Red Robin, a popular burger chain, will cut jobs at all 570 of its locations because, chief financial officer Guy Constant said, We need ... to address the labor [cost] increases weve seen.
To put it differently, Red Robin is cutting these jobs because of bad government policy: namely, hikes in the minimum wage. On January 1, some 18 statesfrom Maine to Hawaiiincreased their minimum wage.
Founded in Seattle but headquartered in Colorado, Red Robin hopes to save some $8 million this year by eliminating bussers from their restaurants. (Bussers, or busboys, clear dirty dishes from tables, set tables, and otherwise assist the wait staff.) According to the New York Post, the company saved some $10 million last year after eliminating expediters, who plate food in the kitchen.
Despite what many people, including policymakers, would argue, this is an altogether painfully predictable response to increased labor costs. Its basic economics. The first law of demand teaches us that when the price of a good or service increases, people will tend to buy fewer units. Conversely, when the price of a good or service decreases, people will tend to buy more. This idea is usually presented no later than chapter 3 in any econ 101 textbook.
Labor is no exception to this rule. If the cost of employing workers increases, wed expect companies to hire fewer workers and even to let some go.
Some might say, Well, why cant Red Robin just make a smaller profit and stop being greedy? Consider, however, that pretax profit margins for the restaurant industry typically range between 2 and 6 percent. This means theres not a lot of room for error or cost increases before realizing a loss.
Now suppose that a restaurant like Red Robin is operating normally when minimum-wage hikes are imposed. Lets take Colorado as an example. On January 1, Colorados minimum wage increased by about 10 percentfrom $9.30 to $10.20 an hour.
Have the workers at the restaurantthe cooks, the servers, or the bussersacquired any new skills? No! Will they magically become more productive and begin to generate more revenue for their employer as a result of this policy? No! The workers simply become more expensive to employ. So what is a company like Red Robin to do?
One option would be to add a surcharge to customers bills to recoup some of the losses from the higher labor costs. This is precisely what happened in San Diego following a minimum-wage increasemuch to the chagrin of policymakers and customers alike. Another option would be to increase menu pricesa particularly unpopular move when it comes to luring in customers.
A third alternative would be to fire some staff and make due with a smaller workforce. Restaurants like Chilis have taken to installing ordering kiosks at its tables, allowing customers to order and pay their tabs without ever having to speak to a waiter. Other restaurants, like McDonalds and Wendys, have also begun to substitute technology for human beings in the form of automated ordering kiosks.
Note that three groups could lose here. First, Red Robin loses. No company likes firing employees, incurring higher costs, or trying to provide the same quality service with fewer workers.
Second, customers may lose through poorer service or higher prices.
And third, workers lose if they find themselves without jobs.
While we may not like the idea of someone trying to live on $5 or even $7 an hour, we can likely all agree that earning a small wage is better than earning nothing at all due to unemployment. Its easy to vilify restaurants and other companies when they respond to higher costs with layoffs. But its important to place the blame where it belongs. In this case, its bad policynot incompetence, not corporate greedthats causing people to lose their jobs.
|Abigail Hall Blanco is a Research Fellow at the Independent Institute and an Assistant Professor of Economics at the University of Tampa.|