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Some Business Owners Take a Gamble: Higher Prices, Higher Wages

Topics: Current Events

Raising the federal minimum wage is a hot topic. On one hand, you have supporters who feel it’s necessary to increase the minimum wage, so that hourly workers can earn a decent living. On the other hand, you have the skeptics who fear that higher wages means higher prices, thus higher cost of living.

The Fear of Increasing Wages

A higher minimum wage doesn’t just affect the consumer, but could also mean higher prices along the production line.

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“An increase in the minimum wage to a $10, $12, $15 level is going to impact the industry not just in terms of the wages to the entry-level workers within the industry,” says Scott DeFife, executive vice president of policy and government affairs for the National Restaurant Association (NRA). “There’s a lot of other costs that are going to go in there that don’t have anything to do with just the wages of the restaurant employee.”

Fast-food restaurants would be impacted the most by wage/cost increases, because their entire business model is based off of quick, affordable food — which means cheap food and cheap labor. If costs go up, then these businesses will be forced to pass the extra costs onto the customer in the form of higher menu prices.

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However, Kent Jacobs, chair of the UC Berkeley Center for Labor Research and Education, suggests that the proposed federal minimum wage increase isn’t going to be as “steep and detrimental,” as many are fearing, reports QSR Magazine. “In San Francisco, for example—where the minimum wage was raised from $6.75 to $8.50 in 2004—limited-service concepts raised their menu prices an average of just 2.8 percent, compared with restaurants in areas that did not institute a minimum wage increase.”

The Upside for Business Owners

Raising the minimum wage “isn’t all doom and gloom for the industry,” says Jacobs. In fact, giving employees a bump in wages often leads to “lower employee turnover, improved morale and performance, better customer service, and a reduction in grievances and absenteeism” — which are not only good for business, but also the economy.

Ivar’s Restaurants, a chain of seafood restaurants in Seattle, has successfully increased wages (and menu prices) and done away with tipping — but it’s not a “one-size-fits-all approach,” said Bob Donegan, President of Ivar’s Restaurants, in an interview with PayScale two years ago.

One of the restaurants, Salmon House, increased employee wages to $15 an hour and even offered revenue sharing to all of its employees. How did this affect the menu prices? Although customers saw a 21 percent increase in prices, the increase included a 17 percent built-in tip — which was the average amount of tip customers left servers from 2013 to 2014, according to the restaurant’s calculations. So, in reality, customers only paid a 4 percent increase for menu items in the end.

Donegan said he believed the wage increase would benefit Ivar’s “by retaining key talent and through better recruiting because we can provide a more reliable and fair compensation package for everyone. …When we’re able to retain and attract key talent, it helps us provide our guests an unparalleled dining experience.”

In fact, in a more recent interview with The Seattle Times, Donegan said that business had remained steady, while employees were largely satisfied with the change in pay.

“Every employee working there today who was working there a year ago made the same or higher income as they made in 2014 and 2013,” Donegan said.

At the End of the Day

The Economic Policy Institute estimates that raising the minimum wage to $12 an hour would raise pay for 35 million workers. A CareerBuilder survey from earlier this year showed that two-thirds of minimum-wage workers currently can’t make ends meet. Higher wages may mean higher prices, but higher wages also means hourly workers can earn a decent living.

Tell Us What You Think

What are you thoughts on paying higher prices so businesses can pay their hourly employees more? Share your thoughts with our community on Twitter, or leave your comment below.

Leah Arnold-Smeets
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