In his “Statement on the National Industrial Recovery Act“, President Franklin Roosevelt (1933) outlined the main aim of minimum wages law as protecting the workers from exploitation: “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country” (par. 2).
Since that time laws guiding the process of setting the lowest possible wages have become the essential part of American legislation. The minimum wage in the United States has risen from 25 cents to more than seven dollars during the last century, and many specialists predict its further growth. The minimum wage impacts hospitality industry significantly, as many of its employees belong to the group of low-wage workers. The purpose of this paper is to analyze how the changes in minimum wages affect the industry based on the information provided by relevant literature sources.
Such analysis will help to reveal how the laws defining the lowest possible wage influence all stakeholders of the industry, including the customers, the people involved in the provision of services, the organizations, etc. The knowledge about the investigated topic is vital for everyone planning to be or currently involved in working in the hospitality industry as being aware of the potential positive and negative consequences of changes in minimum wages is the key to putting efforts in adjusting to new conditions and preventing possible problems.
History of Minimum Wages in the U.S.
Till the 30s of the twentieth century, minimum wage laws were focused on protecting certain groups of the population (e.g. the state of Massachusetts introduced the standard minimum wages for children and female workers in 1912). The creation of International Labor Organization in 1919 stimulated the development of appropriate legislative norms protecting the workers across the globe from the violation of their right to earn not less than it is required for satisfying the minimum living needs.
The first steps to setting the standards for minimal payment received by all members of the general workforce in the United States were made after the Great Depression. The first law defining the amount of the minimum wages every employer is obliged to pay to his/her employees was introduced in 1938 in the U.S.
That time the minimum wage was set at 0,25 cents. Since that time, the amount has been continually growing, reaching 3 dollars in 1980, 5 dollars in 2000, and 7,25 in 2009. Many specialists in the U.S. claim that the minimum wage in the country does not keep pace with labor productivity, which serves as a proof of the fact that raising the minimum wage is a necessary step to providing the appropriate quality of life for the citizens.
Current Laws
The current federal minimum wage was set based on The Fair Minimum Age Act of 2007, and it implemented three increases, which elevated the minimum wage from 5,15 to 7,25 dollars. The last increase was introduced in 2009. U.S. Code provides the information on regulations on minimum wages in title 29, chapter 8, § 206. The Fair Labor Standards Act (FLSA) requires an employer to pay a tipped employee $2.13 an hour if that amount plus the tips equals the Federal minimum wage and sets the special minimum wage of $4.25 per hour for the employees under the age of 20 during their first 90 days of employment.
Each of the states is given the right to set its standard for minimum wages. Most of the states have minimum wage rates higher than the federal. California, Massachusetts, and District of Columbia have the highest rates across the country. A number of states have the same rates as the ones defined by the federal law, and five states (Louisiana, Mississippi, Alabama, Tennessee, and South Carolina) do not have state laws regulating the issue. Georgia and Wyoming have rates that are lower than the federal law defines.
Literature Review
Effects of Minimum Wage Growth on Employees
Employees working in the hospitality industry are considered the main stakeholders that might be influenced by the changes in minimum wages. Since the minimum wage was defined in the U.S. for the first time, all subsequent changes have been directed towards the growth of the lowest acceptable wage. Most sources consider a further minimum wage increase advantageous for the employees of the hospitality industry, as this industry along with wholesale and retail business and education and health care account for 77 percent of the total minimum wage workers (Risher, 2013).
The main benefit of growth of the minimum wage for the employees of the hospitality industry is related to the improved quality of life and broadened opportunities for buying services and goods. Besides reducing poverty, the discussed changes can help to overcome income inequality. The employees working in the hospitality industry belong to the group of the population receiving the lowest wages in the country, and the difference between the lowest and the highest wages in the U.S. is considered too high by many specialists (Offenheiser, 2014).
One more advantage of raising the minimum wage is that it is often accompanied by the increase in the level of training organized for the employees and result in higher morale. Heyes and Gray (2003) found that minimum wage increase promotes training efforts aimed at boosting the professional skills of the employees and improve their qualifications by converting them from low-skilled workers to people with valued professional knowledge.
The possible disadvantages of the rise in minimum wage include the high possibility of numerous discharges among the employees of the hospitality industry. The organizations will need to find the ways of maintaining adequate revenues after being obliged to pay higher wages, and one of the potential solutions they can implement is cutting down the workforce.
Gorry (2013) conducted an original research that revealed that the rise in minimum wages is directly related to the elevated rates of unemployment, especially among the youngest workers (15-24). As the majority of the employees in the hospitality industry are of the young age, they are especially vulnerable to the described potential negative consequence of minimum wage growth.
The inevitable cuts in bonuses and benefits are other negative issues that might be faced by the employees in case the minimum wage will be raised. One more disadvantage is related to the high motivation of the employers to substitute workers with up-to-date technologies. The organization will be more interested in using the machines for providing certain services. For example, some cafes have already started using tablets and other devices as substitutes of waiters. Using devices can become more cost-effective than employing people if the organizations are obliged to pay higher wages.
Effects of Minimum Wage Growth on Employers
The main advantage of the minimum wage rise for the employers in the hospitality industry is related to the possible higher job retention. High turnover is one of the typical features of hospitality workforce, and the growth in minimum wage resulting in stronger competition and job motivation can benefit the organization looking to retain the employees.
Despite the popular view that growing minimum wage inevitably leads to unemployment, some studies present the opposite evidence. Addison, Blackburn, and Cotti (2013) investigated the data on restaurant/bar employees’ retention after minimum wage increase and found that it does not lead to elevated unemployment rates. The employers might enjoy higher motivation of the staff to receive appropriate training and stay at the current position than to change the job place. Higher wages obviously convert low-paid jobs that are vital for hospitality industry into more prestigious and wishful.
