The subminimum wage for tipped workers is on the table

This episode explores the ongoing debate and potential changes to the subminimum wage system for tipped workers in the U.S., particularly in the context of broader economic conditions and policy implications.

1. Inflation remains a significant concern, particularly with rising shelter and energy costs.
2. The labor market shows unexpected resilience, with robust wage growth despite economic pressures.
3. Federal Reserve's rate decisions are crucial, balancing economic strength against inflation and political timelines.
4. The tip credit system's phase-out in DC leads to employment and pricing changes in the restaurant industry.
5. Economic policies and outcomes are deeply intertwined with political events, especially in election years.

1: Introduction

Overview of today's economic focus and guest introductions. Key topics include inflation and the resilience of the labor market.

• Kai Rysdal: "This economy waits for no one."

2: Economic Analysis

Discussion on inflation trends, Federal Reserve policies, and their implications for the upcoming election.

• Neela Richardson: "Shelter costs have been a constant with the inflation these days."

3: Subminimum Wage Debate

Exploration of the effects of DC's tip credit elimination on local restaurants and workers.

• Kai Rysdal: "How and how much waitstaff and cooks and bartenders ought to be paid."

1. Stay informed about economic policies affecting your industry.
2. Consider the long-term implications of wage policies on employment.
3. Evaluate how federal economic decisions can impact local businesses.
4. Be aware of the broader economic environment when planning business strategies.
5. Understand the interplay between politics and economic policies, especially during election years.

As more cities and states debate abolishing subminimum wages for tipped workers, we’re keeping an eye on Washington, D.C., where the tip credit system is being phased out. Though food service staff shrunk last year, some current servers say their paychecks are much more stable. Plus, corporate defaults climb and the cost of Asian imports falls as the cost of goods from Mexico increases.

People

Neela Richardson, Rachel Siegel, Kai Rysdal

Companies

ADP, The Washington Post

Books

None

Guest Name(s):

None

Content Warnings:

None

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Kai Rysdal

A thing I think I'm going to be saying a lot the rest of this year. Political news. Sure. Yes, of course. But remember, this economy waits for no one.

From american public media, this is marketplace in Los Angeles, I'm Kai Rysdal. It is Friday today. This one is the 12 April. Good as always to have you along, everybody. This is going to be all right.

It already is a political cycle unlike any other for reasons we are all aware of. But alongside that is a very real need to keep one's eye on the economic ball, which is what we're going to do today. And we're going to do it with Neela Richardson, she's at ADP. And Rachel Siegel, she is at the Washington Post. Hey, you two.

Rachel Siegel

Hi, guys. Neil, let me start with you. We have to start, I think, with inflation. CPI came in this week a little bit hotter than anybody wanted. Were you surprised?

Neela Richardson

No, I'm not surprised because the driver of inflation, the big one, shelter costs, it just hasn't really relented. And it hearkens back to the fact that there's still a housing affordability problem in the country. There's still inventory shortages. And so, so that's not cyclical. It's not something that can be fixed in the short term.

I think what was the surprise here is the uptick in gases and the driver of insurance premiums, which is playing havoc with the index right now. But it's always something. Shelter costs have been a constant with the inflation these days. It is always something. Rachel, on your first Friday with us, let me throw you straight into the jaws of the belly of the beast, as it were.

Kai Rysdal

Put yourself inside the mind of Jay Powell, the Fed chair, obviously, and imagine his conversation inside his brain saying, well, do we pause now forever? Do we wait and see what happens? What is Jay Powell thinking? Well, I would have to assume that those thoughts are probably being asked by or too many PhD economists around Jay Powell. If I had to imagine what those questions look like, it has to do with this question that they've been asking.

Rachel Siegel

Is this a blip? Is this a bump, or is this a more worrisome trend? And March really seemed to cement the latter. Right. So the question is, what do they do with that?

How many cuts does that mean and when do they do it? And they're juggling not only with the number of cuts, but the timeline. Right? Because it's not like the Fed is considering cuts in a calendar year that only revolves around the Fed. There's an election coming up, and the closer they cut to November, the trickier that pivot is going to get.

Kai Rysdal

I'm glad you went there. We will finish that thought in about two and a half minutes because that's where I want to end. But neila, let me ask you this. How are we going to know? Actually not how are we going to know, because we're going to know by the data.

