URC

The Effects of Raising the Minimum Wage on the Hospitality Industry

Emily Carpenter

Bradley University

Key Words: Minimum wage, hospitality industry

Abstract

President Obama broached the subject of raising the minimum wage in the United States, and this paper investigates the impacts of the increase, especially on the hospitality industry. The pros and cons of raising the minimum wage are discussed in terms of employees and employers. The minimum wage will eventually be increased, knowing the benefits and challenges associated with doing so could help managers prepare for the ensuing changes.

Introduction

On January 28, 2014, President Obama addressed the issue of raising the minimum wage during his State of the Union speech. This has been a very controversial topic for the past couple of years since the President called on Congress to raise the federal minimum wage. President Obama would like to increase the minimum wage for those workers under new federal contracts from $7.25 per hour to $10.10 per hour. This executive order would apply to all contractors performing services for the federal government. This plan differs from previous ones as it would only affect future contracts and contract renewals if other terms of the agreement have changed. It would not impact any existing contracts. The change would impact the lives of more than 2 million people, which is significant, but far fewer workers than originally planned ("Obama to Sign Executive," 2014). People have mixed feelings on how effective the increase will be and the consequences that could follow. It is important to look at the history of the federal minimum wage in order to fully understand why the President and legislators are pushing for such a hike. The federal minimum wage was implemented in 1938 as a part of the Fair Labor Standards Act (FLSA). The very first minimum wage was set at only twenty-five cents. At that time, twenty-five cents was a lot of money (Sherk, 2013). In the United States (U.S.) today, when adjusting for inflation, twenty-five cents in 1938 would be equivalent to $4.07 in 2012 (Kurtz, 2013). Table 1 shows the steady increase of the federal minimum wage over time ("History of Federal Minimum," n.d.). It is amazing to see how far our economy has grown and the changes that could happen in the future.

Table 1. Minimum Wages Over Time

Year

1938

1945

1956

1968

1979

1981

1991

1997

2007

2009

Minimum Wage

$0.25

$0.40

$1.00

$1.60

$3.10

$3.35

$4.25

$5.15

$5.85

$7.25

Note. The numbers presented in this chart are an overview of the minimum wage increases over time. Not every increase is shown in this table. Adapted from "History of federal minimum wage rates under the Fair Labor Standards Act, 1938-2009," n.d.

The U.S. minimum wage is currently at $7.25 per hour and was instituted in 2009. States are allowed to set their own minimum wage rates as long as they meet the federal standard. Several states have already taken measures to increase wages but there is not enough information to immediately know what the effects will be if the federal minimum wage is raised. Washington is currently the state with the highest minimum wage, which is set at $9.19 an hour. The average minimum wage in the U.S. is $7.57 per hour (Sherk, 2013). Managers in the hospitality industry in particular, have many concerns as they employ millions of workers, many of whom are in low-wage jobs. An increase in the federal minimum wage has both advantages and disadvantages for employees, organizations, and consumers within the hospitality industry.

Literature Review

Advantages for Employees          

A raise in the federal minimum wage would greatly impact employees in the hospitality industry. When looking at the effects, it is important to examine both the advantages and the disadvantages on workers. One of the greatest positive impacts on employees is the increase in standard of living. Currently, the federal minimum wage is at $7.25 per hour. An employee working full time at this rate would earn $15,080 annually. The federal poverty threshold is currently $15,130 meaning that those working at minimum wage would have income just below the poverty line. It is also important to note that seventy percent of minimum wage employees are part-time, meaning that they would be making even less money (Shemkus, n.d.). The leisure and hospitality industry currently has nineteen percent of workers with hourly wages at or below poverty level, which is higher than any other industry ("Raising the Minimum Wage," 2013, p.11). This is very concerning for those who have families to support and several bills to pay. Increasing the minimum wage would put money back into the pockets of low-wage workers so that they could afford goods and services necessary to have a positive quality of life.

