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Minimum wages go up, Red Robin’s employment goes down

Yesterday I wrote about the demand curve for labor which slopes downwards meaning that, as the price increases, the quantity demanded decreases.

Minimum wages go up, Red Robin’s employment goes down

The examples I used to illustrate this might have sounded a little abstract. They were, deliberately so, to highlight the forces at work. For a real world example, look at burger chain Red Robin, which has five branches in Minnesota.

On January 1, 18 states — from Maine to Hawaii — increased their minimum wage. In Minnesota, for example, it went up from $7.75ph to $7.87ph for small employers and from $9.50ph to $9.65ph for large employers. But if there has been no corresponding increase in productivity, this could be a problem. If a worker added $9.55ph to revenue on December 31st, 2017, the employer made a profit on the hire of $0.05. If that remained unchanged, on January 1st, 2018, the employer now made a loss on the hire of $0.10ph.

Businesses will not keep a worker on if doing so adds more to costs (wages) than to revenue (income). Changes in wages dictated by politicians impact this calculation and businesses will act accordingly. That is what Red Robin is doing. In an effort to save $8 million, the chain is cutting jobs at all 570 of its locations, with chief financial officer Guy Constant saying “We need…to address the labor [cost] increases we’ve seen.”

The unskilled pay the price

The jobs being cut at Red Robin are ‘bussers’, or busboys, who clear dirty dishes from tables, set tables, and otherwise assist the wait staff. Sure, a restaurant that left dirty plates piled up all over would struggle to stay in business, but Red Robin can economize by getting the wait staff to add the busser’s duties to theirs.

This isn’t skilled work so it isn’t well paid work. Hikes in minimum wages – which simply outlaw low wages – are essentially outlawing the hiring of low skilled workers. It is sometimes said that companies that cannot pay these wages to all their staff no matter how productive do not ‘deserve’ to stay in business. Of course, the unskilled, frozen out of the labor force by laws such as this, might like to make their own minds up about that.

John Phelan is an economist at the Center of the American Experiment. 

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