But, but is your sense that inflation is stuck where it is, which is slightly elevated from where the fed wants it to be, or is it bumpy and eventually the Fed's going to win out? I think it's bumpy and eventual, but it might, that eventual may have a very long tail. I sit and look at a lot of payroll data at ADP, about 25 million workers, and what I see is an uptick in wages, especially for people who've changed jobs in the last year. And so labor cost is going to be a big factor also into the input of goods. And I think that we're going to see match with that very hot employment picture that we saw last week, 300,000 jobs created in this economy, that the labor market is still in play and wages are not to be ruled out as not triggering more inflation, but keeping inflation kind of stalled at where it is for a longer period of time.

Wait, say more about that in the labor market is still in play thing. What do you mean by that? Because that obviously, I mean, Powell and the gang are keeping a really close. Eye on that, as they should, because wages are the bridge between the labor market and inflation and usually with higher interest rates people. And when I say people, I always mean economists assume that there is this trade off, that with higher interest rates it's really going to make the labor market vulnerable and the unemployment rate will spike up.

Neela Richardson

Even Powell himself said at Jackson Hole last year that there will be pain by the consumer, by the worker. But we haven't seen that. What we've seen is a very strong, very resilient labor market where wage growth has been robust and solid. And if wages keep that pace, it's not really consistent with a 2% inflation target. So you add that to shelter costs and the higher energy costs we saw last month, and you get a really slow, a complex picture for the Fed to keep track of.

Kai Rysdal

Is it possible, do you think, Rachel, that the first move by the Fed is not a cut but a hike in rates? I feel like that hasn't quite entered the conversation yet. And obviously, Neela, please correct me if the winds seem to be shifting that way, but it seems that right now at least, the conversation is still between cuts or just higher for longer. And the higher for longer assumes staying where they are are there isn't an urgency to cut. The economy is looking really strong and unless we started to see a weakening in the kind of labor market strength that Neela was just talking about, they might not have a reason to cut anytime soon.

Rachel Siegel

I think, though, that that would lean towards just keeping rates where they are. Then again, we've learned time and time again that just because that's the way the economy looks right now doesn't mean that it'll stick that way. And we could be having a different conversation depending on where the data goes. Yeah. Well, so, Neil, quickly, you know, when I had Powell at the San Francisco fed like two weeks ago now, and, and I asked him, you know what I asked him in essence, what do you make of this economy?

Kai Rysdal

And he did all but shrug and say things are still weird. How much is the weirdness a factor? Weirdness is a factor because we're not expecting the labor market to perform in the way it is. And we've seen consumers be pretty resilient to very steep price increases for a really long time now. I do think that that consumer staying power is softening a little bit, but, yeah, the economy is strong.

Neela Richardson

And by the way, Kai, that's a good thing. Yeah. I mean, let's not complain about the good things in life. This is good that the economy is strong. But as Rachel mentions, it means that the urgency to cut is not there.

And then without an urgent reason, an urgent trigger to make some kind of definitive action. I think the Fed and chair Powell is perfectly happy holding this position. Right, right. Totally. These are good problems to have.

Kai Rysdal

Rachel, very quickly, on that note, you struck before about the politics of the Federal Reserve and to where I started this program today, the politics of this economy are going to come more pronounced over the next six months, especially if the Fed does decide to start cutting rates into the closer we get to election day. Discuss that for a minute and 10 seconds, please. Sure. You know, this is going to bump up really close up to the wall and then right into that exact homestretch where President Biden and former President Trump are trying to drive home their own economic agendas. And even though the Fed's own decisions, they say, will be totally independent from that process, they don't operate in a vacuum.

Rachel Siegel

Those moves are going to affect the housing market and other parts of the broader economy that we already know are playing a massive role in how voters are thinking about who they're going to cast their vote for for November. So the Fed might otherwise wish the timeline was different, but this is just how 2024 is shaping up. It is indeed. Rachel Siegel at the Washington Post, Neil Richardson at ADP on a Friday afternoon. Thanks, you two.

Neela Richardson

Thank you, Kai. Wall street on this Friday. Well, you know, not so great, actually, for some of the reasons we just spent seven minutes and 20 seconds talking about. We'll have the details when we do the numbers.

Kai Rysdal

All right, let's talk prices a little bit more here, specifically the prices of goods that we import into this economy. We've got some new data on that this morning from the labor department. Import prices up four tenths percent last month, a bigger bump than we saw in February, thanks in large part to the cost of imported fuel. Straightforward so far. Yes, but things do get more interesting when you look at where this import inflation is coming from.

