Last week saw the announcement of a significant increase in the minimum wage in Australia. The lowest paid workers will, from October 2008, receive a 4.15% pay rise, equivalent to 57 cents per normal working hour. Bang! Restaurateurs have been complaining about how this sort of increase would hit really hard and the flow-on would be large increases in costs to diners.

… on average their next main course will increase by $1.50 …

– Con Castrisos (Restaurant and Catering Australia)

Restaurant and Catering Australia (site) whipped up a press release and the papers lapped it up without analysis [1, 2, 3].

… the increase in minimum wages is felt more harshly in the restaurant industry as many employees are working less than full time and subject to penalty rates that magnify the increase …

– John Hart (Restaurant and Catering Australia)

… yesterday’s decision by the Australian Fair Pay Commission will cost his business up to an extra $50,000 a year, leaving him considering introducing weekend surcharges.

“Soon people are going to be paying $4.50 for a cup of coffee and wondering why,” he said.

The Australian newspaper, quoting Perth restaurant manager Warwick Lavis (see link 2, above)

This sounds almost as stupid as the incessant griping about the GST in the restaurant industry (now in place for eight years).

Why introduce weekend surcharges? The rise in costs affects every day of business. He doesn’t understand his own business model? And what’s with the cup of coffee? Mr Lavis thinks the result of a 4.15% pay rise for some people will cause a 29% increase in the price of a cappuccino? (I’m assuming a current $3.50 price.)

All employment factors (penalty rates, multiple employees, admin) are already built into a restaurant’s menu pricing. Restaurant and Catering Australia’s argument is solely about employment costs, so there would be no reason to assume that this pay increase could result in more than a 4.15% increase in menu prices (that’s $0.83 on a $20 main, say). And even then, they’re pretending that the menu price is entirely based on wage costs.

Amusingly, their complaints actually overlook the possible higher flow-on effects from their suppliers. Assuming produce is bought from low-wage suppliers, with one low-wage intermediary, the increase could hypothetically be as high as 8.3% (two layers of 4.15%) on food costs. But wait…

Reality is that not every supplier in the restaurant chain is subject to uniform application of the adjustment of the minimum wage. Only the lowest income employees are benefiting from the full increase, while those on an Australian Pay and Classification Scale benefit to a lesser extent. This means that for each layer of costs, the maximum cost increase is considerably less than 4.15%.

So let me see… (1) wages are only part of total costs, (2) the full increase applies to only a tiny part of the workforce, and (3) food costs won’t increase by as much as I hypothesised above because not all suppliers will be affected. I can only see a final menu price rise of 2-6% (that’s A$0.40-1.20 on a $20 main, up to A$0.21 on a $3.50 coffee).

Have I missed anything?