Minimum wages are among the most studied topics in economics, but numbers can’t fully foretell what a proposed $15 per hour federal wage floor would do to the big but battered hospitality industry in Arkansas, where voters have already imposed an $11 minimum.
The federal minimum, $7.50 an hour since 2009, would double to $15 by 2025 under proposals in the Raise the Wage Act that’s now part of a Democratic House coronavirus relief package. Even if the wage issue is eventually stripped from President Joe Biden’s $1.9 trillion stimulus package, the $15 proposal will endure a separate bill.
Arkansas economists, business owners and advocates like Montine McNulty of the Arkansas Hospitality Association say that potential effects of a $15 wage are even more unpredictable now, with the state and country fighting back from an unprecedented COVID-19 recession.
There’s no doubt the proposal would upend the way restaurants pay workers, raising pay but also phasing out a subminimum wage as low as $2.13 an hour for workers who get tips. That would increase labor costs directly in the 32 states that allow less guaranteed pay for certain workers whose earnings top the minimum wage with tips included.
McNulty, whose not-for-profit trade group represents 1,100 Arkansas businesses in the food service, lodging and travel industry, said mandated new labor costs take a disproportionate toll on industries employing a great many entry-level and part-time workers.
“It’s a really difficult time to add burdens to these businesses,” McNulty said. “This could hurt these businesses being able to recover.” She also fears that ending the subminimum will backfire by hurting the pay of well-tipped workers.
‘Never Been This Tough’
Restaurateur and caterer Travis Hester, whose Eat My Catfish chain has locations in North Little Rock, Little Rock, Benton, Conway and Fayetteville, said Arkansas already has a higher minimum wage than neighboring states and that the pandemic “has wreaked havoc on our industry, causing sporadic cost increases and labor shortages.”
A $15 national minimum would push Arkansas restaurateurs to “absolutely” look for ways to cut labor cuts while raising menu prices 20%-30%, he said. “It has never been this tough in the restaurant industry to drive profit to the bottom line. … An increase at this time would surely add to the 110,000 restaurants that have closed in the last year nationwide.”
The prospects for the federal wage increase are far from certain. Democrats would have to coax 10 Republicans to favor it in the Senate unless the law is included in the budget reconciliation process, where it could pass with a bare majority. A procedural ruling on whether the bill can proceed in reconciliation is expected this week, but Senate Democrats themselves aren’t unified on the plan. Some say $15 is too lofty; others are wary of the tipped minimum issue.
A 2018 Congressional Budget Office report cited by the economists and McNulty estimated that a $15 minimum would reduce employment by 1.4 million workers nationwide — “but also reduce the number of Americans in poverty by 0.9 million,” Jeremy Horpedahl, an economist and assistant professor at the University of Central Arkansas, told Arkansas Business.
Traditional business-sector resistance to some higher minimum wage is relatively muted for now, with retailers like Walmart Inc. of Bentonville and Best Buy announcing their own raises last week. Republicans are also engaging on a topic long pushed by the other side and understandably popular with workers.
Sen. Tom Cotton of Arkansas and Sen. Mitt Romney of Utah last week offered a counterproposal to the Democratic wage plan: a $10 minimum by 2025 that would include a youth minimum wage and rules directing the raises only to “legally authorized” workers.
Walmart CEO Doug McMillon announced Feb. 18 that the nation’s largest private employer was raising pay for 425,000 workers around the nation. The plan, which emerged just after McMillon and Biden met to discuss the president’s $15-an-hour goal, will put the pay of about half of Walmart’s 1.5 million U.S. workers at $15 an hour or better.
Walmart’s base wage is $11 an hour, but certain starting positions pay more.
Economists Weigh In
Economists like Horpedahl and Mervin Jebaraj of the University of Arkansas say recent studies appear less conclusive about the job effects of rising wage minimums, but there’s emotional force in McNulty’s argument that it seems unfair to ask restaurateurs to pay more amid a health disaster that wasn’t their fault. She also said Arkansas had addressed wages for itself through a 2016 popular vote that stepped up the state minimum wage.
“Arkansas is already at $11 an hour,” said McNulty, suggesting the federal plan would amount to piling on Arkansas’ No. 2 industry behind agriculture. “We’ve dealt with the issue here and hoped that would last for a while.”
Costs will be passed on to customers and, McNulty said, “jobs and hours will likely be cut.”
McNulty said restaurants and hotels will be less apt to hire not only entry-level workers, but also teenagers, mothers working part time and even retirees looking to make ends meet.
Hester, the Eat My Catfish owner, said his 200 employees statewide already make more than $11 an hour. “We offer health care, a 401(k) match and profit-sharing to every employee,” he said. Adding wage expenses would exacerbate what he called “the hardest environment the restaurant industry has ever faced.”
He also believes the federal government shouldn’t set a blanket minimum. “It should be a state-by-state issue.”
Horpedahl, the UCA professor, said a $15-an-hour plan represents an increase larger than any ever studied before, even in decades of wage analysis. Even though Arkansas had a head start to an $11 minimum, its median wage is $15.84, meaning half the state’s workforce earns less.
“While a $15 minimum wage would be about 75%-80% of the national median wage, it would be closer to 95% of the median wage in Arkansas,” affecting more workers, Horpedahl said. “It might mean both more unemployment and more [people being] lifted out of poverty. The fact that Arkansas has already increased the minimum wage to $11 could also mean that the additional increase to $15 is not felt as hard here, since roughly half of the effects will have already happened.”
Jebaraj, director of the Center for Business & Economic Research at the University of Arkansas at Fayetteville, agreed. “From the overall perspective, Arkansas is already at $11. So it’s not like we’re going from $7.25 to $15 by 2025,” he said. “We didn’t really see any big distortion in employment” as Arkansas stepped up its minimum, he said. “But it’s hard to define the effects, especially in hospitality. That sector has not seen a lot of employment returning.”
Arkansas’ tourism industry had about 70,000 direct employees through 2019, serving 36 million annual travelers in the state. Of course, those numbers swooned during 2020 as travel constricted.
“A $15-an-hour minimum wage nationally is really hard to make predictions about,” Horpedahl said. “Some recent research suggests the impact on employment from minimum wage increases might be smaller than we previously thought, but even this research only goes up to about 55%-60% of the median wage. … It’s really uncharted territory. In Hot Springs, Jonesboro, Fort Smith and most of the rural parts of the state, $15 an hour would be more than 100% of the median wage.”
Some Arkansans would clearly reap more for their labor, but McNulty fears for workers on the bubble. “Beyond restaurants and lodging, there are lots of mom-and-pop businesses that have entry-level folks, students, mothers and older people on the payroll,” she said. “These are people who want to work, but not 40 hours a week, and we want them to keep those jobs, which are also training grounds for management and ownership. Ask the next group of businesspeople you’re with how many of them ever waited tables. Most of the hands will go up.”