Imports from Mexico and Canada last month, more expensive imports from China and Japan, cheaper marketplace. Justin Ho has more on what's going on. Part of it has to do with the types of products those countries are sending us, says Ed Gresser, director for trade in global markets at the Progressive Policy Institute. Canada and Mexico are big sources of cars and auto parts and of energy. Japan and China much more consumer manufactured goods, technology products.

Justin Ho

And while consumer goods and electronics got cheaper in March, auto and energy imports got more expensive. And that will show up more in our trade with Canada and Mexico than anywhere else because the weight of those products is larger there. Us companies have also been trading more with Mexico and Canada lately especially after all the trade drama with China in the last few years and the supply chain congestion earlier in the pandemic. Theresa Ford, a professor at Dartmouth, says us companies see Mexico in particular as a good substitute with low cost manufacturing and closer proximity. So you could see firms that are shifting from producing in China to producing in Mexico for the US market.

Import prices are also being affected by the value of those countries currencies. Megan Schoenberger, senior economist at KPMG, says all that investment in Mexico is helping to push up the value of the peso, which makes imports from there more expensive. Meanwhile, the japanese yen is way down. So we would expect import prices to fall from Japan, given depreciation in their own currency. Schoenberger says China's currency is down too, in large part because its central bank is trying to stimulate a stagnant economy.

Rachel Siegel

And so they're cutting rates, which is diverging from the Federal Reserve, which can, for these central banks, cause currency depreciation. And that helps to make imports from China cheaper, too. I'm Justin Ho for marketplace.

Kai Rysdal

We told you the other day about a new ish study that shows immigrants in this economy start new businesses at much higher rates than native born individuals do. We're going to continue that theme of immigrant entrepreneurship today with this next installment of our series, my economy. My name is Adrian Espinosa. I'm owner of Empanada Club in Portland, Maine.

Adrian Espinosa

We make and sell bolivian style empanadas, selling them at farmers markets, breweries, festivals, concerts. I moved to the US eight years ago from Bolivia. I left my career. I didn't want to do what I was doing there. I was working in an office job.

And around Portland, the first job that I could get was restaurant jobs. I had no idea how to cook. But once here, I learned everything.

So I opened the business in 2018, basically when my partner was pregnant. And I was like, okay, I cannot keep working as a line cook because I'm not going to be able to support my daughter and her mom.

When I started, I wanted to sell packaged empanadas, like frozen, so I don't have to spend my weekends on pop ups. But soon I realized that you need a big name to put your product in the market. And a friend text me saying, oh, you should start doing farmers markets. So I did. And, you know, it was nice to sell 50 empanadas that day.

I was like, ah, finally I got some money coming into my pocket.

Over the last few years, basically the rent on my kitchen, it went up. So I rent a space in a commercial kitchen, it used to be $10 an hour and it went up to $12 an hour. So you have an idea that probably I paid from, I switched from $600 a month to 750 a month. It's a challenge, you know, to keep up because it's not the only expense that went up. So I've been managing the higher prices with many different ways.

Like I rise up my prices of my product. I used to sell them panels are $550 to $6. Now I selling them at seven to $8.

Looking back, I just think, and looking where I'm now, I feel really happy of myself. And I do enjoy too. Sometimes people come by to my booth and start speaking me in Spanish and tell me I'm being in Bolivia or I've been in South America and I tried empanadas. Or they asked me, what's an empanada? And I do have enjoy sharing that.

Kai Rysdal

Adrian Espinoza making and selling empanadas in Portland, Maine about which two things. Number one, I'm hungry now. Number two, we cannot do this series without you. So let us know what's going on. We're at marketplace.org myeconomy.

Coming up. We just want to know what to do when we get to the end of the meal. Tipping is only the beginning of the end of the meal. First, though, let's do the numbers. Yeah.

The wawas down, industrials off 475 today. One and a quarter percent, 37,983. The Nasdaq descended, tumbled, fell, cratered. Take your pick. 267% points, one and six tenths percent, 16,175.

The S and P 500 dropped 75 points, about one and a half percent. There ended things at 51 and 23. For the week, the Dow shed 2.4%. The Nasdaq dip a half percent. S and P 500 fell one and six tenths of 1% today.

So what do you have going on this weekend? Anything? Maybe thinking about a trip to museum? Well, a 2018 study by the American alliance of Museums found that museums contribute more than $50 billion a year, 50 billion dollars a year to the US economy. That's a lot of purchases at the gift shop, am I right?

