sealPurdue News

April 1995

Raising minimum wage not a good idea; just ask restaurateurs

WEST LAFAYETTE, Ind. -- President Clinton's pursuit of an increase in the federal minimum wage is a well-intentioned idea, but not the welfare reform panacea some are suggesting, a Purdue University professor says.

E. Alan Kluge, professor in the Department of Restaurant, Hotel, Institutional and Tourism Management, recently studied the effects of minimum wage legislation in the restaurant industry. He says his research shows that raising the minimum wage may cause restaurant owners to raise prices, offer fewer menu options, cut employee hours and lay off employees.

"What the president is trying to do is admirable," he says. "However, what it amounts to is a pocket full of good intentions, because I don't think raising the minimum wage will raise the quality of life for all poor workers in this country -- at least not those employed in the restaurant industry."

President Clinton is proposing a 90-cents-per-hour increase over the next two years. The current minimum wage of $4.25 an hour took effect in April 1991. Proponents of the move say it will boost the incomes of the working poor and may ease the burden on the welfare system. Advocates also contend that the raise will be an incentive for teen-agers to work and that a ripple effect will increase wages at all levels.

Those on the other side of the fence, however, contend that an increase will decrease employment opportunities for the poor and unskilled, reduce teen-age employment, hurt small businesses more than large ones, and increase wages in middle-income families more than poor ones.

Kluge and a colleague studied employer reactions in 158 restaurants in Oregon after that state increased its minimum wage to $4.75 an hour in January 1991. Results of the study were presented at the annual convention of the Council on Hotel, Restaurant and Institutional Education. Kluge says the Oregon study may be a good model for service industries throughout the country.

"In many instances the restaurant industry runs on the manpower of minimum-wage workers," he says. "Many predictions are based solely on theoretical economic models. Oregon gives us a case study that we can look at and actually see what happened when there was a significant increase in minimum wage. As a result, we should be able to better predict what impacts an increase will have on many industries in other states."

Kluge found that Oregon restaurant owners responded to the increase in a variety of ways. Their first response was to remove items from their menus and raise prices. "Raising prices and reducing options to offset an increase in wages hits the consumer the hardest," Kluge says. "This causes inflationary pressure on the economy."

Second, employers cut back employee hours. Many went one step further and decreased the number of employees.

"The very people who need the increase most are seeing their hours cut or are being pushed out of a job altogether," Kluge says. "The people who are keeping their jobs are middle-income workers who are older and working full-time. Those workers are already making more than the new minimum wage, so they won't see a pay increase as a result of the legislation. They may find themselves doing more work to make up for fewer employees. In effect, they end up working harder for less money."

Employers who did hire reported hiring more part-time employees 21 years old and older, and hiring fewer younger or full-time employees.

Kluge says many operators, given a choice, would prefer to staff their restaurants with five less-experienced waiters at $4 per hour instead of four more-experienced waiters at $5. If there's a significant raise in the minimum wage, he says, there isn't any choice but to go with only four employees.

Kluge says it's important to remember who is working for minimum wage in the restaurant industry.

"The majority of people working for minimum wage in the restaurant industry are not heads of households," he says. "Most are teen-agers in their first jobs, college students working part-time while going to school and spouses earning extra income for their families. Increasing the minimum wage beyond a reasonable level will eliminate opportunities for these employees."

Source: E. Alan Kluge, (765) 494-0855; Internet,
Writer: Victor B. Herr, (765) 494-2077; Internet,
Purdue News Service: (765) 494-2096; e-mail,

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