The action behind a minimum wage increase at the federal level might be stalled in Washington, but the debate over this issue in cities and states around the nation has some operators worried that their grave concerns are getting lost in the noise.
In some markets, restaurant brands might be dissuaded from expanding or might face the need to cut worker hours or raise menu prices if proposals for a wage floor anywhere between $10 and $15 get enacted. California, which raised its state minimum wage to $9 per hour July 1 and where higher wages have been proposed for Los Angeles, San Diego and San Francisco might be the microcosm for how the fight to raise the minimum wage could play out on the national stage.
Protestors in the Golden State, as they have in other places this past spring and summer, chanted that they “can’t survive on $7.25” at recent demonstrations, only to be met with billboards suggesting they would be “twerked off” like the ad’s giant picture of pop star Miley Cyrus if California’s higher wages drove an increase in youth unemployment.
Less than 100 miles from Los Angeles, in Carpinteria, Calif., Andy Puzder of CKE Restaurants Inc. saw the optics of a political issue attracting attention away from concerns restaurant executives have for mandated, significant increases in wages suggested at the federal, state and local levels. Chief among them are the decelerating effect he thinks a minimum wage increase would have on economic growth, as well as the needs that would arise to cut labor costs, raise menu prices or shift growth to lower-wage areas of the country, he said.
Puzder said when a financial issue gets turned into a “political football,” little constructive headway can be made on the economic growth the restaurant industry needs.
“It’s easy [for a politician] to sell: ‘I’ll get you a minimum-wage increase,’” Puzder said. “It’s a 30-second sound bite. But it’s political, and it’s not really helping the people we need to help.”
A patchwork problem
Though a raise in the federal minimum wage became a nationwide issue this year with President Barack Obama’s call for a $10.10-per-hour rate during his State of the Union address, inaction in Congress has stalled his initiative. The Senate blocked a bill April 30 that would have brought up the proposal to raise the national minimum wage from $7.25 per hour to $10.10.
But in the absence of federal legislation to raise the wage floor for Americans across the country, bills have been proposed and passed in states and cities mandating different wage rates. Some are tied to inflation and some not, creating a checkerboard of higher- and lower-wage areas that affect restaurant brands’ expansion. California and Massachusetts, as well as San Francisco, Seattle and Chicago have all gotten in on the action:
• California enacted this week its statewide increase to $9 per hour, which is an intermediate step to the state’s plan to raise the minimum wage to $10 per hour by 2016.
• Massachusetts Gov. Deval Patrick signed into law last week that state’s plan to raise its minimum wage from $8 an hour to $11 per hour by 2017.
• San Francisco lawmakers proposed June 11 a $15-per-hour minimum wage for that city, which will be put before voters this November on the ballot.
• Seattle’s city council approved June 3 a raise to the city’s minimum wage to $15, which must be implemented in stages over three years for large businesses and over seven years for small businesses.
• Aldermen in Chicago on May 28 brought forward a proposal for a $15-per-hour minimum wage. A task force formed by Mayor Rahm Emanuel to study the issue is due to report on its findings some time this month.
Restaurant chains, such as CKE’s two burger brands Carl’s Jr. and Hardee’s, take notice of where wage inflation would put pressure on labor costs for company-owned or franchised locations, Puzder said.
“It’s high in California and going to be higher,” Puzder said. “It’s our home, and we love to grow in California, but we’ll be opening fewer restaurants here. The principle growth will be in Texas for Carl’s Jr., and in Tennessee and North Carolina for Hardee’s.”
Puzder has not yet been able to speak with his franchisee growing aggressively around Chicago to determine how the city’s proposed minimum wage hike might affect his plans. There currently are no Hardee’s locations within Chicago’s city limits.
A no-win argument
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Protestors and progressive groups counter the restaurant industry’s arguments that a higher minimum wage would suppress profitability and growth with the contention that the American economy, heavily reliant on consumer spending, would grow if more workers had more disposable income from a higher paycheck.
Yet a definitive answer to that question remains out of reach, because theories over the minimum wage are one of the last few places where economists divide along political lines, making the issue difficult to argue, let alone solve, said Dr. Arjun Chakravarti, a professor of economics at the IIT Stuart School of Business in Chicago.
Chakravarti also is a consulting economist for Chicago-based market research firm Technomic, and he framed the minimum wage issue during his economic keynote speech at last month’s Technomic Restaurants Trends & Directions conference.
“In theory, there is a net loss on the economy with respect to businesses on the investment side, but aggregate growth of the economy depends on the spending by consumers, so there’s an inter-relation there that’s important to think about,” Chakravarti said. “The trouble is, you have to start saying, what are people going to actually start spending on if they have that money in their pocket? Then you have to think about how money multiplies throughout the economy as a net-growth factor.”