That number also includes $12 billion a year in tax revenue paid to local, state, and federal governments. By the by bond prices rose yield on the ten year t note down to 4.52%. Not down a lot, though. You're listening to marketplace.

Shopify

Shopify is the global commerce platform that helps you sell at every stage of your business, from the launch your online shop stage to the first real life store stage all the way to the did we just hit a million orders stage. Shopify is there to help you grow. Plus, Shopify's award winning help is there to support your success every step of the way, because businesses that grow grow with Shopify. Sign up for a $1 per month trial period@shopify.com. Marketplace all lowercase.

Go to shopify.com Marketplace now to grow your business, no matter what stage you're in. Shopify.com Marketplace hey there, I'm Bridget, co. Host of million Bazillion Marketplaces podcast for kids about money. I want to tell you about our email news newsletter Course Million Bazillion Academy. In this new and improved course, well help your kids learn about crypto, credit cards and inflation in just six weeks.

Bridget

Each lesson comes with a podcast episode, a fun cartoon, discussion, questions and an activity that lets kids apply with their learning in the real world, you can start at any time and work at your own pace. Sign up today@marketplace.org. Academy. This is Marketplace. I'm Kai Rizdahl.

Kai Rysdal

If, as seems likely, the Fed keeps interest rates where they are for a while, that means money is going to stay relatively expensive for a while, and that is going to have some knock on effects for consumers and companies, both of which borrow take on debt, right? There was a study out from S and P global ratings this week on the topic of corporate debt, one slice of it in particular, defaults, which are on the rise, and there's an accompanying rise in redefaulters marketplaces. Kimberly Adams explains. According to S and P, the number of defaults was up 80% in 2023, the fastest increase since 2008. But within that trend, over one third.

Neela Richardson

Of the defaults we saw in 2023 and again are seeing in 2024 are companies that have already previously defaulted. Nicole Sereno is director of credit research and insights at S and P Global and says some of these companies are defaulting two, three, four, some up to five times. This tells us that there is a group of highly leveraged companies where restructuring after that initial default may not have sufficiently addressed the company's secular or operational challenges. But the defaults she's referencing here aren't necessarily tied to bankruptcy and closure. There is also another kind of default.

Kimberly Adams

Cristiano Zazzara teaches finance at NYU's Stern School of Business and points out a lot of these multiple defaults come out of what are called distressed exchanges, where companies often just default on a portion of their debt. But they tend to restructure their capital. Commitments, their financial structure, and then tend to stay in a weak situation also in the future. But even though there has been a sharp increase in companies not paying up, the overall default rate for companies S and P tracks is still less than 4.8%. Fewer than 200 companies in Washington, I'm Kimberly Adams for marketplace.

Kai Rysdal

True story got an email from my accountant last night about some documents I had forgotten to send him. Time stamp on that was 09:58 p.m. Wrote him back this morning a little bit before five. Not two minutes later, he answered evidence, in case anyone needed it, that accountants are working some very long hours ahead of tax day on Monday. Complicating the long slog of tax season for accountants mostly not the rest of us, is that we are in the middle of an accountant shortage, and not just the ones who do taxes.

Companies that are looking to hire CPAs and others in that industry are trying to figure out how to create a new generation of accounting professionals as marketplaces, Elizabeth Trobal reports. With so many accountant baby boomers retiring, Michael Decker with the American Institute of CPAs is looking at younger generations. We're trying to change the messaging around accounting. CPA, not certified public accountant, but coolest profession around the industry is trying to reverse the decline in college students studying accounting. With incentives like scholarships and a new.

Ed Gresser

Pilot program, the young employee can get their education for licensure, they can work, and then they're preparing for the exam at a low cost a credit hour. In Texas, University of Houston professor Mohan Kurovilla is trying to get accountants into high school classrooms in his role with the Texas Society of CPAs. It is not just about talking about the opportunities of accounting. It's also providing a platform to be a mentor to these students, he says. This can be especially valuable for first generation college students who may not have grown up with an accountant in the family like he did.

Just like I saw my father and the lifestyle he provided us. Just showing them the person you are and what you do will transform their. Lives, and mentorship can also play an important role in retention, says Brandy Britton with the talent firm Robert Half. If you have a mentoring program that really serves your newer generation workforce very well because they like that coaching, etcetera, she says. Other education, like work conferences, can help, too.

