The Paradoxical Position of the National Restaurant Association in the Minimum Wage Debate

March 16th, 2014 at 3:13 pm

In recent weeks, supporters and opponents of the proposal to raise the federal minimum wage to $10.10 have circulated letters to further their cause.  I was one of the 600 signers of the supporters’ letter, organized and posted by the Economic Policy Institute on their website.

We learn in today’s paper that unknown to its signers, the opponents’ letter was organized and even partially drafted by the National Restaurant Association (NRA).  From today’s NYT:

The National Restaurant Association did not disclose upfront its role in helping draft and circulate a statement signed by more than 500 prominent economists, including four winners of the Nobel Prize, urging the federal government to reject the proposal by the Obama administration to increase the minimum wage to $10.10 an hour, interviews with signers of the letter showed.

OK, clearly smarmy but biz as usual in DC.  Clearly, the (other) NRA thought they’d lose signatories if they revealed their role, a fear the Economic Policy Institute, a research organization (where I used to work), did not share.

But the NRA’s hypocrisy is only partly in hiding its role to gain signers.  What bothers me is the lobby’s phony concerns about the impact of the increase.  What they actually, and legitimately, worry about is the impact of higher labor costs of their members’ bottom lines.  But what they say they worry about in both the letter and other public statements is how the policy will hurt low-wage workers and not reach the enough of the poor.

The letter emphasizes how the minimum wage will cost jobs and is poorly targeted, arguments that are not even well supported by the CBO report that they cite (CBO finds that while 500,000 jobs are lost, 24.5 million workers benefit from the increase; and two-thirds of the direct beneficiaries of the proposed increase are in the bottom half of the income scale), though I’m sure many of the economists who signed the letter believe these claims to be true.

But the NRA does not exist to raise the living standards of low-wage workers.  If they did, presumably they’d listen to those workers who loudly and persistently advocate a position on the minimum wage which is diametrically opposed to that of the NRA.

Here’s what the NRA says it actually does:

We advocate for pro-restaurant regulation and operational freedom. And we empower all restaurant owners to achieve even more success than they thought possible.

Got that?  The clients here are of course restaurant owners, who through their membership will achieve unimaginable success.  Not minimum wage workers; not poor people.  The fact that the NRA is protecting its members’ profits is not exactly news, and in fact their letter notes that profit margins are tight among low-wage employers.

But their very presence in this debate, given their mandate, actually tells you something important about how minimum wage increases are absorbed in real life, and why we don’t see anything like the job loss effects opponents decry.  Higher minimum wages are partially paid for out of the profits of low-wage employers, from the franchisees to their large corporate parents, where profit margins are considerably fatter.

In other words, the NRA’s very presence in this debate, the very fact that they planted this letter, is paradoxical evidence against the argument that the higher minimum wage comes exclusively out of workers’ jobs and higher prices.  It also comes out of profits, more specifically, out of redistribution from profits to wages, which in an era where the former is highly elevated and the latter very much depressed, makes it a timely policy.

Update: Both Noah Berger and Larry Mishel point out the following quote in the NYT from Robert Lucas, Nobel-winning economist who signed the opponents’ letter.

“I was convinced that the minimum wage was not a good idea in Milton Friedman’s class in 1960,” he said, referring to the University of Chicago economist, whose classes he took as a graduate student.

In other words: I learned how this works 50 years ago so don’t bother me with the path-breaking empirical work on the issue since then that’s changed the way many, probably most, economists think about this.

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19 comments in reply to "The Paradoxical Position of the National Restaurant Association in the Minimum Wage Debate"

  1. Brett says:

    It really shouldn’t be a problem for the restaurant business. If everyone (including them) gets hit with a minimum wage increase, then they aren’t disadvantaged compared to other businesses – they just raise their prices accordingly to reflect the change, or make other adjustments. It would only be a problem if the resultant price raises caused people to shift towards non-restaurant sources of food (such as eating more at home), but that doesn’t seem to have happened with places where the real or de facto minimum wages are higher.

    In other words: I learned how this works 50 years ago so don’t bother me with the path-breaking empirical work on the issue since then that’s changed the way many, probably most, economists think about this.

    There’s a bunch of freshwater economists on there who are probably the same way (Edward Prescott, for example).

  2. Richard A. says:

    The National Restaurant Association also wants expanded guest worker programs which would push down wages while also reducing the demand for US workers in targeted occupations. Raising the minimum wage would act as a barrier against the employment of guest workers near the minimum wage.

