By Adam Pagnucco.
The county council’s Office of Legislative Oversight (OLO) has submitted its economic impact statement on Council Member Will Jawando’s bill to repeal the county’s tip credit for minimum wage. And OLO’s judgment is unambiguous: the bill would damage Montgomery County’s economy.
OLO begins with this summary.
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OLO anticipates that enacting Bill 35-23 would have a net negative impact on economic conditions in the County in terms of the Council’s priority economic indicators. In this analysis, OLO performed a review of empirical studies on the economic impacts of increasing the tipped minimum wage (TMW). Based on this review, the net impact likely would be negative for the following reasons. First, due to higher labor costs and challenges mitigating these costs, the County’s restaurant sector likely would experience a net decline in profitability. Second, while increasing the TMW would likely economically benefit certain tipped workers who reside in the County, it is possible that total earnings in the sector would decrease due to the combined effects of reduced tipping and aggregate job and work hour declines. Third, the studies reviewed here suggest that increasing the TMW would not effectively target poor tipped workers in the County. Finally, because restaurants likely would pass-through a portion of higher labor costs to customers, the net economic impact of higher wages for certain tipped workers likely would be offset by higher prices for customers who reside in the County.
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OLO goes on to describe the provisions of the bill and then discusses the methodology of its analysis. Crucially, OLO relies on ten studies from academic and governmental institutions for its analysis. The authors include faculty and employees of Ball State University; California State University, Fullerton; Cornell University; Miami University (Ohio); Mount Royal University; the Office of the Comptroller of the Currency; San Diego State University; Sejong University (South Korea); Trinity University; University of California-Berkeley; University of California-Irvine; University of Nevada-Las Vegas; University of South Florida; the U.S. Census Bureau; and Virginia Commonwealth University. That’s important because this bill is getting swarmed by lobbyists, out-of-state advocates, ideological interest groups and other self-interested parties making a variety of claims across the gamut.
In its review of academic literature, OLO finds the following.
“Overall, there is strong evidence that raising TMW increases employer-paid wages for tipped workers in full-service restaurants and causes customers of these restaurants to reduce tips. The evidence also points to the potential for raising TMWs to reduce jobs and available hours for tipped workers in the industry. However, it is uncertain whether the benefit of higher employer-paid wages outweighs the costs of lower tips and/or employment.”
“Overall, the evidence suggests that raising the TMW is ineffective at increasing income for poor restaurant workers.”
“Overall, there is limited evidence on the impact of TMWs on restaurant survival, with one study with limited geography and temporal scope finding no negative impact.”
“In sum, the Bill likely would significantly increase labor costs for restaurants. Owners and managers likely would reduce jobs or hours and/or pass-through costs to customers to protect profits. However, these actions may risk revenue loss from the potential effects of lower service quality and/or higher menu prices on customer demand for eating out. The limited evidence reviewed above suggests these dynamics may not affect the size of the County’s restaurant sector. But they likely would result in a decrease in total profitability.”
“Overall, OLO anticipates that certain tipped workers would experience net income gains, while others may experience a neutral or negative affect. In addition, the studies reviewed above suggest that these income gains likely would not target poor workers in the industry.”
“The Bill would also impact customers of restaurants who reside in the County. As previously discussed, increasing the TMW likely would increase menu prices. Residents whose demand is unchanged by higher prices would experience a net increase in household expenses, holding all else equal. However, certain residents likely would reduce their consumption of eating out at full-service restaurants, either by eating at home and/or shifting to limited-service restaurants.”
OLO ends with this conclusion.
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OLO anticipates that enacting Bill 35-23 would have a net negative impact on economic conditions in the County in terms of the Council’s priority economic indicators. In this analysis, OLO performed a review of empirical studies on the economic impacts of increasing the tipped minimum wage (TMW). Based on this review, the net impact likely would be negative for the following reasons. First, due to higher labor costs and challenges mitigating these costs, the County’s restaurant sector likely would experience a net decline in profitability. In theory, this could undermine the competitiveness of the sector and may undermine the County’s reputation for a “business friendly environment.” Second, while increasing the TMW would likely economically benefit certain tipped workers who reside in the County, it is possible that total earnings in the sector would decrease due to the combined effects of reduced tipping and aggregate job and work hour declines. Third, the studies reviewed here suggest that increasing the TMW would not effectively target poor tipped workers in the County. Finally, because restaurants likely would pass-through a portion of higher labor costs to customers, the net economic impact of higher wages for certain tipped workers would be offset by higher prices for customers who reside in the County.
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The county’s economy is a major focus of Montgomery Perspective. In the past, we have found that the county’s restaurant sector is still recovering from the pandemic and that the county trails the rest of the region on a long series of economic performance measures. That has not stopped the county council from passing back-to-back-to-back tax hikes on property ownership, new construction and property transactions as well as rent control, which will damage the county’s assessable tax base and is already stopping development.
The council must beware of causing further economic damage, especially when the alleged benefits for groups it is trying to help are as uncertain as described above.
The full economic impact statement can be downloaded below.