Balancing better wages with business realities

Some say an increase will finally give minimum-wage workers nearly a living wage, making them less dependent on government.

Others argue a mandatory wage increase will stifle business growth, eliminate jobs now available for low-skill, entry-level workers and raise consumer prices.

For Washington workers and businesses, that discussion has brought on a strong sense of déj vu.

Washington’s minimum wage, $9.19 an hour, the nation’s

highest, is already more than the president’s target for 2015. And the state has seen its minimum wage increase yearly based on rising living costs – just as the president is proposing – for more than a dozen years.

“It’s interesting to see those same arguments that we saw in 1998 re-emerging on a national scale,” said Anthony Anton, president of the Olympia-based Washington Restaurant Association. That’s the year Washington voters overwhelmingly passed Initiative 688, a measure that raised the state’s minimum wage from $4.90 to $5.70 in 1999 and to $6.50 an hour Jan. 1, 2000. In subsequent years, the initiative provided that the wage would be adjusted upward in step with inflation.

Nationwide, restaurants are the largest employers of minimum-wage workers.

Anton said Washington’s experience could be instructive to those now loudly predicting what could happen if the national minimum wage is increased.

“We’ve learned what did happen and what did not,” said Anton.

From the standpoint of the labor groups who backed the initiative, the results have been overwhelmingly positive.

“I’ve looked at lots of research on our minimum wage,” said Lynne Dodson, secretary-treasurer of the Washington State Labor Council, “and the overwhelming evidence is that raising the minimum wage here has had no impact on the number of people who are employed.”

“While minimum-wage jobs still aren’t what we call ‘family wage jobs,’ at least people with those jobs in Washington are better off than their peers in other states when it comes to buying the basic necessities,” said Dodson. “They’re out there in the economy spending that money every day at businesses in Washington.”

Indeed, there’s no doubt that the Washington law is putting more money in the hands of entry-level workers. Here’s what’s happened:

 • Total compensation for minimum-wage workers increased.

If workers in other states making $7.25 an hour were suddenly to be paid Washington’s $9.19 an hour, then their yearly compensation for full-time work would rise from $15,080 to $19,115, a $4,035 difference.

But some employers, particularly in the restaurant industry, say the initiative has changed the finances of business in the Evergreen State.

 • Money available to restaurant owners or other business people employing minimum-wage workers and their customers decreased. The money has to come from somewhere, either from cutbacks or efficiencies or from customers paying higher prices.

Finding that extra money, said Anton, caused a bit of chaos in the industry for the first two years as restaurants scrambled to find new sources of income or to become leaner and more cost-effective, cutting back on expansion or staff.

 • Minimum-wage worker employment declined on a per-restaurant basis.

Washington restaurants now are operating on three fewer employees per location than they did before the wage rates were adjusted upward, said the restaurant association president.

Jas Sangha, owner of three Wendy’s fast food restaurants in University Place, Chehalis and Centralia, said he bought new dishwashing equipment to cut labor costs and carefully trimmed staffing to match demand.

Anton said some restaurants have eliminated kitchen prep work they formerly did themselves and substituted prepackaged foods. For example, some restaurants no longer prepare salads from individual vegetables, electing instead to buy prepared mixtures of greens.

“When I was growing up in the restaurant business, we made all of our own salad dressings,” he said. “Now a restaurant may make just its signature dressing and buy the others already made.”

 • Minimum-wage jobs for teens dropped.

“We now employ about half the number of teens we used to in the restaurant industry,” said Anton. Restaurant proprietors now tend to hire older, more experienced workers instead. Restaurant owners don’t have the luxury of employing teens who need extensive training or who haven’t developed good work habits that make them reliable employees.

“That’s a shame, because the industry is where a lot of Americans learned about work,” said the restaurant association president.

 • Minimum-wage increases compressed the wage scale at restaurants.

“There’s just less money available to reward the cooks and the managers,” said Jeff Iverson, president of Lakewood-based Ram Restaurants, which has 30 restaurants in the Northwest and other states.

Cooks used to earn significantly more than waiters, but that difference has narrowed as available funds are used to fund the yearly minimum-wage escalations. Waiters don’t have as much monetary incentive to seek promotion to management, said restaurant owners, because of the rising minimum wage and how Washington treats tip income.

The Evergreen State is one of seven states that don’t treat tip income as an offset against the minimum wage. Anton said association figures show that the average income for a waiter in Washington is about $24 an hour, $9.19 from the minimum wage the restaurant owners must pay its workers plus the average hourly tip total of $15.

Bob Casey, general manager at Tacoma’s Harmon Brewing Co., said the higher minimum wage exerts upward pressure on the whole wage scale.

 • Higher wages ultimately are reflected in higher prices charged consumers.

Most restaurants have resisted raising menu prices because of the sour economy and economic pressures affecting customers, said restaurant owners. But when there are no more efficiencies to implement, prices inevitably jump.

Adam Adrian, owner of four Olympia-area restaurants, Ramblin’ Jacks, Rib Eye, i.talia and Mercato, said the yearly minimum-wage increases have become part of the routine.

“I’ll be totally honest with you,” said Adrian. “We know it’s coming. We look at our costs and make corrections.” In many cases, he said, that means upward adjustments of menu prices.

Some franchise restaurants are caught between those rising wage rates and prices that are dictated by the chain. Sangha, the Wendy’s franchise owner, said some prices such as the fast food chain’s value items are advertised nationally, and the franchise owner has no latitude to raise them.

Iverson, Ram International president, said he sees the minimum wage law as a kind of government-mandated inflation. Higher wages translate to higher prices, he said.

“If wage increases cost us, say, an additional $150,000, the rule of thumb says we have to generate about $600,000 in new income to pay them,” he said.

Customers, he said, are well aware of price increases.

“They’re awfully sensitive, and I don’t blame them,” he said.

With the economy still limping, price increases can drive customers away, he said.

Years ago, the industry might have adjusted prices only every three to four years, said Anton. Now, it’s not uncommon to raise prices twice a year. Some restaurants adjust prices quarterly.

The growing minimum wage in Washington has put pressure on restaurants’ bottom lines, but it has not, as some prophets had feared, decreased the number of restaurants in the state, said the restaurant association president.

But the yearly increases have changed the basic financial facts of life in the Washington restaurant business.

“It has altered what used to be the general rule in the business that 33 percent of a restaurant’s cost is food, 33 percent is payroll, and 30 percent is overhead, leaving 4 percent for margin,” said Anton. “Now it’s 36 percent for labor, 30 percent for food, 30 percent for everything else, and, if you’re lucky, 4 percent for margin.”

Sangha worries what will happen in future years as wage growth picks up speed. Most restaurant owners, he said, have already cut staff and deployed more efficient methods. They’re running out of tricks to handle the financial pressures.

Already, he said, he sees that squeeze affecting his ability to create more jobs.

Wendy’s has a new breakfast menu it is asking franchise owners to roll out. But at Washington wage rates, said the Wendy’s franchise owner, the revenue from breakfast won’t justify the expense of four or five more employees needed to produce it.

Likewise, he said, he’s passing up expansion opportunities because his profit margins have been shaved.

“I own a nice piece of land in front of a Walmart in Othello, but I don’t think it makes sense now to make the investment to open a new store,” he said.