News Story

Bars, Restaurants Could See 280 Percent Increase in Labor Costs With Minimum Wage Ballot Proposal

Small business owners fear negative consequences; group pushing proposal disagrees

A group working to substantially increase Michigan's minimum wage says doing so would not likely lead to job losses or higher prices. But restaurant and bar owners disagree.

The coalition, Raise Michigan, is working to increase the minimum wage for all workers from $7.40 to $10.10 per hour over a period of three years. Currently, all Michigan workers are required by law to make at least $7.40 per hour, but tipped workers are allowed to be paid a base wage of $2.65 provided their tips take them over the minimum. If they do not, their employer is required to make up the difference.

Going from $2.65 per hour to $10.10 is a 280 percent increase in wages for some employees, which restaurant managers say would be hard to manage.

Paola Mendivil is a general manager and server at her family's restaurant, El Granjero Mexican Grill in Grand Rapids.

"[Some] tipped employees … will obviously be happy about it, but there will be a negative impact," Mendivil said. "We might have less employees or reduce the hours they work [to] a part-time schedule."

Scott Parkhurst, an operating partner with Restaurant Partners Inc., which runs 17 businesses including the Omelette Shoppe in Traverse City and Boone's Prime Time Pub in Sutton's Bay, said the average wage of their tipped employees is closer to $15 per hour than $10.

"This [hike] would be potentially devastating to the industry," Parkhust said. "It would definitely discourage new business growth. There are a lot of people who wouldn't survive. The margins are already so thin."

He said he thinks restaurants would be more likely to change their business model, becoming buffets or adapting in ways that require less staff.

Frank Houston, head of the Restaurant Opportunity Center-Michigan (ROC), is helping run the ballot campaign to increase the minimum wage and he disagrees that there would be much of a negative effect. He said the tipped hourly wage would be raised 85 cents a year to transition the cost to businesses.

"We understand it's a dramatic change for how [bars and restaurants] traditionally pay employees," Houston said. "[But] when other states did this, they did not see a dramatic dip in small businesses or a dramatic [increase] in unemployment."

Houston said this is "not unprecedented" and pointed to other states that do not make exceptions for tipped workers. He said it is problematic for tipped workers to have to go back to their employers when they make under the legislated minimum.

Tim Barr, the owner of Art's Tavern in Glen Arbor, said he thinks the proposal would put restaurants and bars on a more level playing field, but would lead to an increase in prices.

"We would strive to keep the employees we have, as we have the right amount of employees for the business we have," he said. "If there is a business downturn because of the need to increase the price on menu items, we would most likely have to decrease the amount of employees we employ year round."

Among the states with the highest mandated wage floor, Oregon and Washington do not allow exceptions to their laws for tipped workers while Vermont, Connecticut, New Jersey and Illinois do. Only seven states do not make exceptions for tipped workers.

If the ballot proposal were to pass, Michigan would have the highest minimum wage in the nation.

According to the Bureau of Labor Statistics, the average pay of tipped workers is about $10 per hour nationally and $9.50 in Michigan. The National Restaurant Association says this amount "greatly underestimates" the actual earnings of servers, which their survey data shows to be $16 per hour for entry-level workers to $22 per hour for experienced servers.

Previously, employees were asked their wages excluding tips by the BLS, said Katie Laning Niebaum, director of communications and media relations with the association. This was changed a few years ago when the survey began asking for both wages and tips.

"[T]he [government] data has never reflected an uptick in the numbers that would be expected with this change in the survey methodology," she said. "[T]he BLS field economists are aware of this situation, and they are currently working on a solution."

The ballot proposal language for Raise Michigan was accepted Wednesday by the state Board of Canvassers. The group will have to collect 258,088 signatures by May 28 to place the proposal on the November ballot.

A working paper from professors Joseph Sabia of San Diego State University and Richard Burkhauser from Cornell University suggests that increasing the minimum wage is a poor way to deal with the problem of poverty.

Analyzing Census data, the professors show that, "Under 15 percent of workers who would be affected by a $10.10 federal minimum wage live in poor households. Nearly two-thirds live in households with incomes of over two times the poverty line and approximately 40 percent live in households with incomes over three times the poverty line."

The same applies to Michigan, Sabia said.

"In contrast to the myth that a common minimum wage worker is a poor single mother head-of-household struggling to make ends meet, the typical minimum wage worker is actually a second- or third-earner in their 20s from a non-poor household," Sabia said. "Thus, the increase in the minimum wage in Michigan is unlikely to appreciably affect poverty because most poor individuals will not be affected by it."

Sabia added that the consensus of the economic literature suggests that every 10 percent increase in the minimum wage is associated with a 1 percent to 3 percent decline in low-skilled workers.

"This could suggest that the 36.5 percent increase in the minimum wage (from $7.40 an hour to $10.10 an hour) in Michigan would reduce low-skilled employment by approximately 4 to 12 percent," he said.

(Editor's note: This story has been slightly edited since its original posting to make more clear the cost increase would be specific to wages.)

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.