Question

The U.S. Department of Labor provides a comparison of the federal minimum wage and different state minimum wages at Minimum Wage Laws in the States. The U.S. Bureau of Labor Statistics provides updated information on average wages, by state, at State Occupational Employment and Wage Estimates. (Links to an external site.) Compare the average wages of waiters in Texas, New York, and one state with a minimum wage below the federal level (this will be found in the category "Food Preparation and Serving Related Occupations").

If the minimum wage were to go up by $0.50, where do you think it would have the greatest effect on restaurant costs? On unemployment? What does this tell you about what stage in the business cycle (for example, during a recession or during a boom) an increase in the minimum wage is more likely to be approved?

State: Texas
Federal Minimum Hourly Wage: $7.25
State Minimum Hourly Wage: $7.25
Waiter Average Hourly Wage: $11.31

State: New York
Federal Minimum Hourly Wage: $7.25
State Minimum Hourly Wage: $11.80
Waiter Average Hourly Wage: $16.57

State: Wyoming
Federal Minimum Hourly Wage: $7.25
State Minimum Hourly Wage: $5.15
Waiter Average Hourly Wage: $11.38

Answer 1

It is estimated that 90% of countries have some type of minimum wage policy. The minimum wage rate is the lowest hourly pay that can be rewarded to workers and it is also known as "Floor pay". US passed federal minimum wage legislation in 1938 and since then minimum wage levels have been increased keeping in mind changes in economic conditions, new state and local laws, etc.

Since July' 2009, federal minimum wage has not increased and for year 2020 also it is $7.25.

Below table reflects the federal and state minimum hourly wages along with Waiter average hourly wages state wise.

Above table reflects that states Wyoming and Georgia are those states wherein states minimum hourly wages are lower than that of Federal minimum hourly wages.

Texas and New York have equivalent or higher state minimum hourly wages than Federal minimum hourly wages. However the most important thing which above table shows us is that waiter average hourly wage in all 4 states is more than the Federal minimum hourly wages or State minimum hourly wages.

Impact of increase in minimum wages by $.50 on restaurant costs.

Increase in wages will directly going to impact the bottom line. So in order to maintain the same bottom line restaurants owners may use 2 methodologies to act with minimum wage hike - cutting cost and raising prices. Reducing the cost can even out the profit losses, however it may have effect on the quality and services which restaurant currently offers. On the other hand by raising the price also profit and losses can be balanced out, however again there is a risk of losing few customers which may hurt business in long run.

Some other options which restaurants owners may consider to manage the impact of minimum wages is - Downsizing staff, Eliminating tips, re-thinking menu offering etc.

The above steps would be taken by those restaurant owners whose business is at Contraction stage. These restaurant owners would mainly be of Georgia state as reflected by the Waiter's average hourly wage paid in this state. As average is on the lower side in comparison to other states it means in Georgia state restaurant businesses are not running as successfully as it is being running in other three states.

In New York, Texas, Wyoming, Waiter's average hourly wage paid are way higher than the minimum wages required to be paid. This shows business being run in these states are at Peak stage (boom) of the business cycle and because of which restaurant owners are able to pay higher to their employees. So during such stage of business cycle increase in minimum wages is more likely to be approved as current employees would feel more happy leading to employees retention and motivation among them.

Summary:

- Businesses which are being running at Boom stage are more likely to approve any suitable increase in cost than the business which are being run at Contraction or Trough stage.

- Increase in cost during Contraction or Trough stage may lead to downsizing of current employees in order to manage the impact of increase in minimum wages.

- States which are paying way higher than the minimum wages required are those states in which this type of business is being run at Boom stage.