The truth likely lies between conservative and liberal economists’ theories, but “it’s a very tough little social experiment to get people to do,” Chakravarti said.
What would operators do?
At its same conference, Technomic shared findings of its most recent foodservice operator survey, which showed that more restaurant brands anticipate a negative effect on their businesses the more severe a theoretical minimum wage increase gets. When asked if the minimum wage were to rise from $7.25 per hour to $10 per hour, 50 percent of restaurant operators surveyed said that would negatively affect their businesses. At a theoretical minimum wage of $15 per hour, an overwhelming 79 percent of operators predicted a negative effect, Technomic found.
The firm also asked those operators how they would react to the higher labor costs they anticipated from an increase to the minimum wage. The two most likely actions, each receiving 55 percent of the vote from respondents, were “cutting hours” and “raising menu prices.” Another 44 percent said they would reduce the number of employees. Rather than lay off employees, 36 percent of respondents said they would hire fewer workers than planned, and 35 percent said they would not fill vacant positions.
Fewer operators indicated they would try to cut other costs, such as food costs, but 12 percent of survey respondents said they faced the risk of having to close their restaurants if the minimum wage were to increase.
“Obviously, minimum wage is a forefront concern for many operators, especially when you start getting into higher levels,” Technomic senior vice president Joe Pawlak said during the Technomic conference presentation. “Even at 12 percent of operators [saying they risked having to close their stores if the minimum wage goes up], that’s pretty dramatic. Risking that many units — think about how many employees that would effect.”
Pawlak also raised the possibility of automation replacing some labor hours in restaurants, such as online ordering, self-order kiosks or at-table tablets. Another billboard in California — funded, like the Miley Cyrus billboard, by industry group the Employment Policies Institute — insinuated that idea with a picture of an iPad ‘asking,’ “May I take your order” and carrying the caption, “San Francisco, meet your minimum-wage replacement.”
Puzder speculated that brands across the restaurant industry might automate some functions, but more likely would raise menu prices and reduce hours, as they have in response to higher anticipated health care costs when the employer mandate for the Affordable Care Act finally goes into effect.
“If there were an increase in a rational amount, business could absorb it,” he said. “But raise it too significantly, then they can’t, especially in a down economy.”
Moreover, he said, he fears consumers would not feel the intended boost to their purchasing power, because businesses of all types would have to raise the prices they charge for their goods and services to remain profitable.
“Politicians enact a minimum wage increase and like to say, ‘Look how much bigger your paycheck is,’” he said. “They don’t say, ‘Sorry it’s not worth as much.’ People and businesses have to offset wage inflation with consumer price inflation.”
More to be done
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As the debate continues, restaurant operators must be proactive in shaping that debate, even if their markets are not currently taking up proposals to raise the area’s wage floor, said Rick Berman, president of Washington-based government-relations firm Berman and Company.
Berman’s group also controls the Employment Policies Institute, which paid for the billboards in California as part of its “Bad Idea, California” campaign. He acknowledged that the city- and state-level activism posed a bigger threat to the industry at this moment, as Republicans in Congress and Democrats in the White House likely would remain deadlocked, probably even after the 2014 midterm elections.
But a federal minimum wage law possibly could get attached to must-pass legislation somewhere along the way, he said.
“Keep in mind this is a political issue, not an economic one, and politics has a way of delivering strange results when we’re on the doorstep of an election,” Berman said. “That’s why the industry should not become complacent. If we’re winning the debate, that’s fine, but we shouldn’t be sitting on a lead.”
In Seattle, the International Franchise Association has sued the city council over the minimum-wage law, raising the objection that the law’s treatment of franchise owners as employees of the large franchisor brands from whom they license trademarks could violate equal-protection statutes of the Constitution. The IFA has raised similar concerns over Chicago’s proposal, which also considers franchisees to be employers of the same size as their franchisors.
For individual restaurant executives, Berman argued that the industry does not need more lobbying. Rather, operators should focus more on speaking to their employees and customers in their communities about the realities of what higher mandated wages would do to their profitability.
“The members of Congress and lawmakers in statehouses already know what restaurants think about this issue,” Berman said. “What we need to be doing is changing public opinion, so that politicians don’t feel the pressure to vote for an increase just because the public thinks there should be one.”
Puzder agreed, saying that the debate needs to be reframed toward what will enable private sector growth in the economy.
“I’m not being political or over-stating the case, because the numbers don’t lie,” Puzder said. “The economy can’t be fixed by pretending an ideologically based program will have a great impact on prosperity. Entrepreneurs are still out there and want to continue to make the U.S. the economic envy of the world. We need to convey that.”
This story has been revised to reflect the following correction:
Correction: July 3, 2014 This article has been updated to properly identify the group funding the “Bad Idea, California” campaign as the Employment Policies Institute.
Contact Mark Brandau at [email protected].
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