UC Berkeley report finds higher wages may not lead to business closures

Photo of "We are Closed" sign
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A federal subminimum wage allows businesses where workers receive tips to pay the same workers less than the federal minimum wage. However, a study from the UC Berkeley Food Labor Research Center and One Fair Wage found that businesses in states without the federal subminimum wage experience similar levels of decline.

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The UC Berkeley Food Labor Research Center and One Fair Wage, or OFW, released a report analyzing how a higher minimum wage impacts the ability of small businesses and restaurants to stay open during the pandemic.

Responding to the National Restaurant Association, which claimed small businesses will struggle to pay employees during the pandemic if the minimum wage is increased, the report came to contrasting conclusions. The researchers found that in the seven states where restaurants are required to pay a full minimum wage in addition to tips, business declined at a rate equal to states with a subminimum wage.

Saru Jayaraman, director of the Food Labor Research Center and president of OFW, said if the National Restaurant Association’s claim was true, they expected to find a higher rate of business closure among restaurants in states with a higher minimum wage or no subminimum wage since the start of the pandemic.

“In fact, what we found was that on average these businesses had the exact same business closure rate as the other states,” Jayaraman said. “The states with the highest rates of closure are states with very low subminimum wages. Four out of seven states that pay a full minimum wage have actually a lower rate of closure.”

The federal subminimum wage gives businesses where workers receive tips — including restaurants and bars — the ability to pay employees below the minimum wage, but no less than $2.13 an hour. California and six other states currently require all businesses to pay the minimum wage, with tipped workers keeping the additional income.

In the report, Dave Cooper, senior economic analyst at the Economic Policy Institute, explained that a higher minimum wage increases how much money families can spend, leading to overall increased consumer demand in those states. He said this may explain why states, where employees earn more in direct wages, are retaining business.

The report also said workers who rely on tips often feel like they should tolerate sexual harassment or violations of social distancing guidelines in order to appease tipping customers. Jayaraman noted that 70% of women who work in casual restaurants reported experiencing harassment.

“You have to put up with all this inappropriate behavior in order to support your family,” Jayaraman said.

The report comes amid a push from the Biden administration to pass a $1.9 trillion COVID-19 relief package for small businesses, which includes increasing the minimum wage to $15 an hour and eliminating the subminimum wage. The Raise the Wage Act, which is part of the relief package, passed in the U.S. House of Representatives in 2019, according to the report, but was removed from the bill in the Senate on Thursday.

Contact Emma Talia at [email protected] and follow her on Twitter at @emmataila.