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Seattle’s Already Closing Restaurants/Lost Jobs

Seattle’s new minimum wage law takes effect April 1 but is already leading to restaurant closings and job losses

Seattle’s new minimum wage law government-mandated wage floor that guarantees reduced employment opportunities for many workers goes into effect on April 1 and already the city has seen a number of restaurant closings and job losses related to the government-mandated wage hike. The law will take effect in stages and will require Seattle employers to eventually pay a minimum wage of $15 hour by 2022, with the first increase to $11 per hour scheduled for April 1 – a 16.2% increase over the state minimum wage of $9.47 per hour. The Seattle City Council takes great pride in its “economic death wish” for the Emerald City and boasts on its website that it “unanimously approved the adoption of a $15 per hour minimum wage, making Seattle the first major city in America to take such an action to address income inequality.” That reminds of something I read recently to the effect that liberals have hearts that bleed so profusely that it often prevents oxygen from getting to their brains and results in extreme lightheadedness, and cloudy and defective decision-making. Not surprisingly, the first reports of Seattle restaurant closings and job losses are just coming in, here are a few:

From the Washington Policy Center’s article “Seattle’s $15 wage law a factor in restaurant closings“:

As the implementation date for Seattle’s strict $15 per hour minimum wage law approaches, the city is experiencing a rising trend in restaurant closures. The tough new law goes into effect April 1st. The closings have occurred across the city, from Grub in the upscale Queen Anne Hill neighborhood, to Little Uncle in gritty Pioneer Square, to the Boat Street Cafe on Western Avenue near the waterfront.

The shut-downs have idled dozens of low-wage workers, the very people advocates say the wage law is supposed to help. Instead of delivering the promised “living wage” of $15 an hour, economic realities created by the new law have dropped the hourly wage for these workers to zero.

Advocates of a high minimum wage said businesses would simply pay the mandated wage out of profits, raising earnings for workers. Restaurants operate on thin margins, though, with average profits of 4% or less, and the business is highly competitive.

When prices rise consumers seek alternatives, a behavior economists call the “substitution effect,” which results in lower demand for the higher-priced product. In the case of restaurants, consumers have access to the ultimate substitution – they can stay home.

Fewer people will be able to afford to dine out, and as a result there will be fewer great restaurants to enjoy. People probably won’t notice when some restaurant workers lose their jobs, but as prices rise and some neighborhood businesses close, the quality of life in urban Seattle will become a little bit poorer

From the Seattle Magazine article “Why Are So Many Seattle Restaurants Closing Lately?“:

For Seattle restaurateurs recently, there is also another key consideration. Though none of our local departing/transitioning restaurateurs who announced their plans last month have elaborated on the issue, another major factor affecting restaurant futures in our city is the impending minimum wage hike to $15 per hour. Starting April 1, all businesses must begin to phase in the wage increase: Small employers have seven years to pay all employees at least $15 hourly; large employers (with 500 or more employees) have three.

Since the legislation was announced last summer, The Seattle Times and Eater have reported extensively on restaurant owners’ many concerns about how to compensate for the extra funds that will now be required for labor: They may need to raise menu prices, source poorer ingredients, reduce operating hours, reduce their labor and/or more.

Washington Restaurant Association’s Anthony Anton puts it this way: “It’s not a political problem; it’s a math problem.” He estimates that a common budget breakdown among sustaining Seattle restaurants so far has been the following: 36 percent of funds are devoted to labor, 30 percent to food costs and 30 percent go to everything else (all other operational costs). The remaining 4 percent has been the profit margin, and as a result, in a $700,000 restaurant, he estimates that the average restauranteur in Seattle has been making $28,000 a year.

With the minimum wage spike, however, he says that if restaurant owners made no changes, the labor cost in quick service restaurants would rise to 42 percent and in full service restaurants to 47 percent.

“Everyone is looking at the model right now, asking how do we do math?” he says. “Every operator I’m talking to is in panic mode, trying to figure out what the new world will look like. Seattle is the first city in this thing and everyone’s watching, asking how is this going to change?”

Last summer after the Seattle city council unanimously passed the minimum wage bill, this is how some of the city’s restaurant owners reacted when interviewed by the Seattle Eater:

Manu Alfau, Chef/Owner of La Bodega: I wish they would’ve done a little more research on how it would affect small businesses. For smaller businesses, only the super strong will survive. It will mean that only owners who are willing and able to work every day at their own businesses to reduce labor costs will survive.

