Businesses find creative ways to cope with minimum wage hikes

[dismal]

Businesses find creative ways to cope with minimum wage hikes
When the minimum wage in San Jose went from $8 to $10 an hour in 2013, Adolfo Gomez started sending kitchen staff at his Mexican restaurant home early. His mother and brother handled the extra work..

In Albuquerque, Myra Ghattas told cooks and hostesses to come in later when the wage there increased from $7.50 to $8.50 the same year. Down the road, Steve Paternoster started closing the bar early at his Italian restaurant.

"You just schedule as tight as you can," said Paternoster, who owns Scalo Northern Italian Grill. "I put the emphasis on being there fishing when the fish are biting."

As political leaders in Los Angeles look to raise the minimum wage, some business owners have argued the move would force layoffs for workers and price increases for customers. But a look at how businesses fared after minimum wage hikes elsewhere offers a more nuanced portrait of how businesses cope with higher labor costs.

Many owners who at the time predicted their business would close are still in operation. Mass layoffs weren't an option, business owners said, because service would suffer.

Still, the wage increases ate into profits at businesses in San Francisco, San Jose, Albuquerque and Santa Fe, N.M. And that fundamentally changed the way they did business. Owners couldn't simply absorb the costs, so they scrubbed their budgets to preserve profits.

Many question whether workers benefited.

http://www.latimes.com/business/la-fi-minimum-wage-cities-20150211-story.html#page=1

It seems like many of the things basic economics would predict in response to a minimum wage increase are in evidence here. Reductions in hours, lost profits, reduced service, shifting investment to lower labor cost models.

Do greedy business owners respond to incentives after all?

 

[Nice Squirrel]

Good for them, now the current employees can use two hours a day find creative ways to work elsewhere for more money.

 

[ksen]

The story says the MW increase ate into the profits of those two places not that profits were eliminated. The restaurants were still profitable but not as profitable as the owners were used to. The owners didn't have to do any of those cutbacks but in order to preserve the level of profit they felt entitled to they resorted to scamming off family for free labor and making it more likely their trained staff would look for better hours somewhere else.

Which is their prerogative as business owners.

Yes, business owners respond to incentives just like anyone else. Why would we think they wouldn't?

 

[Axulus]

The story says the MW increase ate into the profits of those two places not that profits were eliminated. The restaurants were still profitable but not as profitable as the owners were used to. The owners didn't have to do any of those cutbacks but in order to preserve the level of profit they felt entitled to they resorted to scamming off family for free labor and making it more likely their trained staff would look for better hours somewhere else.

Which is their prerogative as business owners.

Yes, business owners respond to incentives just like anyone else. Why would we think they wouldn't?

Around 15%-20% of restaurants close every year. They do so most often because there is no profit being made. How do you know that minimum wage hike didn't have anything to do with this for some of them in CA?

 

[ksen]

Around 15%-20% of restaurants close every year. They do so most often because there is no profit being made. How do you know that minimum wage hike didn't have anything to do with this for some of them in CA?

If 15%-20% of restaurants close every year and it's the same when the MW is raised and when it is not raised then it's probably safe to say the MW increase didn't have too much of an effect on restaurant closings.

The two restaurants in the story didn't close because of the MW. The MW didn't even cause them to become unprofitable. The MW just helped reallocate some of the profit, not all of it, to the people working in those restaurants. And the owners didn't like that so they shifted work and shifts around in order to preserve the level of profit they had become accustome to.

If MW induced restaurant closings were rampant then the author of the OP piece wouldn't have had a hard time finding examples of those to fill his story with.

 

[ksen]

Way back during the booming 80s and 90s after tax corporate profits were between 5% and 6% of GDP. Currently after tax corporate profits are around 11% of GDP. After tax corporate profits as a percentage of GDP has almost doubled over the past 30 years. Would it really be so horrible for businesses to have after tax corporate profits go back to the level it was during the Reagan years?

Link to graph: http://research.stlouisfed.org/fred2/graph/?g=cSh

The problem is that the owners of those profits have become used to that level of profits and will fight tooth and nail to prevent any withdrawal back to normal levels of profit.

IMO the current level of corporate profits is unsustainable if you want to have a healthy, thriving economy.

