Latest dining fad -- labor-cost surcharges

You get what you pay for … and you pay for what your politicians get, too. As states move to impose higher minimum-wage levels, restaurants have begun offering a more transparent way to pass the costs onto customers. Rather than raise the prices of each dish on the menu, in some states diners now get an added labor surcharge tacked onto the bill. The Wall Street Journal noted the trend in four states that have recently enacted minimum wage hikes — and it’s not just restaurants getting into the act:

In lieu of steep menu price increases, many independent and regional chain restaurants in states including Arizona, California, Colorado and New York are adding surcharges of 3% to 4% to help offset rising labor costs. Industry analysts expect the practice to become widespread as more cities and states increase minimum wages.

“It’s the emerging new norm,” said Sharokina Shams, spokeswoman for the California Restaurant Association. She said California restaurants are adding surcharges as the state lifts the minimum wage every year until it reaches $15 an hour by 2023. It is currently at $10.50 an hour for employers with 26 or more workers. …

Many restaurant owners say they have added surcharges because jacking up menu prices can turn off customers who are sensitive to how much a sandwich or bowl of soup should cost. When prices do rise, “consumers often trade down in the types of menu items they order, choosing a sandwich instead of an entree, or they leave off beverages or dessert,” said Bonnie Riggs, restaurant analyst for NPD Group Inc.

Other industries are considering using the same practice, although it hasn’t exactly worked out. Business Insider reported that the W Hotel in Seattle added the “MW Surcharge” to its receipts as well, but backed down when protests hit social media. Surcharges took some heat from the media as well, with owners accused of making “overtly political statement[s]” with the practice — even though most of them didn’t mind the overtly political statements made to push for the passage of minimum-wage hikes, including attempts to organize strikes of employees at low-price dining establishments.

This isn’t the first time that retail establishments have used this practice for “political” statements. Three years ago, restaurants began adding surcharges to cover the costs of ObamaCare in anticipation of the costs of the employer mandate. At the time, the practice seemed anticipatory at best, but in this case the costs are being borne immediately. That leaves retailers in low-margin, highly competitive markets like the restaurant business with three basic options: reduce staff, raise prices, or do a little of both. The “surcharge” may be a political statement, but it’s also a way to transparently pass cost increases to consumers that they’d get anyway.

Unfortunately, that last point still needs some explaining. The criticism of this practice amounts to resentment over demonstrations of what an artificial hike to labor costs actually do — and denial, too:

Jamie Hampton, 37 years old, walked out San Diego’s BO-beau kitchen + bar in January after seeing a notice about the surcharge. She and her boyfriend chose a restaurant across the street that didn’t charge one.

“I think they were just making a political statement,” said Ms. Hampton, who voted for the minimum-wage increase and said she was personally offended that the restaurant blamed the wage increase for higher prices.

Hey, that’s also a feature of the free market, and demonstrates the risk of getting too political with customers. But this consumer is fooling herself to think that the prices will remain at the status quo at the restaurant across the street. That establishment is also passing along higher costs in the form of either less service or higher prices — they’re just not itemizing it. Artificially forcing an increase in labor costs will raise prices. One restaurant just allows its customers to ignore reality a little longer.

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