The main disadvantage of minimum wage growth for the hospitality industry employers is related to their possible inability to maintain the adequate balance between the revenues and wage spending. In the case such balance cannot be kept, the organization might face the need to dismiss valuable workers to manage to provide the sustainability of the business. Besides, the employers might be forced to increase the prices for services they provide, which can lead to the significant loss of clients. Such situation might further aggravate the employment crisis as low demand for expensive services can lead to decreased in the organization’s income and ability to retain the same number of employees.
Effects of Minimum Wage Growth on Customers
The main positive effect of the minimum wage growth is related to the higher customers’ satisfaction with the hospitality services. Such positive change is supposed to be stimulated by a higher motivation of organizations to provide the highest quality of services due to the need to attract more consumers to be able to receive the enough revenues to pay the employees. Therefore, the customers will enjoy better services and more attractive propositions provided by the hospitality industry organizations eager to maintain their sustainability. The
The negative side of minimum wage growth is related to the high possibility of the increase in the prices for hospitality services. Aaronson, French, and MacDonald (2008) conducted a study that revealed the direct relation between the minimum wage hikes and price increase in the restaurant business. Growing prices will affect the ability of customers to use the services and lead to the inevitable decline in the demand for luxurious products and offers in tourism and restaurant businesses. In such case, the consumers will not be able to pay for the services they used to use before the minimum wage hike.
The rise in the minimum wage will have both negative and positive effects on the hospitality industry as its stakeholders will experience various consequences of the pay hike. The industry might face the higher competition caused by the necessity to attract more customer to maintain the business sustainability. Besides, the industry might experience positive tendencies in job retention promoted by higher job motivation, while the need to cut spending for wages can force the employers to dismiss many employees and remove the bonuses.
Therefore, while minimum wage rise can promote educational activities and encourage employees to attain more skills and qualifications with the help of training, the rates of unemployment can grow significantly. Hospitality industry can experience a serious decline in the demand for its services due to the need to raise the prices faced by the organizations eager to keep the balance between the revenues and employees’ wages spending.
The minimum wage hike can cause considerable negative consequences for hospitality industry if such changes are introduced too quickly and oblige the organizations to meet the requirements that put a serious threat to the sustainability of their business.
AH&LA and AAHOA v. City of Los Angeles Case
In 2014, two national hotel industry groups (American Hotel and Lodging Associations and Asian American Hotels Owners Association) filed a lawsuit against the city of Los Angeles. The case was based on the assumption that the recent minimum wage increase for hospitality industry workers introduced by the city’s Hotel Workers Act (defining the minimum wage rate for large hotel workers as 15,37 dollars) contradicted the federal labor law and could cause severe losses for the lodging business (Phillips, Morath, & Karmin, 2014).
The plaintiffs claimed that they were forced to file a lawsuit to protect hotels from serious harm and keep the balance of economic power between labor and management. The associations stated that the Hotel Workers Act ignored federal labor law and put a serious threat to the sustainability of many organizations working in the hotel industry.
AH&LA and AAHOA claimed they are not against the growth of minimum wage but oppose the unfair treatment of hotel owners that do not participate in unions. The motion for preliminary injunction was filed on January 26, 2015, but the Court denied the hotel associations’ motion for preliminary injunction, The Court concluded the Wage Ordinance’s minimum wage provision did not compel pre-emption and from July 1, 2015, the hotels owners in Los Angeles were required to pay a minimum 15,37 per hour minimum wage.
The same year the U.S. Chamber filed a joint brief with the Coalition for a Democratic Workplace arguing that a Los Angeles minimum wage ordinance governing large hotels creates an exception for hotels that have a collective bargaining agreement and in such way operates as a penalty for hotels that do not participate in unionization efforts (United States Court of Appeals, 2015). The case has not been decided yet.
Both of the cases illustrate that minimum wage increase can present certain threats to the sustainability of the businesses involved in hospitality industry if the laws introducing such increases contradict the interests of the owners severely. Therefore, each legislative act aimed at providing the employees with higher wages need avoid favoring particular employers, e.g. giving special rights to the hotel owners participating in unionization as in the case of Hotels Workers Act.
The analysis of the relevant literature sources reveals that the minimum wage increase greatly affects the hospitality industry as a considerable part of employees working in this industry are low-wage workers. The influence such changes can have on the employees, employers, and customers of hospitality industry can lead to both positive and negative consequences.
The introduction of minimum wage increase can raise the quality of life of hospitality services employees, but at the same time provoke unemployment and price hikes. Further research is required to define the most appropriate algorithm of increasing minimum wage without causing any losses for different industries.
References
Aaronson, E., French, E., & MacDonald, J. (2008). The minimum wage, restaurant prices, and labor market structure. Journal of Human Resources, 43(3), 688-720.
Addison, J., Blackburn, M., & Cotti, C. (2013). Minimum wage increases in a recessionary environment. Labour Economics, 23, 30-39.
Gorry, A. (2013). Minimum wages and youth unemployment. European Economic Review, 64, 57-75.
Phillips, E., Morath, E., & Karmin, C. (2014). Hotel industry groups sue Los Angeles over minimum wage law. Web.
Risher, H. (2013). Facts on the minimum wage. Compensation & Benefits Review, 45(1), 7.
Roosevelt, F. (1933). Statement on the National Industrial Recovery Act. Web.
United States Court of Appeals for the Ninth Circuit. (2015). No. 15-55909. Web.