A study recently released in December by the School of Hotel Administration combats the commonly held view that increasing minimum wage would lower a restaurant’s profitability.
The controversial new study — conducted by Prof. Michael Lynn, hotel administration, and Prof. Christopher Boone, hotel administration — shows that modest increases in the minimum wage over the last 20 years have not affected the number of restaurants or employment levels.
Boone said the study — titled “Have Minimum Wage Increases Hurt the Restaurant Industry? The Evidence Says No!” — was prompted by the United States’ new focus on wages that resulted from the recent recession.
“There have been a large number of proposals to raise the minimum wage at the national, state, and local levels,” Boone said. “We were interested in studying the effects that past changes in the minimum wage have had on the restaurant industry in order to learn about what the effects of future changes might be.”
The restaurant industry has historically resisted government efforts to increase the minimum wage, fearing that they will be forced to raise prices and hire fewer unskilled workers, thus reducing the demand and profitability of restaurants. The study’s researchers point out that the relationship between wages and profitability “is an empirical question that must be answered with real world data,” according to their report.
With this aim in mind, Lynn and Boone based their conclusions on data showing the percentage changes in minimum wages, employment, wages and number of restaurant establishments each year from 1995 to 2014.
“Economic theory is often portrayed as clearly predicting that minimum wage increases will adversely affect the employment of low income workers, but this portrayal is overly simplistic,” the report states.
Their findings show that increasing the minimum wage increases the amount paid to employees but does not decrease the number of restaurant establishments, according to Boone.
“There is no doubt that restaurateurs face higher expenses as a result of minimum wage increases, but if restaurants are raising prices to compensate, those increases do not appear to decrease demand or profitability enough to sizably or reliably decrease either the number of restaurants or the number of employees,” the report states.
Although Boone said the study did not find evidence of large effects on employment, they did find increases in total earnings for employees once wages were augmented.
“Workers can expect to see their total earnings rise, even taking into account any possible impacts on hours or employment,” he said.
The study ultimately asserted that the restaurant industry may benefit from minimum wage increases. Its evidence concluded that even employees who worry that they will lose their jobs as a result of the higher cost imposed by an increase in the minimum wage have little to fear.
“That argument suggests that these workers are so risk averse that they would forgo a large increase in expected earnings to alleviate a minor risk of job loss — a risk that may not even exist,” the report states.
The report additionally states that the restaurant as a whole can benefit from increased minimum wages despite the increased costs because employees who are highly compensated “tend to be happier, more productive, and less likely to quit their jobs.”
“Increases in the minimum wage allow restaurant firms to enjoy these benefits of paying workers more without suffering a competitive disadvantage in terms of labor costs,” the report states.
However, Boone cautioned that while increasing the minimum wage did not lead to changes in the number of restaurants, they did not have data on restaurant profits and were therefore unable to determine its impact on profitability.