Minnesota’s hospitality industry highlights the ‘Just pay them more’ fallacy
Last weekend, the Star Tribune reported:
This was going to be the big comeback summer for Minnesota’s tourism business.
Freed from the limits placed on them last year during the COVID-19 pandemic, the state’s resorts, hotels and camps were poised to welcome a flood of visitors eager to get out and enjoy themselves.
Well, the visitors are there. But the workers aren’t.
From the North Shore to the limestone bluffs of the Mississippi River, the state’s tourism destinations are struggling to staff up. Many are operating with half their normal complement of workers while dealing with an explosion in demand for their services.
This staff shortage is having a serious impact on business operations:
“After last year, we were hopeful that things would get back to normal,” said Sue Dutcher, manager of the St. Croix River Resort in Hinckley. Instead, she said, “we’re being run ragged.”
The four properties in Dutcher’s group would normally employ about 50 people — from cooks to groundskeepers to shuttle drivers — to handle summer guests. But right now, staff numbers are about 50% of normal levels despite months of help-wanted ads and Dutcher’s willingness to “pay whatever it takes to get somebody in here.”
Dutcher has had to cut back on services, including shuttles that take canoers to and from the river.
In Detroit Lakes, Joanne Anderson faces a similar challenge at the Forest Hills Resort. Anderson manages Izzo’s, the resort’s bar and restaurant, and right now she’s running it with eight workers instead of the usual 20.
The restaurant, which normally stays open until 11 p.m., now closes after supper. The entire resort, which usually has about 80 workers during the summer months, has fewer than half that number.
“It’s a sad situation,” Anderson said. “Being we got through the COVID, we were pretty excited for this year to be a boom. But it’s not a boom.
“The faucet wants to run, but we can’t turn it on full blast. It’s trickling.”
“We’re hearing from people who have had to turn guests away, cut hours for restaurants,” says Ben Wogsland, a spokesman for Hospitality Minnesota, the trade association for the state’s hotels, restaurants, resorts and campgrounds:
“So many of these folks accumulated debt over the last year. Now that they’re allowed to get back to 100% capacity, it’s frustrating not to be able to operate at full speed to dig out from that financial hole.”
‘Just pay them more’
Some people, some of them serious, like Minneapolis Federal Reserve President Neel Kashkari, have asked: “Why don’t they just pay them more?” Well, “they” are:
Job boards are full of postings for resort workers, many offering as much as $17-$18 an hour. But it hasn’t moved the needle.
Those people might respond: Why don’t they just pay them even more?
Well, where would this extra pay come from? The business owner could take it out of their profits. But that assumes that these businesses are profitable in the first place. Even if they are, if the business owner’s return for running the enterprise falls far enough, they won’t bother and the employee will be earning nothing.
The alternative is to pass the cost of the higher wage on to the customer. Some businesses, such as Chipotle and Broder’s in Minneapolis, are doing this. But this presupposes that the customer will simply pay higher prices. Obviously, this is nonsense. If demand is “price inelastic” then why don’t businesses just hike their prices anyway and pocket the profit? The fact that they don’t tells us is that business owners know that if they raise their prices too high they will lose customers. And, again, the employee will be earning nothing.
What both of these cases show is that there is an upper limit beyond which a business cannot raise its wages no matter how short of staff it is. It is pretty easy to tell business owners that they should just pay everyone more. Actually doing it is rather difficult.