A recent campaign initiated by the Service Employees International Union (SEIU) is set to irreparably harm the ability of businesses to create jobs — and that’s because there won’t be many jobs left.
The SEIU’s primary focus is raising the minimum wage from $10 to $15, particularly to target the restaurant industry. Sadly, statistics show that this will lead to the closure of many restaurants across the U.S. It is already happening in San Francisco due to their recent increase. (via The Washington Examiner)
The union’s campaign erroneously promotes that since major restaurant businesses such as McDonald’s or Starbucks make millions, they have plenty left in the corporate coffers fund massive pay increases.
“I worked for the company for three decades. […] I can assure you that a $15 minimum wage won’t spell the end of the brand,” former McDonald’s President Ed Rensi said in a Forbes commentary. “However, it will mean wiping out thousands of entry-level opportunities for people without many options.”
Rensi is getting at something here. Nearly 90% of the “millions” in profits is usually spent in paying for food, ingredients and maintenance of kitchen itineraries, rent, staff costs, and utility bills, among other expenses. So, while the SEUI estimates that a $15 minimum wage will translate to $30,000 a year for a full-time, entry-level employee, the likely result will be layoffs for major companies and the shuttering of mom-and-pop restaurants.
In fact, research conducted by Harvard Business School found out that a mere increase of the minimum wage by $1 would increase the exit chances of the restaurant by 14%. The research went on to discuss the link between the minimum wage and food prices, suggesting that companies adjust to higher labor costs through price increases.
Let’s do the math: A typical restaurant sells about $2.6 million worth of burgers, fries, and shakes each year and usually ends with $200,000 in profit. Therefore, if the minimum wage is $15, that would mean paying off three-quarters of the profit to employees and leading to a loss. The company would actually have to look for alternative sources of funds to pay off other expenses.
Wouldn’t it be much easier, then, to reduce the minimum wage to $10 rather than recouping those costs from a price hike? Because in the real world, customers who are fond of a particular restaurant are more likely to be sensitive to price increases.
Another California city, San Diego, took a major leap off a short cliff in 2016 with its decision to exceed the state’s minimum wage – destroying thousands of entry-level jobs, even as the higher pay helped others. During the same year, San Diego may have experiences more than 5% of food-service jobs lost — nearly 4,000 — according to Forbes.
Many owners cited difficulties of finding and keeping good employees and rising building rental costs, all the while competing with the new dining options on the block. The difficult truth for some to admit, particularly those who support increasing the minimum wage, is that the unintended consequences of a government-mandated wage hike far outweigh any benefit people will experience with the actual increase. Those who realize this too late receive a real-life crash course in Economics 101.