Restaurants’ inflation problem means tipped wage hikes will cause more pain, not less

Inflation is still soaring after hitting a four-decade-high earlier this year, and causing problems all around for restaurants trying to bounce back after the pandemic. Activists’ demands to raise tipped minimum wages and eliminate tip credits across the country would exacerbate these issues.

While operation costs such as food, supplies, and gas are increasing, labor costs are also on the rise. After the devastation caused by pandemic restrictions on restaurants, Michigan and Virginia were the only states out of 25 that opted to delay scheduled tipped minimum wage hike in 2021. California state law provided an off-ramp for legislators to provide relief to struggling businesses, but Governor Gavin Newsom chose politics over prudence and ordered restaurants to absorb a minimum wage hike (that allows no tip credit). In 2022, 25 states raised tipped minimum wage requirements again.

Right on cue, activists are pushing for more hikes across the country.

Union-backed interest groups are first pushing to eliminate tip credits across the country. One Fair Wage, an arm of the Restaurant Opportunities Center, launched a $25 million campaign this year to end tip credits in 25 states – including high-profile ballot measure battles in Michigan and the District of Columbia. Economic analysis shows eliminating tip credits, which effectively raises tipped minimum wages, causes significant employment and income loss for tipped restaurant employees. Even the nonpartisan Congressional Budget Office estimated last year’s proposal to end the federal tip credit and raise the tipped minimum wage to $15 would cost up to 370,000 more jobs than if the tip credit were left intact.

Second, activists are trying to place more inflation-adjustment clauses in existing state laws. One such bill in New York seeks to raise the minimum wage up to $20.45 in New York City (with other rates by region), and includes a provision to raise the wage requirement annually based on inflation. The Michigan ballot measure to raise tipped wages also would institute an annual adjustment.

Fifty-six states, counties, and cities already include this provision in their minimum wage laws, and based on record inflation experienced in 2021, these increases served restaurants a sharp increase last year. For example, Maine announced a 300% larger minimum wage increase for 2022 than the previous year, and Ohio’s was 400% larger.

These bills allow wage hikes to go without public deliberation through legislation, where lawmakers can learn and discuss the implications of wage increases from employees and businesses they affect. Said a One Fair Wage organizer of the Michigan tip credit elimination proposal:  “Our policy also includes an inflation check so that we don’t have to keep going to the legislature.”

Based on the economic evidence, state and local lawmakers should search for solutions to alleviate cost pressures, not add more to restaurants’ plates.