Minimum Wage Hike Backfires... Again!

July 16, 2017



The minimum wage increases that have been instituted in cities across the country, have not received much attention by the press lately. They are far too busy chasing the latest cat toy in the Russian collusion investigation, or they are ignoring them intentionally. Given the results of these experiments, I would probably vote for the latter.

      Based on simple logic, the area of service industries that would be negatively impacted the most by a wage hike, are small business scale restaurants. These restaurants also employ the majority of minimum wage workers. Given that, it is also logical to use them as a base for creating data that shows this impact. An April 2017 study by Harvard Business School economist Dara Lee Luca, and Michael Luca- Negotiations, Organizations & Markets Unit, shows these results for the San Francisco  Bay Area, in California. You can read the full report here.

Luca, Dara Lee and Luca, Michael, Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit (April 2017). Harvard Business School NOM Unit Working Paper No. 17-088. Available at SSRN: 


        The minimum wage in San Francisco is currently $13 an hour as apposed to California's state minimum of $10.50, and the federal minimum of $7.25. It is slated to increase to $14 an hour this month, and increase again to $15 an hour sometime next year. The state of California is set to catch up with the $15 an hour minimum by 2022.

      One of the really big problems with this minimum rate, is it does not include any exceptions for tipped employees. What this means is basically that a server in a restaurant making $2.13 an hour plus tips is under a tipped employees exception. It works like this. The federal minimum wage is $7.25 an hour, the federal government assigns a "maximum tip credit against the minimum wage" which currently stands at $5.12 an hour. The credit is subtracted from the minimum wage rate leaving the tipped employees hourly rate at $2.13 an hour with the idea that their tips will make up the difference.

       In a nut shell, these servers would be placed at the same rate as non tipped employees, $15 an hour. So if a server works an 10 hour day at $15 an hour (no tips) they gross $150 in wages for that day. Lets just say 5 days a week work schedule which would be around $39,000 a year gross. At that income level, and using a flat average (meaning not taking deductions, filing status etc. into consideration) we have an average of about 23% for a tax rate (based on the individual federal graduated tax rate of, 10 to 39.6%). About $9000 (not including any state, or local taxes, or other withholdings) in taxes leaves an annual income of around $30,000 net.  According to the Census ACS survey, the median household income for the United States was $55,775 in 2015, so even at the $15 an hour rate, these servers fall below the national average.


       When I met my wife 15 years ago, I was working as a kitchen manager in a well known restaurant, she was hired on as a server. Our combined experience in the restaurant business is well over 25 years. Nine of my years were in management. I mention this so that you know I am not just reading articles and basing my opinion off of them. I know a lot about this business from personal experience, and I can tell you that $30,000 a year is chump change compared to what a good server can bring in through tips. I can also tell you that the common statistics concerning servers annual wages, are completely unreliable. Why? They are based on servers reporting of their tips. The more tips they report, the more money the government will take from them. Servers are notorious for under reporting tips as a result. It is just the way it is.

         Through my own dealings with customers I know that if they know a server is making $15 an hour, yeah, they are not going to be all that interested in leaving a tip no matter how good the service was. As it stands now most people know that servers lives are dependent on tips, not their salary. This is a powerful incentive for the customer to reward good service. The hike in minimum wage would all but eliminate this factor, leaving the server effectively stuck at $30,000 a year. For emphasis, my wife was a very good server, and it was not unusual for her to bring in $300 or more a night in tips. Her average was over $200 per night. Her average yearly gross, over $50,000. So using the numbers I know as fact, not statistics, a server like my wife was would be effectively  forced to take a $20,000 a year pay cut due to the increased minimum wage. And that's supposed to be a good thing for who again?

         It is important for me to note that when my wife and I were in the restaurant business, we worked at some nice places, but they were not five stars. So the income she received in tips came mostly from average people like you and I, not rich people. Which brings me back to the study.

         What are considered lower rated restaurants (meaning an average of 3 stars ratings) are already being decimated by the minimum wage increase in San Francisco, even though it will not be fully implemented until next year. While the study also shows that higher end restaurants (meaning those rated 4.5 to 5 stars) are all but unaffected by the wage hike, these lower rated restaurants became 14% more likely to fail after the minimum wage rose above 10% of the state minimum wage rate. Essentially this means that the lower a restaurants rating, the more likely it is to fail, therefore higher rated restaurants will more easily adapt to the changes and succeed. I mean face it, if a restaurant can keep a clientele that is able to afford $80 salads, they will simply pass the losses on to their customers who will most likely never even notice.  

        If a lower rated restaurant tried the same thing, they would certainly lose customers, leading eventually to it's closing down. The study shows that this is exactly what is happening among the Bay Area's estimated 6,000 restaurants. Many are simply unable to absorb the losses, or pass them on to the customer, effectively driving them out of business. Just my opinion but this seems like another example of political ideology destroying the very people it is meant to be helping. I mean seriously, according to this report, the hike in minimum wage in the Bay Area is driving the primary employers of minimum wage earners out of business! Just thinking about the utter stupidity of this has dropped my IQ by at least ten points.


        So according to the Harvard report, the San Francisco minimum wage experiment joins Seattle, as a catastrophic failure before it even gets fully implemented. In 2016 Washington D.C.'s wage hike had immediate negative effects on the restaurant business. According to a article in just six months time after the wage hike, restaurants lost 1,400 jobs. As linked in the article, Mark Perry, a professor of economics and finance at the University of Michigan's Flint campus, shows this negative effect in his August 2016 study.

       In a July 2017 article from Fox News, business owners across the country are warning of layoffs, and price increases due to the minimum wage hike. These business owners have already figured out what this push for a $15 an hour minimum wage means for both them, and their employees. It sure seems to me that these are the people we need to be listening to. But hey, does anything make sense in this world anymore?

 Reference Material:

The link above is a letter to policy makers from over 500 economists, including Dr. Vernon L. Smith, who was awarded the Nobel Memorial Prize in Economic Sciences (2002). They are strongly warning against the minimum wage hike.   (example)


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