It is hard to run a restaurant profitably. It is a crowded and heavily competitive market. This is why most new restaurants go out of business within a few years of opening. Rather than blame their failure on market conditions or their own lack of business acumen, restaurant owners would much rather blame government regulation. Minimum wage laws are featured front and center in this story. Unfortunately, almost any story a restaurant owner tells is likely to be treated seriously by reporters. The Times gives us an account of restaurant owners facing crises because of the prospect of a higher minimum wage. The poster child is a restaurant owner in Montana who explains that the problem is that his wait staff get tips, but the state minimum wage laws provide no exemptions for tipped employees. This means that the higher minimum wage will require him to pay more to workers who he claims are already earning four times the minimum wage. (He also complained that the minimum wage would be tied to the national inflation rate, which means that it would be affected by the price of cappuccino in New York and Los Angeles. Is there any evidence that the price of cappuccino in New York and Los Angeles rises more rapidly than the price of gas in Montana?) Okay, let's do the arithmetic. If a tipped employee earns three times the minimum wage in tips (approximately $15 an hour), and we assume that the tips average 15 percent of the tab, then the restaurant's gross revenue for each waiter is equal to approximately $100 per hour. If the minimum wage goes up by $1 an hour, this implies an increase in labor costs equal to approximately 1 percent of gross revenue. If our intreprid restaurant owner is able to raise his prices by an average of 0.5 percent (his $10 meal rises to $10.05), then he will have to swallow a decline in profits equal to 0.5 percent of his gross revenue. That doesn't sound like a business killer. Of course, this is still better than the Las Vegas restaurant owner who is worried about the higher payroil taxes he will have to pay. With employer side payroll taxes at 7.65%, an increase in the minimum wage of $1 an hour will imply a rise in payroll taxes of less than 8 cents per hour or $2.30 a week for an employee working 30 hours a week. Will this put the guy out of business?
--Dean Baker
