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How New Jersey's Creeping Wage Hikes Are Crippling Mom-And-Pop Restaurants

Another day, another unintended consequence of the socialist state's eagerness to "make things better" for everyone, blowing up in its face.

For today's anecdote we go to New Jersey where legislation introduced by Assemblywoman Shavonda Sumter, D-Paterson which passed in the Assembly’s Labor Committee on a party-line vote last March, calls for an increase in the minimum wage for tipped workers. It would increase the federal minimum of $2.13 per hour to $3.39 by the end of this year and $5.93 by 2016.

Assemblywoman Shavonda Sumter wants an increase in the
minimum wage for tipped workers from the federal minimum of
$2.13 per hour to $3.39 by the end of this year. (Photo:
New Jersey Assembly Majority Office)

So far so good: after all, in isolation, it's a tiny amount, and will hardly impact the employer, while it should boost the bottom line of minimum wage employees, leading to a win-win for everyone right?

Well, no, because nothing is ever "in isolation." However, to grasp the practical implications of how minimum wage hikes flow through the system one needs to actually be a small business owner - the person paying the wage - not a politician, who may have the best intentions in mind (if only for one's own bank account and delusions of grandeur) yet have zero practical understanding that such centrally-planned meddling in the free market always does more bad than good.

Case in point, the following story of Rob Pluta who owns and operates Leonardo’s II, an Italian eatery in Lawrenceville, New Jersey as recounted by The Daily Signal

Pluta wasn’t wild about the constitutional amendment New Jersey voters approved last year that raised the state’s overall minimum wage from $7.25 to $8.25 and linked annual increases to the Consumer Price Index. But he’s even more concerned about legislation introduced by Assemblywoman Shavonda Sumter, D-Paterson. Sumter’s bill, A857, which passed in the Assembly’s Labor Committee on a party-line vote last March, calls for an increase in the minimum wage for tipped workers. It would increase the federal minimum of $2.13 per hour to $3.39 by the end of this year and $5.93 by 2016.

 

For restaurant owners, that’s even worse than it sounds, Pluta says. Under current law, if employees don’t make $8.25 counting tips and base, the employer makes up the rest. Pluta says he’s never had to pay—his employees routinely make $15 to $20 per hour or more.

 

If this legislation passes—a companion bill in the state Senate has not moved, and it’s unclear if Republican Gov. Chris Christie would sign it if it did reach his desk—Pluta would have to pay out up to $24,000 more per year, plus payroll taxes. His employees, however, would see little difference in their paychecks.

In short, "This is not a logical proposal,” he says. “It’s an additional cost and an additional burden." However, there is no populism in being logical: one wins relection by pandering to the lowest common denominator even if it means a wholesale increase in food prices which has a ripple effect on demand, and ultimately, may likely lead to the evisceration of the mom and pop restaurant industry of New Jersey.

Pluta’s customers understand what this will mean. Kevin and Eve Connelly are regulars. They like to order a shrimp platter with cocktail sauce. It’s not on the menu and is supplied only by request.

 

“If the restaurant suddenly has to pay for something it didn’t have to pay before, one way to cover that cost is to raise menu prices,” Kevin Connelly says. “So we are probably going to have to pay more for that shrimp.”

 

And that, says Eve Connelly, will have a ripple effect. Higher prices mean people go out less often, which means less in tips for the wait staff at Leonardo’s II. “I wonder if this is something the politicians understand,” she says.

No, they don't. But they are not paid to understand. If they were, they would grasp that corporations will pass on costs first, middle and last, to the point where the business crosses its viability point and competitors come and, pardon the pun, eat its lunch. 

“What I keep trying to drive home is that we are forced into paying costs we never had to cover before in addition to the minimum wage increase that is already in motion,” he says. “This will cripple the restaurant industry. This is especially true for start-ups and other borderline businesses operating at the margins.”

Ironically, in pursuing this kind of wealth redistribution, politicians are crushing the small and medium businesses, those which traditionally are the biggest sources of new jobs, and handing over their business to established, franchised mega corporations, which have the economy of scale to offset such cost hikes.

T.C. Nelson, who owns the Trenton Social on South Broad Street in Trenton, told The Daily Signal the winners will be chain restaurants, which “have the economy of scale to absorb these costs.” The losers, Nelson says, will be neighborhood bars that can’t survive the extra expense.

 

“What this proposal does is take the art of service and hospitality out of the hands of the small business,” he says. “Right now, it’s hard to know how much this will cost. But you can be sure some of the smaller, local neighborhood places will go under.”

 

Pluta is not optimistic.

 

“This is an easy issue to demagogue,” he says. “If this bill does go through it will mean higher consumer costs and less business in restaurants, which works to the disadvantage of the very workers the politicians say they are trying to help.”

Well yes, but it will also help the major restaurant chains, most of which are subsidiaries of publicly owned holding companies (which most likely have been buying back their shares hand over fist courtesy of Bernanke's policies and rewarding management for doing... nothing at all) and which have also spent countless dollars lobbying the Shavonda Sumters of the world to do their bidding, while masking this corporatist hypocrisy with the pleasant face of "we are just trying to make lives better for the minimum wage earners" populism.

That, like the stock market, only works until it doesn't, until all small businesses are ultimately crushed or simply decide to go away, and there is no marginal creator of any jobs left, period. Which, needless to say, leads to a far worse outcome for everyone.