Case Study Reveals Downside of Minimum Wage Hikes

Los Angeles and California embarked on an unprecedented experiment this past year, when both voted to phase in a $15-minimum wage over a period of years. In L.A., the rate will reach $15 in 2020 for businesses with 26 employees or more and in 2021 for smaller businesses. In California, the $15 rate will be achieved in 2021, making it the highest state minimum wage in the nation.

Business concerns were minimized by both the City Council and the State legislature, who believed that adverse impacts would be minimal. There will be a lot of interest over the next few years to see whether businesses were playing “chicken little” in complaining about the anticipated impact to their businesses and if the economy can absorb these increases with minimal disruption.

While it may take a while to measure the impact of the general $15 minimum wage, there is a more immediate gauge that might indicate whether we need to worry. In 2014, a year prior to the wage vote that was applied to all businesses, the City Council approved a dramatic increase in the minimum wage for nonunion hotels with 300 rooms or more – raising the wage from $9 an hour to $15.37 an hour beginning in July 2015. For hotels with between 150 and 299 rooms, the increase was delayed a year to July 1, 2016. It was a jump of 70.7-percent all at once. This unprecedented increase affected only certain hotels and included all tipped and non-tipped employees.

In Hollywood, only the Hollywood Roosevelt Hotel was impacted by the increase in 2015. So I thought it might be interesting to ask the hotel how it is coping with the minimum wage increase. I spoke with Brett Blass, the Chief Operating Officer (COO) for Journal Hotels, the hotel’s management company. Let me share with you what I learned.

Blass told me that the minimum wage increase has cost the hotel almost $3-million annually – a significant bite to its bottom line. Unlike some government entities, businesses must operate in the black if they are to survive, and so the hotel was forced to take action to cut costs.

Especially of concern to Blass is that the ordinance did not include hotels with which the Roosevelt competes for customers, eliminating a ‘fair and level playing field’ amongst the hotel competitive landscape. “It is impossible to fairly compete when operating a hotel bar, restaurant or the hotel itself when singled out by government wage mandates such as this,” he emphasized. “A hotel can’t just raise all prices, as pricing is marketplace driven.”

The hotel chose to close one of its three restaurants for lunch, Public Kitchen & Bar, resulting in the loss of 10 jobs. “Restaurant margins are not high to begin with,” Blass pointed out. “By increasing tipped wages so much, we found margins at an all-time low or in the red completely.”

Over time, between 30 and 40 full-time positions were eliminated, about 8- percent of the hotel’s total staff. (This job loss is in line with the experience of hotels in proximity to Los Angeles International Airport that were impacted by a similar City-imposed increase a few years before.) In addition, several planned new jobs were put on hold.

Besides this, numerous employees had their hours more closely scrutinized or cut – especially tipped workers in the restaurants. When the increase is applied to tipped workers, the overtime pay becomes astronomical for a business to pay. Overtime is calculated not just on the $15.37 an hour wage, but also on the tipped wages. With the new minimum wage and tips, waiters are earning between $60 and $70 an hour at the Roosevelt, according to Blass. Add in overtime at time-and-a half, and you get the picture. A business cannot afford to have an employee work more than eight hours and so time is reduced to ensure that an employee does not exceed that amount.

The minimum wage hike caused “bleed-up” to happen as well, according to Blass. The hotel had to raise their managers’ pay to keep them above the minimum wage employees.

“We had planned greater annual raises for many of the non-tipped work force,” reflected Blass, “but had to stick to the minimum wage increase only because of the massive and immediate increase to the tipped wage. About 35-percent of the total hotel staff are tipped, so those folks taking home tips every day got the biggest minimum wage lift.”

He also noted that the hotel just completed $22-million in guest room renovations, which would probably have been considered differently had the annual wage increase been known at the time of construction planning.

So, there you have it – a case study showing the actual impact of a minimum wage hike. Now, I’m sure the hotel employees who received increases were very happy, but I wonder what happened to the 8-percent who lost their jobs? Perhaps they found employment at other hotels covered by the wage hike, but if the cutbacks experienced at the Roosevelt are an indication, I doubt it.

I realize that there is a difference between a one-time wage-jump of 70.7-percent versus a phased-in increase, but there is still a lot of good information we can glean from this case study. There are important questions that experts should analyze, such as how many new jobs will not be created by businesses coping with their increased overhead costs, and how much investment in their businesses will not occur since the money is not there. Such investment would create other jobs within the economy that now might not happen.

I wonder how much prices are going to rise over the next few years as the wage hikes work their way through the economy, and how much this is going to cost all of us. I wonder how many employees are going to lose their jobs and what efficiencies businesses will implement to reduce their overhead.

As we stated at the hearings, no one was arguing that an increase in the minimum wage was not warranted. However, based on the Roosevelt experience, I believe more caution and restraint would have been the wiser course. Now we wait to see how this plays out, and hope for the best.

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Leron Gubler has been serving as the President and CEO of the Hollywood Chamber of Commerce for the past 24 years. His tenure since 1992 continues to oversee the great comeback story of Hollywood

One thought on “Case Study Reveals Downside of Minimum Wage Hikes”

  1. Yes, the Roosevelt has had an increase in overhead costs but as someone who has worked in the service industry for over 20 years, we will never come close to the $60 to $70 per hour rate they reported. Remember that tips are not a guaranteed thing. How about the thousands of tourists who don’t know about tipping! No one should work over an 8 hour day so why complain? We aren’t. The owners of the hotel and the top people involved in the hotel will never suffer a loss. I understand that business must run in the black but if the staff doesn’t make a living wage then the repercussions are even heavier on Hollywood then their loss of revenue. If workers can not make a living wage then – we move out of the area, we take our kids out of the schools, we take our skills out of the area, we take our money out of the area, or worse we add tot he thousands of homeless in the area, we drain our unemployment benefits and we put a further strain on the welfare system. Business owners have got to stop crying broke! There is a happy medium, share the wealth by treating valuing great employees and creating long time partners, not just replaceable staff

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