Economists usually think that people’s revealed preferences (what they do) are more important than their stated preferences (what they say they’ll do). With that in mind, let’s consider George Calombaris’ claim that the minimum wages he has to pay his staff on Sundays make it uneconomical to open his restaurant(s). Is it true? Well, he claims that it is uneconomical to open on Sundays, yet he nevertheless opens on Sundays. Why would he do that if it were true that his costs exceeded his revenue?
To believe that Mr Calombaris would open his restaurants on Sundays only to have them run at a loss is to believe that he’s running some sort of altruistic quasi-charity, an impression he attempts to give by suggesting that he opens on Sundays for reasons of “tourism”. I don’t believe that a successful businessman like him would run at a loss out of the vague goodness of his heart. Alternatively, he might choose to run at a loss on Sundays in order to build brand loyalty and increase his custom on other days of the week; the total return to opening on Sundays would therefore presumably make it worth his while.
He claims that he “recently stumped up $45,000 for a pasta extruder for Mama Baba” but that labour costs are now threatening his ability to make a decent return on that investment. The obvious question is why he dropped $45k on a pasta extruder if he knew he wasn’t going to be able to use it at a profit. The current restaurant industry award has been in effect since 1 January 2010; he would’ve known full well at the time he made the investment what the minimum wages and penalty rates were in his industry.
Anyway, he also makes some assertions about minimum wages that are straight-up false. He says that waiters would have to be paid $40 per hour on Sundays. This isn’t true.
The highest minimum wage in the Restaurant Industry Award 2010 is for a Cook Grade 5, described in the award as as a:
chef de partie or equivalent who has completed an apprenticeship or has passed the appropriate trade test or who has the appropriate level of training in cooking.
To employ such a chef at the highest grade would cost Mr Calombaris $19.71 per hour for ordinary time, or $24.64/hour if the chef is a casual (and therefore not entitled to paid annual leave and sick leave). If they’re employed as a casual on a Sunday, they receive a minimum of $34.49 per hour. Calombaris claims that he has to pay his staff a 75% loading on Sundays, but this includes the 25% casual loading. Even a worker at the highest grade in the award would not be entitled to the $40/hour Sunday rate that Calombaris bemoans.
But Calombaris’ criticism is specifically directed towards the wages paid to waitstaff. Here he is even more off base. Waiters (‘food and beverage attendants’ in the language of the award) would typically be employed at Level 1, 2 or 3, depending on their skill, experience and range of duties. If they’re employed at level 3, their ordinary time minimum wage is $17.14, or $30 on a Sunday for a casual.
Minimum wages in the restaurant industry
|Minimum hourly wage||with casual loading||Minimum wage for Sundays||Sundays including casual loading|
Source: Restaurant Industry Award 2010
If Calombaris is paying any of his waitstaff $40/hour on Sundays he is paying at least 33% above the award. Good on him, but if he’s doing so then he can’t really claim that the award is the cause of his high labour costs.
Another of Calombaris’ claims is that Australian fine dining restaurants are more expensive than their overseas equivalents. He told The Power Index, as reported in Crikey, that:
I can eat at [UK three Michelin star restaurant] Fat Duck cheaper than I can at some fine dining restaurants in Australia. But I know why it’s like that … because of our labour laws.
This is a strange claim. The tasting menu at The Fat Duck is £180 per person (plus an ‘optional 12.5% service charge’). At the current exchange rate, that’s around $AU270, without the service charge. The best restaurant in Australia, Quay, charges $220 for its tasting menu. Mr Calombaris’ own flagship restaurant The Press Club, charges $135 for its somewhat ostentatiously titled ‘symposium degustation’ tasting menu.
Australian fine dining restaurants appear to be a fair bit cheaper than their overseas counterparts, if we use the Fat Duck as a yardstick (as Calombaris himself has done) and convert the prices using current exchange rates. A better way to compare the prices across countries is in terms of median wages – how much of a typical full time wage would a diner have to spend to purchase a tasting menu at each of these restaurants? Well, in the UK the median full time wage is £501. This means a typical full time worker would need to spend 36% of her pay packet to buy a tasting menu at the Fat Duck (without the service charge). The Australian median full-time wage is $1050 per week, so a tasting menu at Quay costs 21% of a typical pay packet. The Fat Duck is more expensive for English people (and also for us) than its counterparts in Australia. Of course, overseas restaurants seem a lot cheaper to Australians than they used to, but that’s due to the soaring exchange rate.
Stepping back from Calombaris, what about the restaurant industry more generally? It’s certainly true that a greater than average proportion of workers in restaurants are paid at the award (minimum) rate. 45% of workers in the accommodation and food services industry are award dependent, meaning they’re paid exactly according to the minimum conditions in the industry. Only 15.2% of workers across all industries are award dependent. This means that if a change to the award system really had made it less profitable to employ staff, we’d expect to see the impact of the change most severely in the accommodation and food services industry. If Mr Calombaris’ story was accurate and modern awards were strangling his industry, we’d expect to see the profitability of restaurants go down, and employment in food and beverage service go down. This hasn’t happened.
Profit to sales ratio in the Accommodation and Food Services industry
Source: ABS 5676.0, table 22
Gross operating profits in the industry represented 12% of total sales in the September 2011 quarter, the latest quarter for which the ABS has released data.This is a higher ratio than during most of the WorkChoices period. Since the Restaurant Industry Award came into effect on 1 January 2010, the profit to sales ratio in the industry has been around 10% to 12%, in line with its typical level for the past decade. If the modern award is damaging the industry, it’s not showing up here.
You’d think that if the modern award had made food and beverage workers too expensive to profitably employ, then employment in that industry would fall, or at least grow more slowly than total employment across all industries. That hasn’t happened. Since November 2009, the last quarter before the Restaurant Industry Award took effect, total employment in food and beverage services has risen by 4%. Employment across all industries has also risen by 4%. The Restaurant Industry Award doesn’t seem to be damaging employment in that industry. Note that the employment data let us get down to the industry sub-division level, rather than just the overall industry level like the profits data above.
Employment in the Food and Beverage Service industry sub-division and in all industries (Index)
Source: ABS 6291.0.55.003, table 6.
Employment fell a little in the highly cyclical restaurants sector in 2011, but total growth since the new award system came into place has been the same as for the economy as a whole. If you’re going to blame the modern award system for the industry’s sluggish employment performance in 2011 then you also have to credit it with the surge that began in mid-2010.
At this point some conservatives might claim that total employment growth has been sluggish since the modern awards came into effect, so the effect is spread across all industries and therefore doesn’t show up in a comparison like the one in the chart above. If that were the case, wouldn’t the employment growth slowdown still be more severe in food and beverage services, an industry with a high proportion of award-reliant workers? The story just doesn’t hold up.
George Calombaris would like to pay his staff less money. He is entitled to make his case, but I wish his claims were subjected to a bit more critical scrutiny.