You may have noticed a new line on your restaurant bill—a labor surcharge [subscription required]:
In lieu of steep menu price increases, many independent and regional chain restaurants in states including Arizona, California, Colorado and New York are adding surcharges of 3% to 4% to help offset rising labor costs. Industry analysts expect the practice to become widespread as more cities and states increase minimum wages.
“It’s the emerging new norm,” said Sharokina Shams, spokeswoman for the California Restaurant Association. She said California restaurants are adding surcharges as the state lifts the minimum wage every year until it reaches $15 an hour by 2023. It is currently at $10.50 an hour for employers with 26 or more workers.
The federal government hasn’t raised the minimum wage of $7.25 an hour since 2009, putting pressure on cities and states to boost wages locally to keep up with rising living costs. The effective minimum wage has increased in 27 states and Washington, D.C., since January 2014.
Many restaurant owners say they have added surcharges because jacking up menu prices can turn off customers who are sensitive to how much a sandwich or bowl of soup should cost. When prices do rise, “consumers often trade down in the types of menu items they order, choosing a sandwich instead of an entree, or they leave off beverages or dessert,” said Bonnie Riggs, restaurant analyst for NPD Group Inc.
This is a good reminder that customers often foot the bill in the form of higher prices. For instance, Chipotles in San Francisco raised burrito prices in response to a minimum wage increase in 2015.
Advocates for higher minimum wages push a myth that businesses have a magic pot of money lying around. They mistakenly believe businesses can afford the higher wage by pulling money out of that pot.
But restaurant owners know better. There is no hidden stash of cash. With profit margins in the single digits, even seemingly small labor cost increases can push a profitable business into the red.
About the authors
Sean Hackbarth
Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.