Many advocates for raising the minimum wage agree that an increase would not only reduce poverty but also help to reduce income inequality. Raising wages at the bottom is both a fair and popular solution to fixing income inequality. One report found that the twenty of the richest people in America have as much money as the entire bottom half of the population put together. Income inequality is said to cause major problems such as power differences, which can lead to corruption and weak democracies. Our country needs to address the issue of income inequality in order to preserve our national and global security. Employees have fears about the impact of the increase of the federal minimum wage but many are also hoping for a change. One survey found that sixty-five percent of low-income workers in the United States believe that Congress passes laws that only benefit the wealthy (Offenheiser, 2014). Decreasing income inequality could positively affect Americans and could greatly aid the economy.

Another advantage to increasing the minimum wage is that it increases the level of training as well as boosts employees' morale. One study found that as labor costs escalated, the quality of training offered to employees increased by forty percent in the firms they studied. The national minimum wage increase pushed the training efforts of small enterprises and this enhanced training, which led to improvements in quality of products and services, too (Heyes & Gray, 2003, p. 80). In another study, a survey was given to employers after the San Francisco Airport implemented a living wage policy to understand the effects of the increased wages. Researchers found that the raise in minimum wage increased productivity, overall work performance, employee morale, and customer service. At the same time, absenteeism decreased along with equipment maintenance and equipment damage (Keenan & Greenwich, 2013). Many workers might fear that their employer will fire them when the wages increase, and therefore employees work harder to maintain their position within the company. Companies tend to put more effort on training workers when wages are increased in order to retain employees. The cost of hiring and recruiting new employees is higher than the cost it would take to give workers better training and education for their jobs. With so much competition for motivated and skilled workers, people have to be at their best to retain their jobs.

Disadvantages for Employees

When discussing the possible minimum wage increases, one of the most controversial issues is whether or not such a change will lead to unemployment. This is a very important topic for those employees in the hospitality industry as it is one of the largest employers. A raise in the minimum wage would ultimately lead to higher labor costs, which in turn would cause employers to lay off workers. The employees most likely to be affected are inexperienced workers who take minimum wage jobs. This group would be the hardest hit if there were to be a change in the federal minimum wage. Researchers at Cornell and American Universities found that a raise in the minimum wage would eliminate at least 467,000 jobs (MacDonald, 2013). This is a significant decrease in jobs and many people would be affected not only in the hospitality industry but in others as well. The increase in the federal minimum wage would be particularly hard on small-business owners, as they do not have the level of profits as larger organizations to absorb the new labor costs. Michael Hicks, Director of the Center for Business and Economic Research at Ball State University said, "When the minimum wage for unskilled workers surpassed what companies were able to pay during the recession, employers started cutting back. Instead of hiring a dozen teens to work a popular summer restaurant or theme park, a company hired six or less. Instead of filling positions that required no skills, companies were making due with what they had" (Bailey, 2010, para. 21). Another important topic along with unemployment is the cut in hours that many employees would have to experience. A study of fast food establishments in Illinois and Indiana found that there was a reduction of 2.17 hours for full time employees and 2.44 hours for part-time employees when the minimum wage was increased. They also found that employment in the fast-food sector of downstate Illinois did indeed decrease (Powers, 2009, p.391). There are many concerns about an increase in unemployment in the hospitality industry and the potential for workers to lose hours as a result of the change.

The minimum wage hike would also lead to a higher level of competition among workers applying for unskilled jobs. Low-skilled workers will be forced to compete with higher-skilled workers if labor costs go up and employers have to cut back on hiring. Those individuals with a limited skill set and lack of previous experience will struggle to find employment. GOP Leader Mitch McConnell stated, "We have a crisis in employment among young people right now, and generation 18-30, people that got out of college are finding there are no jobs for them. The last thing we want to do is have even fewer jobs for younger people" ("Obama to Sign Executive," 2014, para. 5). The raise in hourly wages could cause unemployment across all occupations. As a result, if every minimum wage job is $15 an hour, people who are trained in one type of entry level job will be more receptive to any position as the pay rate would be equal. This means that fast food industry jobs will become much more competitive especially if other entry-level positions cutback on hiring. People who gravitate towards the fast food industry would more likely be skilled workers. For example, a factory worker who previously made $8 an hour working a strenuous job could make $15 and hour no matter what entry-level position he or she chooses. This person has no reason to not want to switch to food service as the hours might be more flexible, as well as, less physically demanding (Reisman, 2014). There are a lot of significant issues to consider involving young people and the competition among applicants for jobs.

