Increasing the federal minimum wage continues to be a heated topic across the country. While food service workers have largely led this movement, it’s not unreasonable to think that the effects of a wage hike could severely impact the hospitality industry and force many businesses to completely restructure their business models.
There is significant momentum, which is not necessarily unfounded, to see the minimum wage grow. Wage requirements have remained stagnant while inflation continues to rise. This essentially puts those making the minimum further into poverty because they can’t keep up with rising costs for goods and services. A recent report issued by the Congressional Budget Office illustrates that a minimum wage increase could push more than 900,000 individuals above the poverty line. Eighty-eight percent of that population would be working adults, and 56% would be women.
Unfortunately, the same report warns a wage hike could lead to the loss of 500,000 jobs. Larger companies might be able to absorb the increased labor costs, but smaller companies with thin profit margins might need to cut their workforce. Plus, opponents of a minimum wage increase say it wouldn’t be an effective means to address poverty. They suggest the money would be better spent improving education and job training programs that would give impoverished individuals a better shot at obtaining better paying jobs.
Minimum wage in hospitality
Working more than 25 years in the hospitality industry, I’ve seen minimum wage increases. My question this time around isn’t should the minimum be raised, but rather, by how much?
What I’m concerned most about is an extreme wage hike, as has been suggested here in Chicago, which will have far-reaching consequences. Layoffs and cutbacks of non-wage benefits, such as medical insurance, parking stipends and paid holidays/vacations for employees, are all real concerns.
Growing room rates would be a natural byproduct of increased costs. However, rates are subject to market pressure, so the consequence to hoteliers would be that we might not be able to raise rates to offset the costs.
Hoteliers are already suffering from intense pressure on the bottom line, and an extreme wage will significantly exacerbate that. While consumers would ultimately be asked to foot the bill, there is no evidence that empathy for the increased wage would translate into consumers’ willingness to pay more for a hotel stay. McDonald’s, for example, knows consumers flock to the chain’s value menu. It also knows that increasing those prices to cover rising labor costs would backfire with consumers.
Extreme wage increases also will prompt companies to explore more automated processes. One major hotel company has already announced its plan to do just that. The capabilities exist to rely on automated processes more and more, but at present it’s not widely accepted or cost effective. Raising the federal minimum wage could create a scenario where relying on automated processes does become cost effective.
Personally, I’m looking to cities such as Los Angeles and Seattle in the short term to see how things shake out. Seattle plans to increase minimum wage to $15 for all businesses by 2021, with the first round of incremental increases expected to take place on 1 April 2015. Anecdotally, some service sector providers are talking about plans to exit the market or cut back on operations and automate.
Los Angeles specifically is looking to raise minimum wage for workers in large hotels to $15.37, a significant increase over the current $8 minimum in California. A recent study conducted by Blue Sky Consulting Group for Los Angeles stated a wage increase would have “an inherent tradeoff,” with some workers benefiting while others would probably lose their jobs.
Unfortunately, it appears that studies are largely inconclusive regarding the effects of a minimum wage increase—especially in the hospitality industry. After nearly three decades of experience, I believe an extreme wage hike will create more problems than solutions. Companies that depend on the current minimum wage will have to restructure their business models if those pushing for an extreme increase to $14 an hour or more get their way. In terms of an incremental increase, it remains to be seen how that will affect the hospitality industry.
Strong arguments persist from both sides, and minimum wage increase seems likely soon. The questions remains: Will we see an extreme increase to $14 or $15 per hour, or an incremental increase over the next 10 years or so? Regardless, it would be beneficial not to ignore these talks as idle chatter.
Change will come sooner rather than later.
Robert Habeeb is president and COO of First Hospitality Group, Inc., is a national, experienced, and established hospitality management, and development company serving the investment and real estate industries. Since 1985, FHG has been an award-winning pioneer in the hospitality industry. FHG has successfully developed, marketed and managed over 16 brands and 50 properties throughout the Midwest. Visit www.fhginc.com.
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