Marketplace - The subminimum wage for tipped workers is on the table

Episode Date: April 12, 2024

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.

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 Kyle Rizdall. It is Friday today. This one is the 12th of 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.

Hi, guys. Hi. Neela, 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? No. I'm not surprised because the driver of inflation, the big one, shelter costs, it just hasn't

really relented. And it harkens back to the fact that there's still a housing affordability problem in the country. There's still inventory shortages. And 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. 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 in to the jaws of the belly of the beast as it were. 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 to 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, 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. 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, Neelan, 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 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 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 costs 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, like 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 rates will spike up. 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. 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, Mila, 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 hire for longer. And the hire for longer assumes staying where

they 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. 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 Neela quickly, when I had Powell at the San Francisco Fed like two weeks ago now, and I asked him, I asked him in essence, what do you make of this economy? 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. And by the way, Kai, that's a good thing. Yeah, totally. 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, right. Totally. These are good problems to have. 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. 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. Those news 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, Nilo Richardson at ADP on a Friday afternoon. Thanks you two. Thank you, Guy. 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. 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 of 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 and 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. 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. U.S. 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 U.S. 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 U.S. 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. 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. We told you the other day about a newish 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 Adrián Espinosa.

I'm owner of Empanada Club in Portland, Maine. We make and sell Bolivian-style empanadas, selling them at farmers' markets, breweries, festivals, concerts. I moved to the U.S. 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 know you need a big name to put your product in the market and a friend texted 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, finally I got some money coming into my pocket. Over the last few years, basically the rent of my kitchen, it went up. So I rent and 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 panadas at $5.50 to $6. Now I'm selling them at $7 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 me in Spanish and tell me I'm being in Bolivia or I've been in South America and I tried empanadas or

they ask me what's an empanada. I do have, I enjoy sharing that. Adrian Espinosa 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. Would you marketplace.org slash my economy? 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 wah-wahs. Dow Industrial is off 475 today, 1.25%, 37,983. The Nasdaq descended, tumbled, fell, cratered, take your pick, 267 points, 1.6%, 16,175. The S&P 500 dropped 75 points, about 1.5% percent there and in things at 51 and 23 for the week the Dow shed 2.4 percent the Nasdaq dip a half percent S&P 500 fell one and six tenths of one percent 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 to the U.S. 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 buy. Bond prices rose, yielded on the 10-year T-note down to 4.52%. Not down a lot though. You're listening to Marketplace. This is Marketplace. I'm Kai Rizdal. If, as it 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&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 re-defaulters. Marketplace's Kimberly Adams explains. According to S&P, the number of defaults was up 80% in 2023,

the fastest increase since 2008. But within that trend, Over one third of the defaults we saw in 2023 and again, are seeing in 2024 are companies that have already previously defaulted. Nicole Serino is director of credit research and insights at S&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 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. 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 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&P tracks is still less than 4.8 percent, fewer than 200 companies. In Washington, I'm Kimberly Adams from Marketplace. True story.

Got an email from my accountant last night about some documents. I'd forgotten to send him. Time stamp on that was 9.58 p.m. Wrote him back this morning a little bit before 5, 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 Marketplace's Elizabeth Troval 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 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 credit hour. In Texas, University of Houston professor Mohan Kuruvilla 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, etc. She says other education, like work conferences, can help too.

I'm Elizabeth Troval from Marketplace. You go out to eat, time comes when you get the bill and you have to decide 18%, 20, 22. Whether you know it or not, you're a player in a delicate policy dance going on right now. How and how much wait staff 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, D.C. has become something of a test case. Marketplace's Sabri Benishaw has part two of this story.

Washington, D.C. 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. 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, Ryan has noticed some changes. One big one, fewer workers. In the era of that cheap labor when they were paying, you know, three, four bucks an hour, you know, they would really stuff the floors of 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. 3,200 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 percent. 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 scene 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 OK 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,

who are this is not my primary pursuit. But other people who, I know a lot of people who support their entire lives and their families through which 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 Sabri Benishur for Marketplace. 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 CEOs 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 work week. I for one will allow that. Our theme music was composed by BJ Liederman Marketplace's executive producers Nancy Fargoli, Donna Tam is the executive editor, Neal Scarborough the guy who gets to decide if we work four days a week, is the vice president

and general manager. I'm Kyle Rizda. Have yourselves a great weekend, everybody. We are back on Monday. All right? This is APM. The world can be a confusing place for kids, and finding the words to explain it all can be tricky too.

Introducing Million Bazillion, a webby winning podcast from Marketplace that takes your kids on exciting adventures to answer the awkward and complex questions they have about money. Each week we tackle hard hitting inquiries from kid listeners like, What is a college account and how does it work? I want to know what unions are and what they are for. Why does the U.S. have so much gold in Fort Knox and what do they use it for? Help your kids understand how money fits into the world around us. Listen to Million Bazillion wherever you get your podcasts.