact of the higher minimum wage on the local industry and still achieve higher incomes in the broader economy.” 

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