One of the most nerve-racking impacts of the federal minimum wage increase is the idea that low-skilled workers may be replaced with technology to help with rising labor costs. Restaurant chains around the United States have already started implementing tablets that guests can use to order their food and pay their bills. This new technology has the potential to replace wait staff or greatly diminish the amount of waiters and waitresses that restaurants will need at one time. This new tablet called Presto, can be found at restaurants such as Applebee's, at a cost of $100 for each console per month. The cost for the Presto tablets, for a restaurant that is open eight hours a day and seven days a week, comes to forty-two cents per hour per table, which is cheaper than the cost of any waitress or waiter (Goldberg, 2013). Technology can be a benefit to employers but is a major threat to employees. Machines aid in the efficiency and effectiveness in creating products and services but they also require fewer employees to be present. Employers will need to consider whether efficiency and effectiveness are more important than guest interaction. Older generations expect high levels of guest service and are less technologically advanced. As a result, restaurants, hotels, and other areas in the hospitality industry will have to consider whether technology would be the best solution for the increases in labor costs in the future.

An increase in the federal minimum wage will greatly impact the amount of bonuses and benefits that employees receive. Small business owners will likely be forced to cut bonuses first as a result of the increase. Many managers would not want to lay off their valuable employees, many of whom have worked for their businesses for several years. So in order to balance the new heavy labor costs, bonuses and benefits will be reduced or eliminated. Davis Phillips, the owner of Phillips Entertainment Inc., which operates many tourist attractions in Alamo City, Texas such as Ripley's Believe it or Not Museum and the Tomb Rider 3D attraction, expressed his concerns about the federal minimum wage hike. Phillips stated, "The wage increases could not have come at a worse time for the hospitality industry because the recession had already forced people across the country to cut back on vacations and other discretionary spending" (Bailey, 2010, para. 14). What Phillips is facing is very similar to other organizations in the hospitality industry. Their way to alleviate the higher labor costs is by cutting benefits, bonuses, and decreasing worker's hours. These changes heavily impact employees who rely on their jobs to pay for bills and support their families. Phillips is not the only one who feels this way about the possible labor cost increases. Many other hospitality industry executives are also worried about the challenges, which would be caused by such a change. Managers do not want to have to eliminate benefits and bonuses as many truly care about the wellbeing of their workers and understand the importance of rewarding those who are top performers. When workers are not motivated, it affects all production of goods and services. It is only a matter of time before employees will start to feel the impact of the minimum wage increase and see just what areas will actually be directly affected. 

Advantages for Organizations

Not only does the increase in the federal minimum wage affect employees but it also affects the organizations themselves. There are a few advantages of the wage hike on the hospitality industry. One of these advantages is job retention and how reduced turnover can help balance increased wage costs. Critics of the minimum wage increase believe that it will lead to unemployment but supporters argue that the opposite will happen and that job retention will be greater. A study that focused on restaurant/bar employees and teenagers, found that even when an increase in the minimum wage is implemented in a recessionary environment, it does not appear to have strong impacts on reducing employment with either sector (Addison, Blackburn, & Cotti, 2013). Another article compared a study from thirty years ago to more recent research. The study from thirty years ago found that minimum wage increases do lead to a reduction in employment whereas a more recent study that used more robust data found that minimum wage increases have little effect on employment. Studies found that the reason why minimum wage increases do not result in a decrease in employment is because of the change in turnover. Employee turnover is very expensive so organizations try to reduce the turnover to offset the large costs associated with it (Heath, 2014). Another great example of the effects of minimum wage on job retention is the comparison between Sam's Club and Costco. Costco pays its employees forty percent higher wages than Sam's Club employees. Turnover for Costco employees is seventeen percent whereas the turnover for Sam's Club is forty-four percent (Keenan & Greenwich, 2013). Costco is a real-life example of how a company that gives its employees higher wages has better job retention. Since they pay their employees higher wages, they focus on training and retaining their staff to help reduce the extra costs associated with hiring new workers.

