Special Report: In Favour of the Living Wage

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Traditionally, servers in a foodservice operation are compensated through a combination of wages and customer-provided tips. Debate has continued for years as to whether paying servers a living wage (higher wage) not augmented with tips is “better” than paying servers a lower wage augmented with tips.
Those who support a living wage assert that it is, in fact, possible to provide a living wage while maintaining profit margins and, moreover, that employee morale, stability and loyalty are markedly higher when they’re paid a higher wage. Detractors state that the purpose of tips is to provide incentive for improved service and that higher wages will put unrealistic pressure on an industry with a notoriously narrow profit margin.
To consider which approach is “better,” two distinct frameworks will be employed in this paper: the first looks at economic viability and the second assesses the relationship of foodservice operations to others that are affected in the question of compensation models. Research for this paper will contextualize the variables involved in implementing the living wage model. Connections will be explored between wage and employee economic viability; wage and productivity; and wage and employee satisfaction. The research that follows allows that one can make an argument in support of a living wage model of compensation for foodservice.
For the purpose of this paper it is essential to define the terms and contexts of the debate. Firstly, what exactly constitutes a living wage? It is defined by BusinessDictionary.com as a wage “That allows a family to meet its basic needs, and provides it with some ability to deal with emergencies, without resorting to welfare or other public assistance.” (BusinessDictionary, 2010)
Statistics Canada describes the minimum amount that a person can live on as” Low-Income Cut-Offs,” and set this before taxes level for one person living and working in Toronto at “$21,202” (CCSD, 2010). A server in Toronto working a 40-hour week, for 50 weeks in the year, making the minimum wage of $8.25 (Labour, 2009) per hour, will gross $16,500 in a year, almost $5,000 below a living wage. This calculation does not take into account potential tips; it merely establishes a baseline of earnings. Using the above information it can be argued that a living wage for a server in Toronto would be in the range of $12 per hour or more.
To put the question of a living wage in an economic context, it is important to redefine it in the vocabulary of a discussion of economic factors. The term used in economic dialogue that closest resembles the notion of a living wage is an “efficiency wage.” An efficiency wage is defined as a ”Higher than market wage paid to encourage higher output and to raise worker morale, and to discourage absenteeism and inventory shrinkage.” (BusinessDictionary, 2010)
The litmus test for this type of model is known as the Solow Condition. The Solow condition outlines that financial benefits of employee productivity must offset any costs associated with a living wage.
Researchers in fields outside of hospitality have been investigating the benefits of a living wage. For example, researchers from Oakland discovered that positive results of a living wage offset the increased costs, asserting that, “Even without taking into account the likely business savings due to lower turnover costs and higher productivity, most firms should be able to adjust to the higher labour costs without reducing their workforce or relocating.” (Zabin, Reich, & Hall, 1999)
Additionally, concerning the economic validity of the efficiency/living wage theory, Kraut, Klinger & Collins (2000) make a strong argument for employee retention indicating that “(employee) turnover costs at least 150 per cent of the employee’s base salary.”  These findings lend economic credence to the implementation of a living wage and refute the claim that this type of compensation model will always adversely affect the business profit margin.
Ian Tew, Head of Workplace at KPMG, U.K., outlines the benefits of a living wage to classic hospitality challenges. “As Head of Workplace, I have about 700 in-house and outsourced staff in our U.K. offices, many of whom are directly serving our clients. So, their calibre, motivation and loyalty are extremely important to us. Paying the living wage and improving other benefits, like holidays, sick pay and insurance have contributed significantly to our success.
Here’s how: turnover amongst our cleaning staff has more than halved; morale has been raised; despite improved sick pay potential abuse has not materialized; productivity has improved; attitudes are more flexible and positive; and service has improved, as our help desk gets far fewer complaints.” (September 2008)
Research supports the fact that employees feel a higher sense of commitment to an organization that pays a fair wage. Mulau & Lindenburg investigated this effect and determined that “the firm’s wage level also has a strong relationship to (employee) commitment” (p. 397). The living wage is also gaining governmental support. Boris Johnson, the Mayor of London, England, addressed the social and economic benefits of a living/efficiency wage in a public speech. “Paying the London living wage is not only morally right, but it makes good business sense, too. What may appear to a company to be an unaffordable cost in a highly competitive market should more often be viewed as a sound investment decision. I believe that paying decent wages reduces staff turnover and produces a more motivated and productive workforce.” (2009)
Specific challenges to this research in support of a living wage relate directly to the lack of industry-specific studies that explore the effects of a living/efficiency wage in foodservice. Without such data, application of existing research relies on the connection of principals and theories to the broader topic. It is, however, realistic to apply these principals and theories to the exploration of this very relevant question to an industry known for low wages.
To implement a living wage in an industry known for low wages and high turnover will require a change in mindset in terms of how to compensate employees. What makes economic sense for the operator has traditionally been seen to be at odds with the needs of the staff. On its face, the living wage simply implies higher labour costs that will be borne by the operator and inevitably the consumer. Research has shown that this is simply not the case, proving that the revenue gained from increased productivity can easily offset any additional costs. Additionally, the potential for reduced turnover costs due to better employee retention, the improved morale of staff and the increased commitment of staff to the operation make a living wage a concept whose time has come.
Discussing Why Living Wage Could Have a Place in Canada

