Research in Action: Effects of Minimum Wage Increases

By Kaitlin Dunn, Writer, Hospitality Sales & Marketing Association International (HSMAI)

At HSMAI’s ROC 2019 event in June, six college and university faculty members from hotel schools across the U.S. and Canada presented research in areas related to revenue management in the hospitality industry. During one of the presentations, Dr. Toni Repetti, an assistant professor of finance, accounting, and gaming in the William F. Harrah College of Hospitality at the University of Nevada, Las Vegas, discussed research she completed with Dr. Susan Roe, an associate professor of hospitality and tourism management at San Francisco State University on “Hot Labor Topics in Restaurant Management,” during which she explored the effects of minimum-wage growth on restaurateurs.

Background: In 2019, Repetti said, 21 states implemented minimum-wage increases, ranging from $0.05 to $1.40, with an average of $0.24. The reasons for the increases included the rising cost of living and previously approved legislation. For 2020 and beyond, 16 states have already announced minimum-wage increases, not including any city or jurisdiction increases. Repetti set out to determine the anticipated effects of minimum-wage increases on employment levels and pricing decisions in restaurants. This differs from previous studies that only examined the impact at the industry level.

Research: Repetti surveyed 179 restaurant operators in 45 different states, from a variety of types of restaurants with an average of 28 employees and an average of $19.96 per check in their restaurant. Among survey participants, 53.1 percent were from independent restaurants, with 46.9 percent working for chains; 28.5 percent were general managers, district managers, or owners, while 71.5 percent were managers. Repetti asked them following question four times: “If state minimum wage increased in your area and you could adjust pricing and employment, how much would you adjust each standalone and in combination with the other?” Each time she asked the question, the minimum wage increased a different amount: 25 percent, 50 percent, 75 percent, and 100 percent.

Results: Restaurant operators involved in the study indicated that the level of the minimum-wage increase would significantly affect changes in menu pricing and employment levels. The higher the minimum-wage increase, the more significant the change. When asked about the increases of 25, 50, 75, and 100 percent, the pricing increased, respectively, by 20 percent, 33 percent, 47 percent, and 63 percent, while employment decreased, respectively, by 13 percent, 25 percent, 38 percent, and 51 percent.

Repetti further broke down the ways in which operators said they would likely enact operational changes to offset minimum-wage increases. In regard to price increases, 64.1 percent said they would raise the price on all menu items, while 20.5 percent would target only entrees and 15.4 percent said only beverages or side items. Forty percent said they would consider changing ingredients to reduce costs, 40 percent would reduce portion size, and 20 percent would reduce the number of offerings.

The most common employment adjustment was to schedule fewer hours, with 65.6 percent of respondents saying they would cut costs in that way — while 15.6 percent said they would fire employees, 14.1 percent would shift full-time employees to part-time, and 4.7 percent would eliminate overtime. In terms of modifying work allocation to cut costs, 43.4 percent of respondents said they would take steps to increase productivity, 16.7 percent would assign hourly tasks to management, another 16.7 percent would take steps to improve the hiring process, and 10 percent would reduce services offered.

Categories: Revenue Management, Pricing
Insight Type: Articles