Disadvantages for Organizations

Organizations also face a lot of setbacks when the minimum wage increases. Our nation is still slowly coming out of the recession of 2008-9. The increase in minimum wage may put more money in peoples' pockets but at the same time organizations are forced to raise the prices of their products and services, due to increased labor costs. These increases lead people to cutback on spending and vacations, which greatly impacts the hospitality industry. The real question at hand is how high prices will be expected to rise. Small increases will not make a huge difference but if the increases are substantial, it could hinder people from taking vacations and buying extra goods and services that are not necessities. An increase in prices leads to a lower demand for products and services, which in turn lowers the need for employees. Organizations would have to let go of valuable workers to compensate for the difference (Covert, 2014). The issue of whether a raise in the federal minimum wage would hike the prices of goods and services is very controversial and there is plenty of conflicting data on the subject.

Advantages for Consumers

The increase in the federal minimum wage will not only affect employees and the organizations in the hospitality industry but also consumers. Supporters of the minimum wage hike believe that it will cause an economic stimulus. One study in Illinois found that raising the minimum wage to $10.65 across four years would bring in an additional $3.8 billion directly to families who would then spend the money on extra goods and services of their choice (Hall & Gable, 2012). Higher wages could help America recover faster from the recession and grow the economy. Economists stated, "low-wage workers are more likely than any other income group to spend any extra earnings immediately on previously unaffordable needs or services" (Hall & Cooper, 2012, para. 19). Since employees making low wages are more likely to spend their extra cash on goods and services, our economy could really get a boost from the federal minimum wage hike.     

Another advantage to consumers as a result of the minimum wage increase would be the improved quality of goods and services in the hospitality industry. Since so many organizations would be forced to pay higher labor costs, it makes sense that they would try to focus more on their products and services to increase the amount of customers that they have. People might be apprehensive to spend their money as prices go up, so organizations would need to make sure that offered the best value. It may cost more to provide a quality product but by providing a quality experience takes minimal time and effort on upper-level management's part to train employees how to treat customers better. Sometimes it is the small details that make more of an impact then the larger ones.

Disadvantages for Consumers

One of the biggest fears Americans have with the minimum wage increase is the possibility that prices of goods and services will skyrocket. It is true that most businesses will raise prices to balance the increase in labor costs; however, the impact does not seem to be as severe as many people were initially predicting. A report released by the Food Labor Research Center at UC Berkeley's Center for Labor Research and Education claims that the minimum wage hike will only increase retail food prices for American consumers by at the most 10 cents a day (Maclay, n.d.). Foodservice employees are some of the lowest income workers in the United States and they face a higher level of food insecurity. The research center at Berkeley stated, "Our report shows that raising the minimum wage would help them put food on the table while barely, if at all, impacting everyone else's ability to put food on their tables too" (Maclay, n.d., para. 3). As one can see, prices would increase but not enough to significantly hurt consumers.

Summary

Overall, the potential increase in the federal minimum wage will have both advantages and disadvantages on employees, organizations, and consumers within the hospitality industry. Many employees are advocates of the change as it will result in a higher standard of living, reduce poverty, and also lower income inequality. The minimum wage hike would also possibly increase the level of training and education that employees receive as well as increase workers' motivation to work. When employees are satisfied with their jobs, they are more productive and less likely to make mistakes. Employees opposed to increasing the minimum wage believe that the change will lead to unemployment and cause unskilled/low-wage jobs to be more competitive. These employees also worry about being replaced with technology and machines, (which could be an even more powerful impact), than the unemployment that would result from higher labor costs. There is also the fear that the bonuses and benefits that employees once received would be reduced or eliminated altogether, besides those that are federally required. Some organizations are also undecided when it comes to the minimum wage hikes. Supporters believe that it would help with job retention, which would therefore balance costs as it is cheaper to retain employees then to hire new ones. Organizations against the minimum wage increase fear that people would cut back on vacations, goods, and services as a result of the price increase that they would have to make. Finally, consumers either believe that the change would create an economic stimulus and improve the quality of goods and services or those against the idea believe that it would lead to higher prices and the use of technology in place of guest interaction. After researching this topic, it is very clear that there are two distinct sides to this issue. There are some useful statistical references; however, much of the research took place two or more years ago. There are also many weaknesses in the collection of the data. One article explained how many researchers focus on the less-skilled and less-educated groups but they do not realize that even these narrow groups have subgroups that are affected differently (Sabia, Burkhauser, & Hansen, 2012, p.353). Eventually, the government will have to raise the federal minimum wage and only time will tell what type of impact it will have on employees, organizations, and consumers within the hospitality industry.      