Bridget

I'm Elizabeth Trovall for Marketplace.

Kai Rysdal

You go out to eat. Time comes when you get the bill and you have to decide 18% 2022 whether you know it or not, you're a player in a delicate policy dance going on right now. How and how much waitstaff and cooks and bartenders ought to be paid. It's technically called the tip credit system, where restaurants, the employers, right, don't have to get their workers pay up to minimum wage if tipping can do it. There are moves afoot, though, to change that to get restaurant staff up to minimum wage, tips or no.

And Washington DC has become something of a test case. Marketplace's Brie Benishore has part two of this story.

Ed Gresser

Washington DC is where Brian has been working in restaurants for 16 years. Here at this pizza place and at a fine dining restaurant. I caught up with him on Zoom. Yeah, it's my full time thing. I've been in the restaurant industry since I was like 18.

We're just going with Brian because he says the two restaurants where he works would fire him for talking to a reporter. In 2022, voters in DC approved a ballot measure that would eliminate the tip credit I was definitely in favor of. Since it has started to come into effect and restaurants are having to cover more of DC's soon to be $17.50 minimum wage, Brian has noticed some changes. One big one. Fewer workers in the era of that cheap labor, when they were paying, you know, three $4 an hour, you know, they would really stuffed the floors with a lot of staff, a lot of hands.

Now it is leaner. Crews. Data back up that observation. Shortly after the phase out of the tip credit started in DC last year, employment at sit down restaurants started to fall sharply. According to state level data from the Bureau of Labor Statistics, 3200 jobs were cut.

That's more than 10% of the peak workforce that year. So that's consistent with the same type of analysis that we did. David McPherson is a professor of economics at Trinity University. And a decade ago he studied the effects of requiring restaurants to cover more of their employees minimum wage instead of letting some of it be covered by tips that lowered employment. Either employees are going to get reduced, prices are going to go up, or profits are going to get reduced.

One of those three things has to happen, or all of them. Prices have definitely gone up at restaurants. John Gold is part of a dining club in the DC area. Restaurant inflation in DC, after being lower than the national average for a few years, is now higher than average after the tip credit phase out began. Restaurant inflation is now at 4.2%.

That does not capture service fees that many DC restaurants have been tacking on much to the ire of customers. Is that essentially an included gratuity that goes to the workers? Is that something else? And we're supposed to tip on top of that? It's not always clear as a diner gold would prefer the prices just rise to reflect the wage people are paid.

People love the restaurant seen here. We want to see restaurants thrive. We also want to see workers make the wages that are fair and appropriate and that they ought to make. We just want to know what to do when we get to the end of the meal. The Barcelona wine bar in DC is one restaurant that has resisted service fees for exactly this reason.

And CEO Adam Halberg has other concerns about raising prices. Raising prices is going to create a split where the restaurants in DC are going to become a lot more expensive to go to than the restaurants outside of DC. Not just for diners, but restaurant operators too. Those new restaurants are going out of the district right now. Still, for now, the number of restaurants has continued to grow in DC.

That's exactly why I'm totally okay with it. Again, Brian the server. He says he isn't actually making more money, but with leaner staffing, his job has become more reliable. I do feel like it's definitely a lot more stable than it once was. Like, I definitely feel like I can guess what I'm taking home.

And it is, you know, a respectable amount, but one person's stability is another's inflexibility. Joseph, the waiter in New York from part one, isn't counting on waiting tables as a career. He wants to be an actor, and his erratic but flexible schedule lets him audition. It works well for people who like myself, where this is not my primary pursuit, but other people who I know a lot of people who support like their entire lives and their families, through which like this could be a relief. With a dozen states mulling this question of how tipped workers should be paid and who pays them, the jury is still very, very out in New York.

I'm Sabree Ben ashore for Marketplace.

Kai Rysdal

This final note on the way out today, which comes with the observation that Fridays for most of us are work days for now. There was a survey of CEO's out from KPMG earlier this week. Saw this on CNN. That said 30% of big american companies are toying with the idea of a four or a four and a half day workweek. Aye for one will allow that.

Our theme music was composed by BJ Lederman. Marketplace's executive producer is Nancy Farghale, Donna Tam is the executive editor, Neil Scarborough. And the guy who gets to decide if we work four days a week is the vice president and general manager. I'm Kai Rizdahl. Have yourselves a great weekend, everybody.

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