THE LABOR CRISIS IS ALL OVER THE NEWS: HOW WILL IT PLAY OUT? AND SOME UNINTENDED CONSEQUENCES

We wrote a month ago about the labor crisis within the restaurant industry.  Today, the business press, in writing and on TV, has more than discovered the situation, with a continuous din. Our discussion below is intended to provide more insight as to how it plays out. Since something like 20 million Americans are employed within the hospitality industry, encompassing restaurants, retail and hospitality, the implications for our overall economy are significant.

The restaurant industry is now forced to pay anywhere from $12 to $16/hr. for starting crew members and, even at that wage, it remains difficult to find candidates to interview. Some companies are offering referral bonuses to existing employees, $50 to just show up at an interview and many other enticements. On a recent trip to South Carolina, I saw signs to this effect in the windows of almost every restaurant on the commercial strip. The most striking offer was at McDonald’s, a willingness to pay $28,000 as a starting wage to a trainee who would be a manager within 90 days. We don’t know what the “qualifications” would be to get that job, and the prospect might be slated to be a “shift” manager, rather than general manager. However, no matter how well “qualified” that person would be, is seems a sign of clear desperation that a store owner is now required to hand over the keys to a $3M restaurant, for even a shift, after only 90 days of training. Parenthetically, almost all the management teams of publicly held companies have recently reflected the labor “challenge”, though the longer term margin ramifications haven’t been explored.

The debate about the cause of the crisis unfortunately, as most policy discussions do these days, comes down to a political divide. The left suggests that it is the fear of interacting with the public while Covid-19 is not yet eliminated, even $15/hr is barely a living wage, some potential recruits still have to stay home with children that are not yet back in school, and recruits are just looking for the right opportunity. Conservatives suggest that extended and enhanced unemployment benefits amount to more than a full time employee would earn while working and “if you pay people to stay home, they will stay home”.

The enhanced unemployment benefits are slated to remain until September 6th, and it seems unlikely that the Biden administration will modify that. However, South Carolina and Montana announced last week their plan to withdraw from the Federal Program at the end of July, at least a few other states will likely follow,  and the US Chamber of Commerce announced its support of stopping the extra $300/week.

THE RESULT –some obvious, some not so obvious – including some unintended consequences.

• Crew wages are taking a major step higher, and what goes up will not, in this case, come down.
• Store level managers and other field supervisors will also receive wage increases over time.
• Staffing will remain a challenge, at least until September, because only half the country is Red, and Blue states will mostly keep the unemployment programs in place.
• Store level service will likely suffer and/or training costs will increase materially for raw recruits.
• Menu Prices will move higher, and customers, with inflation news rampant, will understand.
• Store level and corporate margins will be hard pressed to move higher (than in ’19), since manu prices can only be raised with great caution. The other “prime cost”, namely Cost of Goods Sold, is likely to trend higher, affected by higher beef, chicken, etc.

Roger Lipton