A tip credit will go some way towards mitigating the harm that St. Paul’s leaders want to do to the city’s labor market

The leaders of the city of Saint Paul are persisting with their implementation of a job killing $15 an hour minimum wage. A key question now centers on a ‘tip credit’. As Minn Post explains,

City council members have the option of writing the law so that employers can pay tipped workers less than the potential $15 minimum, under the rationale they’ll make up the difference in tips. Supporters say this “tip credit” is the best route for restaurants and other businesses that could face dramatic — and potentially negative — shifts to their businesses by paying every employee $15, and that the carveout would level the playing field between non-tipped and tipped workers. Opponents of the tip credit, meanwhile, say the provision defeats the purpose of a new minimum wage and puts too much weight on the reliability of tipped earnings. The new Minneapolis law does not consider tips as wages.

At the state level, Minnesota is one of a handful of states that don’t allow employers to pay tipped workers less than the statewide minimum wage. Under federal law, tipped workers in some places can make as little as $2.13 hourly.  In the Twin Cities area, the average hourly wage for “front-of-house” workers in restaurants — or people who take orders, seat people and handout orders — is already $12.77, according to federal labor statistics. That’s roughly 50 cents higher than the national average.

Other unanswered questions council members will address in coming weeks as they sit down to write the ordinance: What constitutes as a small business? How, or to what extent, should the wage hike impact them? Should the ordinance include exemptions for employment programs geared toward helping teens or people with disabilities? And under what timeline should the city phase in the increase?

 Questions, questions. What we see here is another example of the old truth that, every time a government intervenes in the economy, there are unforeseen consequences that necessitate further intervention. These interventions, in their turn, have unforeseen consequences that necessitate further intervention…

From an economic point of view, the city of St. Paul should ditch this whole policy. But, given the apparent determination to hobble the city’s labor market in some way, a tip credit represents a least-worst option. As WCCO reported,

“Quite frankly tipped income is what we count on for our wage”, Jennifer Schellenberg said. She’s with the Restaurant Workers of America, which is very pro tip credit. She’s a bartender in Minneapolis.

“We don’t want to see all of our small businesses close. The only restaurants that are going to be able to survive this (minimum wage hike without a tip credit) are big corporate chains. Small restaurants just can’t afford it,” Schellenberg said.

Restaurant Workers of America was outside City Hall on Monday in St. Paul to make sure the St. Paul City Council hear them. Matt Gray, who is a server, said, “We are the industry, we are the workers that will be most impacted with the policy without a tip credit… We are the workers and we are very concerned about the direction this policy will go.”

“What I am hearing from most owners is that around $12 an hour, the business model breaks down, and tipping is no longer viable. So most businesses I have talked to are considering doing service charges. What that looks like is generally 20 percent or so tagged on the menu, and then they tell the guests that servers make enough money now, we make a livable wage, they don’t have to tip anymore. When that happens, you turn people like myself that have made this my career, into minimum wage employees,” Schellenberg said.

One thing sentence leaps out from Ms. Schellenberg’s comments; “The only restaurants that are going to be able to survive this (minimum wage hike without a tip credit) are big corporate chains. Small restaurants just can’t afford it”. This echoes the findings of a report by the Citizens League earlier this year. They found that most of St. Paul’s large employers, such as U.S. Bank and Wells Fargo, were already paying their staff at least $15 an hour. The people who would be hit hardest by the the city’s politicians commanding its small business owners to increase their staff costs by up to 90.6% would be the independent bookseller whose margins are being squeezed by Amazon, the immigrant store owner competing with Target and Walmart, or the nonprofit trying to give a disabled worker a break.

Big businesses in St. Paul won’t notice a $15 minimum wage. Small businesses will be hit hard. Here we have another of those ‘unforeseen consequences’.

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