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National Restaurant Association - Economist's Notebook: Setting the record straight in the wage debate

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Economist's Notebook: Setting the record straight in the wage debate

In his latest commentary, the National Restaurant Association's Chief Economist Bruce Grindy provides data to correct recent erroneous claims about the restaurant industry. 

As the wage debate intensified in recent weeks, mischaracterizations of the restaurant industry have increased in frequency.  Today’s Economist’s Notebook takes a look at some recent assertions, and provides data to help set the record straight.  This blog post will be updated as additional erroneous claims are made about the restaurant industry. 

Claim: The restaurant industry is full of minimum-wage workers who are struggling to support families. 
Reality: Minimum-wage workers make up a small proportion of the restaurant workforce, and a large proportion of them are young, students, working part-time, and living in households with above-average incomes.

According to the Bureau of Labor Statistics, the majority of minimum wage workers in the U.S. are employed in industries other than restaurants.  Nearly 1.6 million individuals earned the federal minimum wage of $7.25 an hour in 2012, according to BLS.  Of these, 30 percent (or 503,000) worked at eating and drinking places. 

Minimum wage workers also represent a small proportion of the total restaurant workforce.  Of the total eating and drinking place workforce of 10 million in 2012, only five percent earned employer-paid wages of $7.25 an hour.

BLS data also tells us that a majority of minimum wage restaurant workers are young.  Forty-seven percent of federal minimum wage restaurant workers are teenagers, while 71 percent are under the age of 25.  In addition, the vast majority of restaurant workers that earn the federal minimum wage work part-time.  Seventy-seven percent of restaurant workers that earn the federal minimum wage work part-time, while only 23 percent work full-time.

Overall, 28 percent of restaurant employees are enrolled in school, according to data from the U.S. Census Bureau’s American Community Survey.  Among restaurant employees that earn the federal minimum wage, 45 percent are students.  As a result, it’s not surprising that the average household income of restaurant workers that earn the federal minimum wage is $62,507. 

Claim: The restaurant industry provides few opportunities for business ownership. 
Reality: The restaurant industry is one of the top entrepreneurial sectors in the economy.

A recent study asserted that the quickservice restaurant industry offers few opportunities for ownership, because franchise owners constitute 1 percent of total jobs.  In reality, the restaurant industry provides more opportunities for ownership than almost any other industry in the economy.  Moreover, a quickservice franchise isn’t the only pathway to ownership in the restaurant industry, as opportunities abound across segments for both independent and franchise entrepreneurs. 

According to data from the U.S. Census Bureau, there were 430,947 eating and drinking place firms in the U.S. in 2010, which provided nearly 9.5 million jobs.  In other words, there was 1 restaurant business owner for every 22 restaurant employees in the overall industry. 

Moreover, the employee-to-owner ratios were quite similar in the fullservice and quickservice segments.  In the fullservice segment, there were 23.1 employees for every business owner.  In the limited-service segment, there were 22.4 employees for every owner. 

All told, the 430,947 eating and drinking place businesses represent nearly 8 percent of all business entities in the economy, according to Census data.

Claim: The minimum wage would be $21.72 an hour if it kept pace with increases in worker productivity.
Reality: Wage growth in the restaurant industry has outpaced productivity gains over the last two decades.

The problem with this claim is that it is based on the BLS productivity measure for All Nonfarm Businesses, and productivity trends have varied significantly across industries over the last few decades.  It doesn’t make sense to lump together an entry-level worker in a labor intensive industry like restaurants with a high-skilled worker in another industry who has benefited tremendously by computers and other technological advances.   

A better approach is to look at productivity trends in industries that are more likely to employ entry-level workers, like restaurants.  The BLS productivity data for restaurants doesn’t go back to 1968, so let’s compare the 20-year period from 1990 to 2010.  Between 1990 and 2010, labor productivity in the total nonfarm business sector increased at an average annual rate of 2.3 percent.  This is the data that was used to say that the minimum wage should be much higher.  However, during the same 20-year period, labor productivity at eating and drinking places increased at an average annual rate of only 0.4 percent each year. 

Another way to look at it is the BLS measure for Unit Labor Costs, which represents the cost of labor required to produce one unit of output.  Between 1990 and 2010, unit labor costs at eating and drinking places increased at an average annual rate of 3.0 percent, more than double the average annual gain of 1.4 percent in the total nonfarm business sector. 

So what does this tell us?  In the overall private sector, compensation has not kept up with productivity gains, a trend that has been well documented in recent years.  However, in the restaurant industry, growth in compensation costs far outpaced the gains in productivity over the last 20 years.  In other words, restaurant operators are paying comparatively more per unit of output than they did 20 years ago. 

Claim: The price of an item on a ‘dollar menu’ would only have to rise 17 cents if the minimum wage was doubled.
Reality: This claim was based on an incorrect use of data from a restaurant chain’s annual report.

Several news articles – some of which have since been retracted – recently concluded that a restaurant chain’s menu prices would only have to increase 17 percent if its labor costs doubled.  This assertion was based on calculations made by an undergraduate student.

It was quickly determined by several organizations that the calculations were incorrect, and the claim that labor costs represent 17 percent of revenues was erroneously arrived at by dividing labor costs at company-operated stores by total company revenue, including both sales at company-operated stores and royalties received from franchised restaurants. 

In reality, labor costs represent 33 percent of sales for a typical restaurant.  This means that if labor costs double, there would need to be a 33 percent price increase to break even.  But that would only be the case under two unrealistic assumptions:
1. There is no increase in the costs of all other restaurant inputs (food, supplies, linens, cleaning, etc.), which would be extremely unlikely if the minimum wage rose to $15.
2. A restaurant wouldn’t lose any business after increasing its prices by 33 percent.  This is also extremely unlikely under a $15 minimum wage scenario, because the prices of all basic goods and services would go up, and consumers would have much less disposable income to spend in restaurants. 

In other words, the 33 percent break-even price hypothesis only works in a bubble in which a restaurant’s sales volume remains unchanged and none of its other costs go up.  Neither of these scenarios would hold true outside of the bubble. 

Putting any price increase of this magnitude in historical context, only twice since the Bureau of Labor Statistics began reporting the CPI for Food Away From Home in 1958 has the restaurant industry even registered price increases in the double digits (12.7 percent in 1974 and 11.1 percent in 1979).  And that was during the high inflationary environment of the 1970s.  During the past 28 years, menu prices haven’t increased more than 5 percent in a given year.

Read more from the Economist’s Notebook and get additional analysis of restaurant industry trends on Restaurant TrendMapper (subscription required).
 

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