The traditional restaurant owner operates on a very tight budget with slim margins: 36 percent goes to labour, 30 percent to food costs, and 30 percent to operational costs. That leaves 4 percent for profit. While this number can fluctuate – for example, if the restaurant happens to be a franchise, the case remains clear that owning a restaurant is not the most lucrative financial pursuit.
The one factor largely in control of the restauranteur is that of labour cost. Food cost is dictated by a variety of factors like weather, cost of fuel, and the cost of labour needed to actually produce it. Operational costs follow a similar pattern. Labour, as a function of production, is beneficial to the restauranteur if the benefit of labour outpaces the cost of it. For example, if a employee at a cafe can pour enough coffee and sell enough sandwiches to offset the hourly cost of their labour, operations, and food, they are beneficial to the restauranteur and their services will be in demand. If the inverse is true, labour will not be in demand, and the availability of jobs, and the hours assigned to employees who possess them, will diminish as the employer seeks the most efficient way to run their business.
In recent months we have seen a surge of protests, particularly from fast food workers, in North America that advocate for a raise in the minimum wage to $15 an hour. The province of Ontario has recently increased its minimum wage to $11.25/hour. Proponents of this movement insist that a higher minimum wage will result in a reduction of poverty and will increase economic prosperity. More dollars in employees’ pockets means more money that is funnelled back into the economy, right? They also draw on real-life examples in cities such as Seattle that have already mandated a raise in their federal minimum wage to $15 an hour. However, the results of this increase indicate the opposite: a raise in the federal minimum wage will actually harm the economy. How is this possible?
As mentioned before, if the cost of labour is too high, employers will seek out alternatives to try to and reduce that cost. One of the largest changes my parents made with their business after they evaluated their first year their numbers was that they drastically reduced their labour cost by cutting back the hours of their employees. Simply put, they didn’t need that many additional staff to keep up with demand, and the bulk of the hours could be worked by either of my parents. Other employers have sought out similar paths, either by cutting back employee hours or by replacing them entirely with automated processes. For example, some restaurants have enlisted the use of tablet-based ordering systems that eliminates the need for a server to take the patrons’ order; instead, only a few staff are needed to deliver customers’ orders, but the time consuming ordering component has been replaced with technology. A higher buy-in cost, but the long term gains are far greater with the investment in service-based technology.
What will occur, and what has already occurred in cities like Seattle that have adopted the $15 minimum wage hike, is a reduction in available jobs or the closure of businesses altogether. It is overly simplistic to think that employers will benefit from raising minimum to a jump as high as $15/hour, because that profit margin needs to be maintained, or the business providing the jobs will suffer. Raising prices will alienate customers and be even more harmful for business, and the cost of operations will remain about the same, so labour cost is the factor that will almost always be targeted. At this point, one has to ask the question: which option is best? 1) A steady supply of jobs with a lower minimum wage or 2) A diminished number of jobs with a higher hourly wage? Most would agree that low-paying jobs are better than no jobs at all.
Another issue with the proposed minimum wage hike is that it would undermine the value of education in society. The vast majority of individuals who pursue post secondary education do so in order to increase their earning potential. If an individual can earn the same wage at McDonald’s that they can in numerous entry-level jobs that require a university degree, it would stimulate a “dumbing-down” of our society as more and more people would just take the easy way out and seek out easy positions that pay $15/hour. A higher minimum wage would also undermine positions that require a higher level of education, and this would only exacerbate the current issue that new graduates are facing with low paying jobs upon their entry into the workforce. Competition for minimum wage jobs would increase, and those who are more high skilled or educated would win out, leaving us right back to where we began, if not worse off.
Let me be clear: I do agree with the reason that the #fightfor15 crowd is trying to enact change: there is a massive wage gap in North America, but the solution is not a $15/hour minimum wage. Most of the protestors involved simply do not understand the costs involved in running a business and are unaware of the other side of argument. Even if a business owner sacrifices their own earnings in the interest of equality for workers, that strategy also backfires.Economics is a very complicated social science; we can pretend to understand it by reading the news, even the pieces from the best sources available, but the reality is, a very small percentage of the population actually has a fundamental grasp of the intricacies and mathematical models involved in economics research and analysis. Most of us have an understanding of the economy from those who write news articles about it, and most journalists do not hold a Ph.D. in economics.
Look at what happened when Dan Price, CEO of Gravity, a Seattle payment-processing company, decided to cut his $1 million USD salary to $70,000 a year and raise the minimum wage for his employees at Gravity to the same amount. It made international news, many heralded Price as a social innovation champion, and tons of feel-good news stories circulated the web. What these stories didn’t account for is the fact that talented workers demand higher pay based on their skills, and if they’re not earning a wage relative to their value, they will seek work elsewhere. Clients also fear increased costs of doing business with Gravity due to this wage hike, so they cancel their accounts. Now, Mr. Price has to rent out his home in order to cope with his now floundering business; his strategy backfired. Fear not; there is a solution to the problem of wage inequality that has been recommended by many prominent economists: a guaranteed annual income.
What is a guaranteed annual income? It is a social assistance program that ensures citizens whose annual income falls below the mandated target a guaranteed level of income, which is provisioned with negative income tax, child benefit programs, or other financial breaks for the less fortunate. For example, if Steve makes $22,000 a year working at a fast food establishment (this is roughly equivalent to what a full-time employee earning the $11 minimum wage in Ontario would earn), his income would be supplemented through a negative income tax break, perhaps a child benefit or two if they applied, or other programs that would be in place to ensure that Steve’s guaranteed annual income reached $30,000 per year, which is the equivalent of making $15/hour before taxes at a full-time job.
While the money for guaranteed annual income programs needs to come from somewhere, like an increased corporate tax, carbon tax, or higher taxes for high earners, the social benefits would be immense. The negative impacts of an increased hourly wage would not occur because the burden would be spread to taxpayers, not business owners. Rates of crime would also decrease, as a lack of money and employment stability is the a key motivator for entry into a life of crime. If more people were assured of their financial stability each year, they are less likely to risk being caught for a crime. Many people who commit crimes today are indifferent if they get caught, because jail is hardly a worse alternative; for some it may be even better considering prisoners are guaranteed to be fed and sheltered.
Canada currently has a child benefit plan, the Universal Child Care Benefit (UCCB), which Ivey business school professor and economist Mike Moffat calls unnecessary, as “Bay Street executives, NHL players and, yes, even business professors are given UCCB cheques each month to help cover the cost of groceries and childcare. There is absolutely no need for this, as those groups have more than enough resources to pay for the cost of raising their children, so the UCCB is a failure on both efficiency and equity grounds.” The proposed replacement, the Canada Child Benefit, would provide assistance to those who actually need it: the lower and middle class families who aren’t bringing in six or seven figure salaries. Under the CCB, families can receive a maximum of $6,400 for children under 6 years of age, and up to $5,400 for those aged 6-17. This is but one of many examples of social assistance programs that could contribute to a guaranteed annual income program in Canada.
While the income equality situation in Canada is far from perfect, the situation here is certainly far better than that south of the border. Regardless, the solution to either problem is a not a mandated minimum wage hike. Small business owners are people too, and their lives are far from perfect. The burden should not fall on the small business sector, which comprise over 98% of businesses in Canada; the burden should fall on tax payers to redistribute a little bit of wealth to ensure even that even a minimum wage employee will not have to struggle to make rent and raise a family.