How Higher Wages Could Cripple The Restaurant Industry

Earlier this month, Chipotle made headlines with the statement that it had raised prices in order to pay higher wages to its employees. The Mexican-cuisine restaurant chain had raised its menu prices by 4%. In May, the restaurant chain announced that it would raise the pay of all of its employees to at least $15 an hour.

Chipotle’s decision to raise prices on its menu is a reminder that everything in economics has tradeoffs. There is no such thing as a free lunch. As labor costs increase, those cost increases have to be offset somehow.

Chipotle is not the only company currently raising wages. In the wake of the current labor shortage, many businesses are turning to wage increases in order to attract and retain workers. 

The Washington Post interviewed 12 companies across the nation that had raised their starting minimum wage to at least $15 an hour in either 2020 or 2021. While all 12 of the companies reported that they had no problems filling their vacant positions, three of the companies had raised their prices and two others cut their workers’ hours or reduced staffing in order to absorb the cost of the higher wages.

In the wake of McDonald’s announcing that it was raising wages in all of its corporate-owned stores with a goal of reaching $15 per hour by 2024, former McDonald’s CEO Ed Rensi warned that McDonald’s would raise prices and increase automation, which would eliminate jobs.

“You got a choice, you go broke by raising prices or you go broke by losing money because you can’t raise prices,” Rensi told Fox Business in an interview earlier this month. 

Despite the labor shortage increasing prices, there are continuing calls to raise the federal minimum wage to at least $15 per hour. But as results from states and cities that have raised their minimum wage show, restaurants often pass on the higher costs in the form of raising menu prices. 

“Ultimately in any business, the customer pays for everything,” Waffle House CEO Walt Ehmer told Business Insider in November 2020. “We don’t have any other source of revenue other than the customer. So, we have to be careful how we treat our customers and we don’t stick it to them with giant price increases.”

Raising wages is coming at the worst possible time for restaurants. Most restaurants have suffered a major loss of revenue due to government-imposed shutdowns and capacity limits. The money may simply not be there to increase wages.

Restaurants are also facing price pressures due to other increased costs. They are paying more for everything from paper products to meat. Higher labor costs could be the straw that breaks many restaurants.

Larger restaurant chains are more likely to be able to handle the higher labor costs than smaller restaurants and mom-and-pops. That is likely a motivator for the larger restaurant chains that are now supporting and/or increasing their wages to $15 an hour. 

On the other hand, wage increases during a labor shortage can be a good thing. The higher wages encourage more people to reenter the workforce. That is extremely important especially after the pandemic and the resulting lockdowns which may lead some to some skittishness about going back to work. 

But that is not necessarily the center of the issue as we face it now. It is one thing for businesses to offer higher wages on their own. But it is something entirely different when the government forces businesses to raise their wages by raising the minimum wage. Even during a labor shortage, rising wages may increase prices, reduce the hours worked, and may even result in job losses.

Higher wages may seem like a good thing on the surface, and indeed there are many benefits to them, but everything has a cost and higher wages are no different. It remains to be seen whether that cost is worth it to all parties involved.

Kevin Boyd is a freelance writer with bylines in numerous publications. You can follow him on Twitter @TheKevinBoyd and find more of his work on his Substack