    • Shantyhag says:

      Larry, as a restaurant owner who came up through the ranks, I’m going to have to disagree with both you and the rather ludicrous Slate article.

      I was an exceptional server when I was younger. A server is part giver of service, part salesman. Essentially, they are paid on commission by the people purchasing the goods and services, if that service lives up the expectation of the person doing the purchasing. As such, as a server, over the course of years I averaged well over 20% gratuities (at a time when the average was 15 or less). Given that I was also consistently, restaurant after restaurant, the highest average sales waiter meant that I made a rather comfortable living. The minimum wage at that time for non-servers was around 5 bucks. Even had it been 10 then it would not have given me the standard of living that being excellent at my job provided. As a professional server I would have to guess that I averaged north of 25 dollars an hour almost always. I worked in Texas most of that time where the wage for servers was 2.13 then 2.35/hour. Many days I wouldn’t even bother clocking in… the wages weren’t why I came to work.

      My restaurant now is fairly small, and we live in a state where the minimum wage is paid to servers as it is to all. I have a 19 year old young man who is learning the craft and he probably averages 500/week from tips alone. His wages added to that, he’s managing to pay for college and help out his disabled mother. But even if he were working for the same 2.35/hour that I got in Texas he’d be making more than a decent living for a kid his age. If he were forced to choose between tips and wages, I’m almost certain that he’d choose tips where he got to influence the outcome of his weekly pay. Eventually he’ll move on to a busier establishment where his earning potentials can be truly realized. In a great bar/restaurant he’ll be making 300 bucks a night easily. I just don’t see how that’s BS at all or why his earning potential necessarily needs to be federally protected.

      I am a fan of living wage provisions, but great servers don’t need the help they need business coming through the door and that happens more often when prices can be kept lower.


  3. Stephen Weinberg says:

    I’m in favor of a minimum wage increase, but I don’t buy Jared’s particular argument here. It’s rather zero-sum. The mere fact that the big franchises are opposed to the legislation doesn’t mean that the effect will be a transfer from ownership to labor.

    Take an extreme example: a bill to ban all fast food restaurants, the NRA would be opposed to that one too, but it would also clearly hurt the workers in that sector as well.

    The fact that the NRA opposes the bill does NOT tell us how much of their loss they expect to come from transfers to employees (a win for labor) v reduced scale of operations, fewer firms, lost efficiency from having fewer workers to spread the work over, etc (losses for labor).

    I agree that the evidence strongly supports the increase. I just think the NRA’s position on the bill adds zero evidence whatsoever to that assessment and moves my Bayesian prior not one iota.

    • Min says:

      If the NRA oppose a bill to ban fast food restaurants, they would not be coy about it, but would loudly proclaim their opposition. It is their not being up front about opposing a hike in the minimum wage that lends credence to the idea that they are putting self interest first, and that they have reason to.

  4. Robert Buttons says:

    Here is an example of the “path-breaking empirical work” Robert Lucas is talking about.

    “Minimum Wage Channels of Adjustment”. Hirsch, Kaufman, et al. 2011
    They studied fast food restaurants during the 2007-2009 minimum wage hikes. They found profits declined by 20% for FY2010. Yet, the authors conclude, puzzlingly, “MW by itself has a negligible to small effect on profits, employment, and growth”. My point: the empirical work on MW is very weak.

    • DonB says:

      Don’t you think that the Great Recession had an effect on the total revenue of those fast food restaurants and thus on their profits? I haven’t read the report, but I do suspect that it mentioned that factor.

      • Min says:

        Doesn’t empirical work on the minimum wage go back decades, and cover varying economic conditions? It does not stand or fall on one study.

  5. smith says:

    The citing of empirical work on MW is very weak. With all due respect, it can border on misrepresentation, as here is the information on profits in 2010 given in context from the actual paper:
    page 34
    “FY 2010 was, in the words of one owner, a “perfect storm” for profit (-20%) since the base of labor cost rose the most in 2009, commodity prices spurted upward in 2010, and local economy activity and restaurant sales remained anemic. It is impossible for us to decompose the weight due to each factor, but the owners agreed in interviews that the decline in sales volume much dominated the MW as a contributor to lower profit growth (roughly estimated as 10 – to -1).”