 

[Axulus]

Way back during the booming 80s and 90s after tax corporate profits were between 5% and 6% of GDP. Currently after tax corporate profits are around 11% of GDP. After tax corporate profits as a percentage of GDP has almost doubled over the past 30 years. Would it really be so horrible for businesses to have after tax corporate profits go back to the level it was during the Reagan years?

Link to graph: http://research.stlouisfed.org/fred2/graph/?g=cSh

The problem is that the owners of those profits have become used to that level of profits and will fight tooth and nail to prevent any withdrawal back to normal levels of profit.

IMO the current level of corporate profits is unsustainable if you want to have a healthy, thriving economy.

How much capital was there invested 30 years ago vs. today? Did the amount of capital also double as a percentage of GDP? If so, that would suggest that profits are normal (return on capital stayed the same).

Take a look here, for example: http://research.stlouisfed.org/fred2/series/RKNANPUSA666NRUG

 

[ksen]

You should do some research and report back.

 

[Axulus]

You should do some research and report back.

You are the one making the claim that profits need to get "back to normal" - perhaps you should do the research to defend the notion that they aren't normal.

 

[ksen]

You should do some research and report back.

You are the one making the claim that profits need to get "back to normal" - perhaps you should do the research to defend the notion that they aren't normal.

I've provided research from the St. Louis Fed that illustrates that after tax corporate profits as a percentage of GDP is at record high levels. I said I believe that level is not sustainable. You said something about maybe capital levels blah blah. Well, I'm not going to research capital levels for you. If you want to talk about capital levels and their effects on after tax corporate profits as a percentage of GDP have at it.

It's not my job to research your stuff for you.

 

[Axulus]

You are the one making the claim that profits need to get "back to normal" - perhaps you should do the research to defend the notion that they aren't normal.

I've provided research from the St. Louis Fed that illustrates that after tax corporate profits as a percentage of GDP is at record high levels. I said I believe that level is not sustainable. You said something about maybe capital levels blah blah. Well, I'm not going to research capital levels for you. If you want to talk about capital levels and their effects on after tax corporate profits as a percentage of GDP have at it.

It's not my job to research your stuff for you.

That's a simpleton analysis. X is bigger than Y, therefore X is not normal.

Profits are primarily a function of return on capital. Why wouldn't you expect profits as a percent of GDP to go up if there is more capital investment as a percentage of GDP?

 

[ksen]

X being at it's highest level in at least the last 60 years is not normal.

 

[PyramidHead]

Around 15%-20% of restaurants close every year. They do so most often because there is no profit being made. How do you know that minimum wage hike didn't have anything to do with this for some of them in CA?

If 15%-20% of restaurants close every year and it's the same when the MW is raised and when it is not raised then it's probably safe to say the MW increase didn't have too much of an effect on restaurant closings.

The two restaurants in the story didn't close because of the MW. The MW didn't even cause them to become unprofitable. The MW just helped reallocate some of the profit, not all of it, to the people working in those restaurants. And the owners didn't like that so they shifted work and shifts around in order to preserve the level of profit they had become accustome to.

If MW induced restaurant closings were rampant then the author of the OP piece wouldn't have had a hard time finding examples of those to fill his story with.

Ok, but what's the endgame here? Will businesses that accept lower profit and maintain the same employment be able to compete with businesses that don't? On the surface, it would seem that the opposite would happen.

What incentive, other than the goodness of their hearts, would a business owner have to not maximize profits in this situation? The whole point is to get more money into the hands of workers, so perhaps raising minimum wage would work better if it were combined with a way for businesses to salvage whatever overhead they lose as a result.

 

[Axulus]

X being at it's highest level in at least the last 60 years is not normal.

Does this also include profits earned on foreign assets owned by the corporations? US corporate investment and activities in other countries being the highest it has ever been is also not normal. Globalization really took off in the 90s.

 

[ksen]

X being at it's highest level in at least the last 60 years is not normal.

Does this also include profits earned on foreign assets owned by the corporations?

I believe it does.

US corporate investment and activities in other countries being the highest it has ever been is also not normal. Globalization really took off in the 90s.

Yes, and according to this Forbes' article that accounts for about 1.5%-2% points of the after tax corporate profit to GDP ratio.

