COVID-19 dealt a mule-kick to the solar plexus for small business, most especially restaurants. Now the Biden Administration, making good on a progressive campaign promise, proposes to increase the federal minimum wage to $15/hour for all employees, including those for whom the majority of their earnings comes from tips. This would cripple restaurants and other small businesses. Let’s remember Nancy Reagan and Just Say NO.

Even the Congressional Budget Office thinks this is not a great idea, estimating that the rate hike would kill approximately 1.4 million jobs even as it lifts 900,000 people out of poverty. Cost would appear to exceed benefit. And that doesn’t account for the ripple effect of increases in the cost of goods and services necessary to pay higher wages, which will hit the poor hardest. One thing I am sure of, though: it will increase the number of minimum wage workers in the country. Is that where we want to go?

There’s a lot of misinformation about minimum wage. Let’s get a few things straight. 

First, the minimum wage was never intended to be a “living” wage. As the name suggests, minimum means minimum, not enough for a family of four. When the Fair Labor Standards Act was adopted in 1938, the minimum wage was set at $.25/hour: the equivalent of $5.00/hour in 2021 dollars. It’s for startups, teenagers, the inexperienced, and the marginal, and was set low to encourage employers to take a chance—on the business as well as on the people.

Second, nothing prevents employers from paying more than the minimum. In fact, about 98% do. It’s a floor, not a ceiling – or even a mezzanine. The minimum wage is the same for a nurse-anesthetist as for a newbie burger-jockey, but you can bet the former gets paid a whole lot more than the latter. It’s competition, not government edict, that determines most wages. In 2019 the U.S. Department of Labor’s Bureau of Labor Statistics found that only 1.9% of U.S. workers earned just minimum wage. There are plenty of places across the U.S. where starting wages are well above the minimum because demand is high. As Martha Stewart would say, that’s a good thing. But raising the minimum wage will not automatically push other workers’ earnings higher: it just shoves a lot of them down a few rungs closer to the bottom of the earnings ladder. That’s a bad thing. And it will absolutely increase the number of minimum wage earners in the economy. 

Third, it’s an insult to workers who have been getting a premium and suddenly find themselves at the bottom of the economic heap. It offends our sense of fairness to inflict a psychological cut, to disregard merit in favor of a mandatory minimum.

Fourth, high minimum wages discourage overtime. Overtime allows hourly workers an opportunity to earn a premium, but a steep rate hike can make overtime prohibitively expensive. An overtime hour at $7.25 costs $10.88: an overtime hour at $15 costs $22.50, more than twice as much.  Bosses can’t refuse to pay overtime, but they darn sure can send workers home. So workers led to expect a raise often end up earning no more.

Finally, remember that a job paying $7.25/hour will get you more than no job at $11, or $15, or even $50/hour. As the great sage Thomas Sowell says, unfortunately the real minimum wage is always zero. Let the market decide how much someone’s time is worth. It seems to be doing a decent job since so few people are actually earning just minimum wage right now. Not broke. Don’t fix.

Can we talk about tipped employees? The Fair Labor Standards Act gives employers a break for employees who earn a substantial portion of their income from customer tips, allowing an employer to pay tipped workers cash wages of $2.13/hour, so long as their earnings exceed $7.25/hour when their tips are included. Most actually take home considerably more: the Bureau of Labor Statistics reports that the average hourly earnings for waiters in 2019 were $12.88, and for bartenders $13.46. 

The House COVID-19 relief bill would more than double the tip credit minimum to $4.95 per hour this year and then, starting in 2022, would increase tipped employees’ cash minimum wage by $2/hour each year until it equals the federal minimum wage for other workers. Let’s do the numbers: the Biden Administration is proposing to raise wages for tipped restaurant workers by 700% at the very moment when it’s reeling in existential COVID crisis!

These aren’t huge figures, but when a restaurant is trying to calculate whether it can afford to open its doors again, it will affect the number of wait staff that gets hired back, or whether it hangs out the “Open” sign at all. Let’s hope returning diners tip well. I believe they will. I know I will. It’s been so long since we could sit down in a pleasant restaurant and enjoy a good meal.