Jeremy Hardy, Owner of Coastal Kitchen and Mioposto: This is a game changer. The myriad of unintended consequences is too complex to really understand; even for restaurant veterans. We cannot survive if we continue doing business as usual. I hope the public will continue to support their favorite spots while everybody figures this thing out. We are going to adjust using all of the tools at our disposal; pricing, reducing menu offerings, look at operating hours, reducing labor where we can and certainly not opening another business in our beloved Seattle. Our business model will need to change. In a business whose goal is “to build community one relationship at a time” this reduction in labor is going to make that even more difficult. This falls somewhere between feeling sad and feeling betrayed that this grenade has been dropped on us.

Brendan McGill, Chef/Owner of Hitchcock Restaurant and Hitchcock Deli: I think what people need to realize is that the money will have to come from somewhere. With a group like mine, we run a very slim margin. To pay my staff more, I need to either buy worse food or raise my prices, and I’m not willing to start buying commodity meats or fish from larger, questionably managed fisheries. My concern is that someone who currently makes $40,000 per year and isn’t affected by the wage hike won’t be willing to start paying more for all their goods and services.


Bottom line, labor can only be a function of sales. If a busy restaurant at lunch serves 150 eaters during the lunch hour, and each person spends $15, the restaurant just grossed $2,250. If labor comprises significantly more than 30 percent, the restaurant won’t be in business for long. So that allows $675 total for labor for the day, and before the employer taxes we pay that allows $550 or so. At $15 an hour, that allows 36 labor hours, which means four people can work a full day. This assumes that everyone is making the new minimum. Now look around in a busy restaurant serving 150 people—do you see more than 4 employees? Of course you do. The new math breaks the system.

Bottom Line: Seattle’s phased-in minimum wage hike to $15 per hour over the next 3 to 7 years depending on employer size isn’t a political problem, it’s a “math problem,” as the Washington Restaurant Association’s spokesman described it. And the “new math” of the minimum wage is already starting to “break the system” for Seattle’s restaurant owners. Expect more damage in the future from the Seattle City Council’s “economic death wish” for the Emerald City.

Update (3/21/2015): As the first link above suggests, this post was inspired by Washington Policy Center’s Paul Guppy’s blog post “Seattle’s $15 wage law a factor in restaurant closings.” Paul followed up with a blog post yesterday “How The Seattle Times got it wrong on our $15 minimum wage blog,” here’s an excerpt:

Our blog accurately noted that restaurants close for many reasons and that in Seattle, as the new mandate goes into effect, the $15 minimum wage law had added a unique factor. There is simply no question Seattle’s $15 minimum wage law is a concern for local business owners, and is a factor in whether restaurants and other businesses remain viable, for several reasons.

First, labor cost is always a factor for businesses. Like other economic inputs, such as rent, taxes, utilities, materials and marketing, the cost of wages and benefits is a consideration in keeping a business profitable. Some types of business incur greater labor costs than others. Restaurants are at the high end, with labor reportedly making up 30 to 40 percent of the cost to remain open. Restaurants operate on thin profit margins of only three to five percent and the sector is highly competitive, making rising labor costs an even more important consideration for this type of enterprise.

Second, Seattle’s $15 minimum wage law is a factor for business owners because many of them say it is. Business owners have been their expressing concern over a $15 minimum wage law since the idea was first proposed. Here are some examples, as reported by Eater.com.

“I wish they would’ve done a little more research on how it would affect small business.”

“I don’t think it’s a bad thing but for smaller businesses only the super strong will survive.”

“This is a game changer. 15Now folks missed the target by about 3,000 miles. But we sit in the crossfire.”

“We operate on a very thin margin as it is.” “Servers will be working harder for less money with less support.”

“If labor comprises significantly more than 30 percent, the restaurant won’t be in business for very long.”

Respected restaurateur Tom Douglas noted, “Maybe there are too many restaurants and this [$15 minimum wage] will be a natural way to cull out the weakest among them.”

http://www.aei.org/publication/seattles-new-minimum-wage-law-takes-effect-april-1-but-is-already-leading-to-restaurant-closings-and-job-losses/

Note: There are active links contained within the original article at the website posted above.





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