Traditionally, servers in a foodservice operation are compensated through a combination of wages and customer-provided tips. Debate has continued for years as to whether paying servers a living wage (higher wage) not augmented with tips is “better” than paying servers a lower wage augmented with tips.

Those who support a living wage assert that it is, in fact, possible to provide while maintaining profit margins and, moreover, that employee morale, stability and loyalty are markedly higher when they’re paid a higher wage. Detractors state that the purpose of tips is to provide incentive for improved service and that higher wages will put unrealistic pressure on an industry with a notoriously narrow profit margin.

To consider which approach is “better,” two distinct frameworks will be employed in this paper: the first looks at economic viability and the second assesses the relationship of foodservice operations to others that are affected in the question of compensation models. Research for this paper will contextualize the variables involved in implementing the living-wage model. Connections will be explored between wage and employee economic viability; wage and productivity; and wage and employee satisfaction. The research that follows allows that one can make an argument in support of a living wage model of compensation for foodservice.

For the purpose of this paper it is essential to define the terms and contexts of the debate. Firstly, what exactly constitutes a living wage? It is defined by BusinessDictionary.com as a wage “that allows a family to meet its basic needs and provides it with some ability to deal with emergencies, without resorting to welfare or other public assistance.” (BusinessDictionary, 2010)

Statistics Canada describes the minimum amount that a person can live on as” Low-Income Cut-Offs,” and set this before taxes level for one person living and working in Toronto at “$21,202” (CCSD, 2010). A server in Toronto working a 40-hour week, for 50 weeks in the year, making the minimum wage of $8.25 (Labour, 2009) per hour, will gross $16,500 in a year, almost $5,000 below a living wage. This calculation does not take into account potential tips; it merely establishes a baseline of earnings. Using the above information it can be argued that a living wage for a server in Toronto would be in the range of $12 per hour or more.

To put the question of a living wage in an economic context, it is important to redefine it in the vocabulary of a discussion of economic factors. The term used in economic dialogue that closest resembles the notion of a living wage is an “efficiency wage.” An efficiency wage is defined as a “higher than market wage paid to encourage higher output and to raise worker morale and to discourage absenteeism and inventory shrinkage.” (BusinessDictionary, 2010)

The litmus test for this type of model is known as the Solow Condition. The Solow condition outlines that financial benefits of employee productivity must offset any costs associated with a living wage.

Researchers in fields outside of hospitality have been investigating the benefits of a living wage. For example, researchers from Oakland discovered that positive results of a living wage offset the increased costs, asserting that, “Even without taking into account the likely business savings due to lower turnover costs and higher productivity, most firms should be able to adjust to the higher labour costs without reducing their workforce or relocating.” (Zabin, Reich, & Hall, 1999)

Additionally, concerning the economic validity of the efficiency/living wage theory, Kraut, Klinger & Collins (2000) make a strong argument for employee retention indicating that “(employee) turnover costs at least 150 per cent of the employee’s base salary.”  These findings lend economic credence to the implementation of a living wage and refute the claim that this type of compensation model will always adversely affect the business profit margin.

