Calling Ezra Klein!

My eldest daughter is a server for a growing chain restaurant.  I think it’s a good gig for her, and she is probably an excellent server, and I like the fact that she seems to enjoy her work.  Here’s the thing.  She told me that in California, the minimum wage is something like 7.50 an hour.  Apparently, there is no exemption for tipped employees.  So, she earns tips in addition to her hourly wage.  Great.  Now, California must be only second to New York with respect to the “costs of doing business”, yet, companies find ways to keep profitable there.  We visited the Nashville location of this restaurant, and she said that the prices were only slightly different, nothing truly noteworthy.  So, Ezra, tell me why that company can pay it’s help 7.50 an hour in California, where they have sky-high real estate prices, (thereby driving up costs) and a much higher tax rate, yet continues to not only operate, but experience record growth? It can’t be volume, I mean, you can only serve so many people a day.  Whenever I hear from Conservatives over the minimum wage debate, all I ever get is the argument that a government mandated wage floor would kill a company’s incentive to hire, and therefor, grow.

I was already thinking about this when I read that CostCo’s average wage was something like 18 dollars an hour.  What is Walmart’s?  6?  10?   Their prices are comparable, so how does CostCo do this?

(I’m asking Ezra because I am a fan of his, and he usually takes complex financial issues and writes about them in a way that a moron like me can understand.  But please, feel free to chime in if you have thoughts)



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13 responses to “Calling Ezra Klein!

  1. I didn’t know that about California. I have so many friends here who live and die on $2.18/hr + tips.

  2. Yup, and I for the life of me don’t understand why our lawmakers allow it. I’m sure someone will come along and point out that a fledgling mom/pop food service cannot afford to pay the minimum wage. First, i say, bull, because I did it, and i operated on a shoestring budget from the jump. Second, i’d say, fine, lets give exemptions right up to the point that you incorporate, and start growing. I’m sure it will seem somewhat arbitrary to set a line for this, but, lets go ahead and try it. I doubt restaurants will cease to do business here if they have t pay their help a fair wage.

  3. Pingback: Music City Bloggers » Blog Archive » Two dollars and eighteen cents an hour

  4. Lu

    I came from California and was absolutely appalled when I heard servers here only $2-something an hour.

    I think it has to do with state law. At least that’s what I remember someone grumbling to me when I asked. Apparently Tenn state law (and other Southern states do this too, like the Carolinas) says that, since tips are counted by the federal government as part of “wages,” the employer can count them as that too, and thus adjust what he/she pays outright to the employee to compensate for their tip earnings. So, in theory, the 2-something/hr is an adjusted figure that, with 15% tips added in, supposedly brings them up to minimum wage. In theory.

    Problem is, in reality it just doesn’t work that way and most servers don’t get the tips required to bring them up to min. wage. I think the employer is supposed to kick in the rest, if its below, but still. It leaves the server out in the cold. Tips are supposed to be on top of their hourly rate, not included in.

    California has really tough labor laws — mainly because of the entertainment industry’s history of overworking and upaying its workers. Servers and other min. wage jobs get to reap the benefits of the ent industry’s greed.

  5. Let’s think about this, because it’s an interesting application of economics.

    Rent is high but, if the restaurant owns the land, the net is zero. Also, a lease has value because it is a contract and the land could be sublet. It’s a fixed cost.

    Pricing is primarily determined by variable costs; for a restaurant, food and labor. Variable labor cost is low relative to the food buy. Even at the additional $5/hour, labor costs are relatively low.

    Volume is absolutely important – both restaurants may have an equal theoretical maximum number of services per day, but the restaurant in the more highly populated area (i.e., CA) will do an a higher average number of services in a day.

    Environmental factors are important too. California has a state income tax. Tips and other cash wages are among the most underreported categories of income to the IRS. By mandating this rate, CA collects more tax revenue.

    So, restaurants can do a better volume in CA at lower margins and equal service. Lower volume operations require better margins.

    As to your Cost-Co/Wal-Mart comparison, CostCo can afford to pay a better wage because the average purchase amount at a Costco store is so high (because it is bulk). That is to say the average revenue per employee is considerably higher as well.

  6. I worked as a server at Cracker Barrel in the boro, and made my 2.13 an hour plus tips.

    I never left a shift where I didn’t make at least 9 bucks an hour in tips though, not counting the paltry wage. Its why I waited tables. How much I got paid was determined (mostly) by how hard I worked. I hate working at a place where I get paid the same as my slacker co worker.

    And as for California, cost of living is much higher, there is much more money in circulation, therefore pay must be higher to be competitive. If they got rid of the minimum wage in CA, wages would still be similar, I would imagine. Supply and Demand works in the labor force as well as the market. If you have a set number of workers, and all businesses are competing for them, wages will rise to a level where the supply of workers and the demand for work meet.

  7. W

    If necessary all the lower paying resteraunts can supplement the income from the higher paying ones. And there is also the volume argument.

  8. Do servers in California still make 15%-20% in tips?

    I get paid $3.50/hr plus tips at one of my restaurants and $2.18 at the other. If I make less than min wage for the week, the employer does pitch it to make it equal. It is very rare that I don’t make min. wage, though. I usually make closer to $10/hr on average, sometimes over $20, not including the hourly wage, which mostly goes back to the government.

    Most servers here in Nashville have a voided check because it all goes to taxes. I don’t really consider my paycheck when I consider my income. Last week’s check was $0.31 from the restaurant that pays me $2.18/hr.

    It would be a lot less pressure if I could count on a paycheck rather than just my tips, so maybe a move to California is in our future…

  9. Mack

    Mike D, let’s substitute Sam’s Club then.

    Also, yes, theoretically, there are more opportunities for volume in large cities, but there is also more competition. Way more businesses competing for that disposable dollar.

    A 200 seat restaurant, turning every table 3 or four times, will do just as much volume and therefor see just as much profit in California as in Nashville, right? If prices are the same, and the fixed costs not an issue, then I am somewhat curious about why more businesses just opt out of a State where they have to pay more in salary.

    The income tax thing makes some sense to me, except that most minimum wage earners won’t pay a dime in taxes anyway. Perhaps you meant payroll taxes?

  10. What just dawned on me (and I took this over to MCB) is that when I was a server back in, oh, 1987, (in Nashville), the base pay for servers was was $2.01 per hour. It is $2.13/hr. now?

    A 12-cent per hour raise in 20 years?


  11. Yes, we still make 15%-20% in tips, and while we are taxed on that income, I still bring home aroun $200 a paycheck PLUS the tips I’ve made that pay period.

  12. Mychal, do you still have to report 8% of your tips for taxes…or has that percentage gone up dramatically?

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