References

Addison, J. T., Blackburn, M. L., & Cotti, C. D. (2013). Minimum wage increases in a recessionary environment. Labour Economics, 23, 30-39.

Bailey, W. S. (2010, September 26). Minimum-wage bumps are stinging hospitality industry. Retrieved from http://www.bizjournals.com/sanantonio/stories/2010/09/27/story3.html?page=all

Covert, B. (2014, February 18). What really happens when you raise the minimum wage? Retrieved from http://thinkprogress.org/economy/2014/02/18/3303201/cbo-minimum-wage/#

Goldberg, J. (2013, December 6). The minimum wage and the rise of the machines. Retrieved from http://www.nationalreview.com/article/365606/minimum-wage-and-rise-machines-jonah-goldberg

Hall, D., & Cooper, D. (2012, August 14). How raising the federal minimum wage would help working families and give the economy a boost. Retrieved from http://www.epi.org/publication/ib341-raising-federal-minimum-wage/

Hall, D., & Gable, M. (2012, January 30). The benefits of raising Illinois' minimum wage. Retrieved from http://www.epi.org/publication/ib321-illinois-minimum-wage/

Heath, J. (2014, January 25). Effect of wage on employment. Retrieved from http://news.cincinnati.com/article/20140126/EDIT01/301260016/Effect-wage-employment

Heyes, J., & Gray, A. (2003). The implications of the national minimum wage for training in small firms. Human Resource Management Journal, 13(2), 76-86.

History of federal minimum wage rates under the Fair Labor Standards Act, 1938-2009 [Table]. (n.d.). Retrieved from http://www.dol.gov/whd/minwage/chart.htm

Keenan, N. V., & Greenwich, H. (2013, September). Economic impacts of a SeaTac living wage. Retrieved from http://pugetsoundsage.org/downloads/PSSage%20-%20Economic%20Analysis%20of%20SeaTac%20Living%20Wage%20-%209-25-13.pdf

Kurtz, A. (2013). A history of the minimum wage since 1938. Retrieved from http://economy.money.cnn.com/2013/02/14/minimum-wage-history/

MacDonald, E. (2013, February 13). High minimum wage, higher unemployment? Retrieved from http://www.foxbusiness.com/economy/2013/02/13/higher-minimum-wage-higher-unemployment/

Maclay, K. (n.d.). Food Day report: Minimum-wage hike would raise food prices pennies, help millions. Retrieved October 24, 2012, from http://newscenter.berkeley.edu/2012/10/24/food-day-report-on-how-minimum-wage-hike-would-impact-consumers-workers/

Obama to sign executive order raising minimum wage for federal contractors. (2014, January 18). Retrieved from http://www.foxnews.com/politics/2014/01/28/obama-to-raise-federal-minimum-wage-in-executive-action-tied-to-state-union/

Offenheiser, R. C. (2014, February 10). Raise the minimum wage to address inequality. Retrieved from http://www.sfgate.com/opinion/openforum/article/Raise-the-minimum-wage-to-address-inequality-5222504.php

Powers, E. T. (2009). The Impact of Minimum-Wage Increases: Evidence from fast-food establishments in Illinois and Indiana. Journal of Labor Research, 30, 365-394.

Raising the minimum wage: The renewed debate over fair labor standards. (2013, May). Congressional Digest, 92(5), 1-14.

Reisman, G. (2014, January 4). The minimum wage forces low-skill workers to compete with higher-skill workers. Retrieved from http://mises.org/daily/6630/The-Minimum-Wage-Forces-LowSkill-Workers-to-Compete-with-HigherSkill-Workers

Sabia, J. J., Burkhauser, R. V., & Hansen, B. (2012). Are the effects of minimum wage increases always small? New evidence from a case study of New York state. Industrial & Labor Relations Review, 65(2), 350-376.

Shemkus, S. (n.d.). Increasing the minimum wage: Pros & cons. Retrieved from http://www.salary.com/increasing-the-minimum-wage-pros-cons/

Sherk, J. (2013, June 25). What is minimum wage: Its history and effects on the economy. Retrieved from http://www.heritage.org/research/testimony/2013/06/what-is-minimum-wage-its-history-and-effects-on-the-economy


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