Ian Tew, head of workplace at KPMG, U.K., outlines the benefits of a living wage to classic hospitality challenges. “As Head of Workplace, I have about 700 in-house and outsourced staff in our U.K. offices, many of whom are directly serving our clients. So, their calibre, motivation and loyalty are extremely important to us. Paying the living wage and improving other benefits, like holidays, sick pay and insurance has contributed significantly to our success.

Here’s how: turnover amongst our cleaning staff has more than halved; morale has been raised; despite improved sick pay potential abuse has not materialized; productivity has improved; attitudes are more flexible and positive; and service has improved, as our help desk gets far fewer complaints.” (September 2008)

Research supports the fact that employees feel a higher sense of commitment to an organization that pays a fair wage. Mulau & Lindenburg investigated this effect and determined that “the firm’s wage level also has a strong relationship to (employee) commitment” (p. 397). The living wage is also gaining governmental support. Boris Johnson, the Mayor of London, England, addressed the social and economic benefits of a living/efficiency wage in a public speech. “Paying the London living wage is not only morally right, but it makes good business sense, too. What may appear to a company to be an unaffordable cost in a highly competitive market should more often be viewed as a sound investment decision. I believe that paying decent wages reduces staff turnover and produces a more motivated and productive workforce.” (2009)

Specific challenges to this research in support of a living wage relate directly to the lack of industry-specific studies that explore the effects of a living/efficiency wage in foodservice. Without such data, application of existing research relies on the connection of principals and theories to the broader topic. It is, however, realistic to apply these principals and theories to the exploration of this very relevant question to an industry known for low wages.

To implement a living wage in an industry known for low wages and high turnover will require a change in mindset in terms of how to compensate employees. What makes economic sense for the operator has traditionally been seen to be at odds with the needs of the staff. On its face, the living wage simply implies higher labour costs that will be borne by the operator and inevitably the consumer. Research has shown that this is simply not the case, proving that the revenue gained from increased productivity can easily offset any additional costs. Additionally, the potential for reduced turnover costs due to better employee retention, the improved morale of staff and the increased commitment of staff to the operation, make living wage a concept whose time has come.

This paper was written by John Volpe, who is in the final year of a four-year Bachelors of Applied Business Degree in Hospitality Operations at George Brown College in Toronto. Volpe has 25 years of chef and hospitality management experience.

References

Abbas, S. K., & Zaman, A. (2005). “Efficiency Wage Hypothesis — The Case of Pakistan.” The Pakistan Development Review, 1051–1066.

BusinessDictionary (2010). BusinessDictionary. Retrieved Jan. 30, 2010, from Efficiency Wage: http://www.businessdictionary.com/definition/efficiency-wage.html

CCSD (2010). Stats & Facts. Retrieved Jan. 30, 2010, from Canadian Council of Social Development: http://www.ccsd.ca/factsheets/economic_security/poverty/lico_06.htm

Economics, G. (2009). “A Fairer London: The 2009 Living Wage in London.” London: Greater London Authority.

Kraut, K., Klinger, S., & Collins, C. (2000). “Choosing the High Road: Businesses That Pay a Living Wage and Prosper.” Boston: Responsible Wealth.

Labour, M. o. (2009, October 28). “Ontario’s Minimum Wage Increases.” Retrieved Jan. 30, 2010, from Ministry of Labour: http://www.labour.gov.on.ca/info/minimumwage/

Muhlau, P., & Lindenberg, S. (2003). “Efficiency Wages: Signals or Incentives?” Journal of Management and Governance, 385–400.

Tew, I. (2008, September 23). “Can Capitalism Deliver A Living Wage For All?” Retrieved Jan. 30, 2010, from First Call: B.C. Child and Youth Advocacy Coalition: http://www.firstcallbc.org/pdfs/LW/Just%20Share%20debate.pdf

Zabin, C., Reich, M., & Hall, P. (1999). “Living Wages at the Port of Oakland.” Berkeley: Univesity of California Berkeley.


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