Small Business Owner: An Increased Minimum Wage Hurts Everyone

By Kevin Kelly

The ballot proposal that would raise Michigan's minimum wage to $10.10 per hour has raised a number of concerns for small business owners in Michigan.

This would increase the wage by 36 percent for non-tipped employees and 280 percent for tipped employees. The magnitude of this increase will have a dramatic impact on the restaurant industry.

I would venture to say few industries, if any, in Michigan are capable of absorbing this percentage increase in costs when labor already represents 30 to 35 percent of every dollar spent by the consumer.

Research indicates that today 1 in 4 restaurants fail in the first year and 60 percent within three years. That failure rate likely will increase significantly with this proposal. Furthermore, future investments in this industry will be curtailed as investors/business owners will find more profitable ways to spend their time and capital.

The coalition behind this proposal suggests that this increase be passed on to the consumer in terms of higher prices, and in part be absorbed by the business owner via lower margins. What they fail to realize is that the return on investment for the business owners in this industry is only about 3 percent. Consequently, further reduction in the margins will make this industry even less attractive for investors/business owners.

And passing this major increase in cost on to the consumer in terms of higher prices is just not practical. The cost increase will be compounded as the restaurant suppliers will also increase their prices to the restaurant. This would necessitate an even higher cost pass through to the consumer.

At a time when the Michigan economy is still struggling and consumers are by necessity very price conscious, I doubt most businesses will be able to pass on a significant price increase and survive.

A recent survey in Michigan found that 75 percent of consumers believe that small businesses will have the hardest time adjusting to price increases resulting from this minimum wage increase proposal. They stated that if approved, they will tip less than they do today. That's bad for local restaurants and servers.

Restaurant employees initially may applaud this wage increase, but I believe the reality will be either no change or even a reduction in their disposable income. The great majority of these employees today earn $15 to $20 per hour — the mandated increase to $10.10 will mean they receive fewer tips while paying higher FICA, state, and federal taxes on their new minimum wage. Restaurants also will be more likely to shift away from having tipped employees.

If approved as proposed, a greater number of businesses will fail and those that survive will need to change their business model. The cost structure will have to be greatly reduced, which generally means fewer employees. All in all nobody wins.

As in all business, cost increases are a way of life and a reasonable increase to the minimum wage could be managed by most businesses. However, a lower tipped minimum wage is essential if the restaurant industry is going to prosper and continue to provide employment opportunities for these entry-level employees.

The current proposal eliminates the tipped exception and increases Michigan's minimum wage to the highest in the nation. That will harm business owners, employees and consumers.

Kevin Kelly is the owner of Blackthorn Pub in Holly.

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.