    Page 26 estimates labor’s share of costs at 24%, so boosting the minimum 30% could add .3 x .24 = 7.2%, which the authors claim is largely passed on to consumers.
    “We do not have a direct measure of labor’s share of costs, but use a guesstimate of 24% based on data from one of the franchise owners showing that non-managerial payroll was 18% to 20% of total sales.”

    Also, get a load of JB huffing and puffing:

    • Robert Buttons says:

      Thanks Smith.

      I try to stay laconic (lest my posts don’t get read). But you are exactly right. After successive MW increases, the authors observed: not only decreased profits, but also higher inflation and decreased aggregate demand.

  6. save_the_rustbelt says:

    Quick observation – much of the pro hike commentary is coming from those who have never met a payroll, directly risked their own money or managed anything more complex than an academic department ( an exercise in herding cats to be certain).

    While I’m not opposed to a phased-in increase, the hating on business is very disturbing. “You didn’t build that” comes to mind. And in much of the country, the recession never really ended. Look at the financial of restaurant groups.

    • Robert Buttons says:

      I own a business. Higher MW will cause me to hire only workers with experience. I won’t be able to “waste” too many work hours on training.

      Keeping with the unintended consequences theme, there is a proposal to reduce 401k tax benefits for high earners:

      Obama’s proposal is being sold as a way “to spur saving by low-, middle-income earners”. I will tell you 401k costs, audits, accounting, etc. are a big pain for me. Further, if real estimates (NOT the blue sky numbers stock brokers tell you) of future taxes, YoY equities growth, inflation and PLAN ADMIN COSTS are considered, you will find the 401k net benefits savings to be minimal.

      Therefore, this plan won’t help the middle class because I will just get rid of 401k altogether.

    • tt says:

      does Lucas ‘manage a payroll’ ?

    • Min says:

      Hi, Rusty! Long time.

      It seems like we have different interpretations of the phrase, “You didn’t build that.” It is not anti-business, but a corrective to the notion that nobody owes anything to the community. When I was growing up in the Deep South, which was then, as now, a conservative area, there was a strong sense of community, and no sense at all that business and communities were at odds. Somehow modern conservatives seem to have lost that connection to the community. Very strange.

  7. smith says:

    **** NEW VARIATION ****

    What are issues associated with creating geographical variations in the national minimum wage to adjust for differences in cost of living?

    Either New York City residents are underpaid or the Harlingen Texas minimum wage will be too high. (No I don’t think New York City residents will, can or should move en mass to Texas, thought there is some evidence of continued immigration from within the US to that state)

    Half-gallon of milk – $2.33
    Monthly rent – $640
    Home price – $218,554
    Gallon of gas – $3.293
    Haircut – $7.50
    Movie ticket – $9.17
    Bottle of wine – $6.27

  8. Kevin Rica says:

    The NRA states on its blog that it wants:

    A robust legal and visa system that meets the needs of the U.S. economy by giving employers—who have made every reasonable effort to hire Americans—a workable and fair system for hiring legal foreign workers at all skill levels.

    On the other hand it doesn’t want to attract Americans by paying a decent wage. Immigrants will work for less; less than the proposed minimum wage (or even the current minimum wage).

    Tighten immigration laws and enforcement sufficiently and the wage problem will take care of itself by driving unemployment lower.

    The Administration’s embrace of both higher minimum wages and higher immigration is a study of cross-purposes. The two policies are logically irreconcilable. Such policy inconsistency would lead to massive unemployment.

    Lucus’ mentor, Milton Friedman was more consistent ( he opposed the minimum wage and supported low-wage immigration. A combination, he happily noted, that is incompatible with the “welfare state.” He never claimed that he was concerned about the well-being of American workers.

    • Min says:

      Is the combination of no minimum wage and immigration of low-wage workers incompatible with the welfare state? In fact, they mesh together in that Walmart and others can pay below slavery wages and the welfare state takes up the slack. In effect, the welfare state subsidizes a few businesses, like Walmart, at the expense of others. Eliminating the welfare state would end up forcing relatives and friends of low wage workers to take on the subsidy to Walmart, et al. Raising the minimum wage is a better way.

  9. pgl says:

    Your update notes how Robert Lucas can’t be bothered to read the empirical papers on the employment effects of a higher minimum wage. The authors of those papers should not be too upset as Lucas once scoffed that he should not be bothered to read some paper by Greg Mankiw as this paper was New Keynesian in nature.