Mallorca owner Laurie Torres worries a $15 federal minimum wage coupled with abolishment of the tip credit, as proposed by Democrats in the House and Senate, could have a detrimental impact on her downtown Cleveland restaurant.
Even if phased in over the coming years through 2025, such changes would likely mean raising menu prices and cutting employee hours to offset higher labor costs, she said. An immediate increase would be even tougher to manage.
Torres said she is relieved the measures can not be considered as part of President Joe Biden's $1.9 trillion COVID relief package working through Congress, as a Senate official ruled Feb. 25. She's hopeful lawmakers don't push the legislation through separately.
In good times, restaurants of all types tend to operate on margins of between 3% to 5% on average, pre-tax, according to the National Restaurant Association. Those margins have largely narrowed amid the pandemic.
"If payroll goes from being 35%, 45% of expenses to 50%, I make zero money as a business owner and I either have to raise prices significantly to make up for that or close the doors," said Torres, vice president of Cleveland Independents, a coalition of locally owned restaurants.
The loss of the tip credit is a whole other animal and what Torres deems as the greater worry, both for her as a business operator and her wait staff.
In fine-dining establishments like Mallorca, top servers can purportedly bring in around $85,000 a year thanks to high-dollar tips. That's more than two-and-a-half times the annual base salary for a full-time employee earning $15 an hour. That income would evaporate with a flat hourly wage and no tips.
"No small business restaurant can afford to pay a waiter what they make with their tips," Torres said.
With tips eliminated, the restaurant would likely lose its best servers as they seek out jobs with better wages, Torres said. The tip credit is what enables the retention of prime wait staff she says Mallorca couldn't afford otherwise.
Ohio's minimum wage is $8.80, and tipped employees earn a base pay of half that. If the employee's wages with tips don't meet the equivalent of minimum wage, the restaurant makes up the difference.
"I will say that I'm a Democrat and I stand on the same platform in the sense I believe in fair wages and a safety net. I absolutely believe we should help people rise up," Torres said. "But when it comes to the restaurant industry, you are looking to make a blanket change that changes the entire dynamic of the industry."
But doing nothing with minimum wage also achieves the same in terms of helping people most in need.
And certainly not all low-wage workers are in high-end restaurants. Six of Ohio's 10 most common jobs — which include servers, fast food employees, home health aides and cashiers — pay too little to support a family of three without food assistance, according to Policy Matters Ohio.
"Many individuals who are facing the need of a $15 an hour wage increase are working two and three jobs just to make ends meet, with many of them still in poverty," said Marsha Mockabee, president and CEO of the Urban League of Greater Cleveland. "So how does one begin to move toward economic self-sufficiency when they are not able to support a family working one or even two jobs?"
One answer, Mockabee said, is raising minimum wage.
But how employers manage that is a cause of concern.
From hospitality to retail to manufacturing, employers of lower-wage workers tend to worry about the worst-case scenarios that might result from increased labor costs, like cutting staff or closing. The smallest companies may be at more risk for absorbing the increases as larger and more diversified companies where scale provides other opportunities to offset rising costs. That's especially true for small, indie restaurants, said Ohio Restaurant Association CEO John Barker.
"The big companies will figure this out," Barker said, "but as you get smaller it gets very difficult."
Proponents of higher wages prefer to emphasize the greater good that could come from raising people out of poverty at a point when the value of wages has failed to keep up over time in one of the world's wealthiest countries.
A February Congressional Budget Office report on the Raise the Wage Act of 2021 offers a mixed message in terms of the pros or cons of the plan, which it estimates could increase the federal budget deficit by $54 billion over the next decade and reduce employment by 1.4 million workers by 2025.
However, the change could also lift some 900,000 people out of poverty, according to CBO, resulting in decreased spending on programs that provide services or benefits to those individuals.
There's evidence the worst-case scenarios that are often purported to come with a mandated increase in minimum wage don't ever play out, said Michael Shields, a researcher with Policy Matters Ohio.
He points to a 2015 research paper analyzing various studies since 2000 about the impacts of minimum wage increases, which finds there to be no support for the proposition that minimum wage has had an "important" effect on U.S. employment.
Furthermore, the CBO report indicates that people who may become unemployed as result of the Wage Act may be so for about a year.
"And then it's quite likely that person comes out ahead based on increased earnings when they get back to work again," Shields said.
Minimum wage needs to be raised because the value of it has not improved since 1968, Shields said.
This is a factor that influenced Ohio passing in 2006 a law tying minimum wage to inflation, which is why that's at $8.80 and not the federal level of $7.25.
"I personally believe businesses can find a way to integrate higher wages," Shields said. "We've certainly seen them do that in every state that has passed a robust minimum wage policy so far. I just think there is a lot of reactive fear that I believe, for the broader economy, is not justified."
In the minimum wage debate, "the argument in the academic world is in a tight range where effects are either zero or perhaps slightly negative for some groups," said Mark Votruba, chair of the economics department at Weatherhead School of Management.
"Economic models in theory say we should see a negative labor demand effect if the minimum wage is forced above whatever the normal market-clearing wage is supposed to be for low-skilled workers," Votruba added. "But the evidence hasn't supported that very strongly."
What makes today's debate different from those of the past is how this all comes amid the throes of an ongoing pandemic. While the health crisis may seem to be in the early stages of winding down, it casts a pall over the future business prospects nevertheless.
Ryan Neumeyer, a labor and employment attorney and consultant with McDonald Hopkins, said he has clients at smaller manufacturing and construction outfits that worry about raising wages across the board. The idea is employers already paying workers around $15 per hour or more will be expected to hike pay even further in response to minimum wage's rising tide.
"People are going to want raises, and they'll have to figure out how to implement those in a tough economic time," he said.
The phasing in of wage hikes mitigates the shock, but not entirely.
"Most folks are forecasting down and not up. And there are labor shortages already in certain areas," Neumeyer said. "It's not that they would close down (because of wage hikes), but it makes things more difficult to plan for in an already difficult time."
An executive of one Northeast Ohio restaurant with some 150 employees, who asked to be unidentified because of the sensitive nature of the wage debate, said a federal minimum wage of $15 would amount to an estimated $100,000 in additional labor costs annually that would need to be offset.
Doug Petkovic, owner of Flannery's Pub and a partner in Michael Symon Restaurants, said he supports people fighting for pay increases but that a $15 minimum wage would be tough to swallow.
"Thinking a marked increase in minimum wage is going to solve society's problems is very shortsighted," he said. "As someone using minimum-wage earners, you're basically taxing me to help society, and that's not fair."
The ORA's position is that minimum wage should be addressed at state levels, not federal. A minimum wage that makes sense in one market, like New York or California, shouldn't necessarily be the standard in another, like Ohio, Barker said, rejecting the idea of a federally mandated one-size-fits-all approach.
"Minimum wage is a blunt instrument that is, I think, more turned into a political football at this point," he said. "We would rather have a thoughtful, smart, careful conversation about a minimum wage that works for all, but then let states that can afford to go higher do so. It's complicated because people take sides and yell, 'We are not going to do that.' (The ORA) is not going to do that. But we do press for the president and Congress to think about everybody carefully as we go through this process."
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