 

[ksen]

Ok, but what's the endgame here?

The end game is to fix part of the stagnating wages problem.

Will businesses that accept lower profit and maintain the same employment be able to compete with businesses that don't? On the surface, it would seem that the opposite would happen.

I believe that's one of the reasons a MW is needed. MW wage forces all businesses to raise some of their wages at the same time so that companies that would like to raise wages won't feel like they can't because of the bad actors in their industries that are quite happy continuing to pay poverty wages.

What incentive, other than the goodness of their hearts, would a business owner have to not maximize profits in this situation? The whole point is to get more money into the hands of workers, so perhaps raising minimum wage would work better if it were combined with a way for businesses to salvage whatever overhead they lose as a result.

I'd like to see two minimum wages: one for adults and one for teen workers. That might alleviate things a little bit. But this talk of, "If I have to accept slightly lower profits I'm just going to take my ball and go home." I mean really, some profit is still better than no profit and the restaurants in the OP were still making profit even after the new MW rate was taken into effect.

 

[Nice Squirrel]

I'd like to see two minimum wages: one for adults and one for teen workers. That might alleviate things a little bit. But this talk of, "If I have to accept slightly lower profits I'm just going to take my ball and go home." I mean really, some profit is still better than no profit and the restaurants in the OP were still making profit even after the new MW rate was taken into effect.

And also after rereading the article, one of those businesses is closing early because of lack of customers. I mean minimum wage.

 

[Axulus]

I'd like to see two minimum wages: one for adults and one for teen workers. That might alleviate things a little bit. But this talk of, "If I have to accept slightly lower profits I'm just going to take my ball and go home." I mean really, some profit is still better than no profit and the restaurants in the OP were still making profit even after the new MW rate was taken into effect.

And also after rereading the article, one of those businesses is closing early because of lack of customers. I mean minimum wage.

Your snide attitude aside, prices could've been raised to cover the costs of the MW, driving away customers. This is why we shouldn't make decisions and form opinions based on soundbites, as reality is a bit more complicated.

 

[Nice Squirrel]

And also after rereading the article, one of those businesses is closing early because of lack of customers. I mean minimum wage.

Your snide attitude aside, prices could've been raised to cover the costs of the MW, driving away customers.

Snide? It sounds like they weren't profitable during late night and concentrated labor where they were most profitable. Smart business. Especially since the bar isn't making money to cover the cost of minimum wage employees.

This is why we shouldn't make decisions and form opinions based on soundbites, as reality is a bit more complicated.

Of course not, but we have nothing else to go on. I'm sure if we actually could open the books and see the actual numbers and business plans then we could see exactly what is happening.

For example, a local pub closed "due to the smoking ban". Steve Malloy (tobacco lobbyist) sent a film crew in to document closing night. He plastered it around as the poster child of tobacco bans killing small businesses. Trouble is everyone in the bar knew the owner was a incompetent drunk who alienated his customers, fired his hardest workers and never noticed that his employees were skimming the top. In other words: bad restaurant management.

But publicly: it was the tobacco ban.

 

[Axulus]

Your snide attitude aside, prices could've been raised to cover the costs of the MW, driving away customers.

Snide? It sounds like they weren't profitable during late night and concentrated labor where they were most profitable. Smart business. Especially since the bar isn't making money to cover the cost of minimum wage employees.

This is why we shouldn't make decisions and form opinions based on soundbites, as reality is a bit more complicated.

Of course not, but we have nothing else to go on. I'm sure if we actually could open the books and see the actual numbers and business plans then we could see exactly what is happening.

For example, a local pub closed "due to the smoking ban". Steve Malloy (tobacco lobbyist) sent a film crew in to document closing night. He plastered it around as the poster child of tobacco bans killing small businesses. Trouble is everyone in the bar knew the owner was a incompetent drunk who alienated his customers, fired his hardest workers and never noticed that his employees were skimming the top. In other words: bad restaurant management.

But publicly: it was the tobacco ban.

I'm just saying we can't jump to conclusions for any particular case. There are many reasons why businesses fail. Increased labor costs can certainly be a contributing factor in some situations. Similarly, rarely can say that increased labor costs are the sole factor for any particular business shutting down.