San Francisco’s $15 minimum backfires on small business

On Nov. 5, San Francisco celebrated its Election Day decision to raise the city's minimum wage to $15 an hour by 2018. Three months later, the hangover has arrived.

On Feb. 2, Borderlands Books on Valencia Street announced that it would be closing its doors by March 31, citing the recently approved minimum-wage increase as a driving factor. One day earlier and one block up the street, a restaurant called The Abbot's Cellar served its last customers, fingering the $15 minimum wage as a factor in its decision to close shop.

These aren't marginal businesses that had lost the support of their customers. The Gawker Media-owned website io9 praised the book outpost as an “oasis” for science fiction lovers, and said it was “simply unthinkable” that it would close its doors. The Abbot's Cellar was twice declared by the San Francisco Chronicle to be one of The City's top 100 restaurants.

The neighborhood hasn't changed much since November, but the economics of operating a business there have. In a blog post on its website, Borderlands explained that the minimum-wage hike would increase payroll costs by 39 percent. Competition from Amazon means that price increases aren't an option to cover that cost, so a 20 percent jump in sales was the minimum amount required to keep the doors open. Management concluded that this wasn't “a realistic possibility for a bookstore in San Francisco at this time.”

At The Abbot's Cellar, the economics were similarly stark. In an interview with Inside Scoop SF, partner Nat Cutler explained: “Restaurants have one way to cover their costs, and it's the price of their items. And especially for higher end places, all of a sudden those numbers start getting really high.” In a subsequent phone conversation, Cutler told me that a series of factors (including The City's sky-high rent) were to blame for those rising costs, but that the cost of the minimum wage increase is what put him over the edge.

Neither business is easily typecast as an anti-government ideologue. Borderlands' management says it supports “the concept of a living wage in principle,” and the restaurateur Cutler told me that he's also a proponent of a higher minimum wage — as long as it's a smart minimum wage.

For instance, Cutler sees the speed of the increases and the lack of a tip credit as two major missteps. The quick phase-in doesn't allow employers adequate time to adjust to a drastically different economic model, he said. And the omission of tip income from the wage calculation prevents the increase (particularly in the restaurant industry) from reaching those it's intended to: Employees who don't receive tips.

Cutler told me that businesses like his are faced with three choices: Increase sales volume, increase prices or find a way to absorb the costs. Like many small businesses in The City, the restaurant had no room for absorbing costs, and a miraculous increase in customer traffic wasn't forthcoming, either. Price increases were his only choice — and even that option was more than customers could handle.

It's not unusual for a minimum-wage increase to cause unintended consequences for businesses and their employees. Decades of empirical research have connected a higher minimum wage and lost jobs. Similarly, the nonpartisan Congressional Budget Office estimates that a half-million jobs would be lost nationwide if the federal minimum wage is increased by 40 percent, as President Barack Obama supports.

But these past increases that economists have studied weren't anywhere near the $15-an-hour figure that was passed in San Francisco. So it's not surprising that an unusually large wage hike is leading to unusually large consequences, including business closures.

The City's organized business community was mostly silent on the proposal, and the San Francisco Citizens Initiative for Technology and Innovation — aka, described by the Chronicle as The City's “largest tech advocacy arm” — even endorsed the ballot measure. Of course, technology is making it possible for service industry businesses to replace newly-expensive employees with self-service alternatives where possible.

Call it another example of the law of unintended consequences.

Michael Saltsman is research director at the Employment Policies Institute, which receives support from businesses, foundations and individuals.

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