Minimum Wage Impact

Minimum Wage Impact

On A 150 Room Hotel It is no secret that the Commonwealth’s economy is dominated by two major industries, garment manufacturing and tourism. Make no mistake about it – the garment industry is responsible for a substantial contribution to the area’s economy. It has also contributed to diversifying what would otherwise be a one industry economic base.

I have been told by knowledgeable people in the industry that it cannot sustain the increase associated with the federal minimum wage and the industry will no doubt relocate should the Congress impose the U. S. wage floor. If this turns out to be true that will leave the Commonwealth with a single economic engine – tourism. This is a fragile industry.

A high incidence of crime, a breakout of some contagious disease, high prices for services, competition from other destinations, unfavorable foreign exchange rates, power outages, droughts, air fare increases, etc., are just a few issues that influence the health of an economy based on tourism, most of which are externally generated and thus beyond the control of the Northern Marianas.

This is the reason that diversification of an economy is a good thing – all of our eggs are not in the same basket – so to state. With the imposition of the United States non farm minimum wage which will increase on the mainland and elsewhere to $5.15 per hour in September of this year, I became curious as to how an increase from the current $3.05 per hour which currently prevails in the hotel industry would influence the operating expenses associated with a hypothetical 150 room hotel in the Northern Marianas. The analysis which follows must necessarily be hypothetical since I’m not in the business of managing a hotel nor would I expect a hotel manager to open his books for my inspection. Never – the – less, as one who has made a number of financial feasibility analyses for potential projects of interest to hotel investors on Saipan and elsewhere, and being generally familiar with the local economy, “indicative” estimated statements of income and expenses associated with both current and possible future wage levels are not too difficult to construct providing one accepts several qualifications and assumptions which must necessarily be employed in the basic matrix. These assumptions are presented below for those who care to probe deeper into the analysis.

The United States minimum wage was $4.25 prior to October, 1996 when it was increased to $4.75 for an increase of 11.76 percent. In September, 1997 the rate will increase to $5.15, or 8.4 percent over ‘96. In examining the recent history of these United States minimum wage increases, the largest percentage increase occurred in 1990 when the minimum was raised from $3.35 to $3.80 for an increase of 13.4 percent. Should Congress extend the U. S. minimum wage to the CNMI outright without allowing for a gradual climb to reach the new U. S. level, private employers will be subject to a devastating increase of 68.85 percent. Based on the assumptions described below, the impact on a 150 room hotel should the minimum wage be immediately applied to the Northern Marianas would result in an increase in the payroll of the facility under study from $0.97 million to $1.6 million. Related employer expenses associated with the staff such as social security and other costs would increase from $180,000 to $259,000 annually. Normally in a hotel when operating costs increase it is necessary to increase the price of goods and services sold. In this case, increased room rates along with the price of food and beverages.

These can’t be increased too rapidly or too high otherwise the hotel loses its competitive edge with similar facilities in other areas. I suspect that if and when the minimum wage in the Commonwealth reaches parity with that of Guam, Hawaii and the mainland United States many of the larger hotels will still find it necessary to provide their employees with transportation to and from work, lodging and one or more meals each day. Whether the employee will be offered the option of receiving these benefits with their “in-kind” value deducted from their salary remains to be seen since theoretically the employer would no longer be obligated to provide such benefits. Certainly the higher the wage rate, the greater the individual wage and salary tax due the government.

A higher minimum wage will also force some marginal businesses to close and thus the tax revenue previously generated will be lost. Whether one will balance out the other is not known at this time. Finally, this article is not intended to address the issue of whether a particular wage level is adequate or not for the CNMI, its single purpose is to examine the impact on one hypothetical hotel under the circumstances described below. As far as the overall inflationary impact of the minimum wage on the economy as a whole is concerned, that issue will have to wait as a subject for another article. Assumptions The pro forma estimated statements of income and expenses from which the above data were developed was based on extensive and elaborate worksheets encompassing full staffing patterns and wage rates for each position, nonresident recruitment costs, materials and supplies and many other expense items.

Because of space limitations these data can not be presented in detail. No overtime payments were considered. Further, a comparison was made between the current $3.05 per hour and the U. S. rate of $5.15 per hour. If a supervisor earns $5.00 per hour, and those he supervises earn $3.05, obviously if their wages are increased to $5.15 it stands to reason that the supervisor’s wage must likewise be increased. The analysis therefore assumed that the wage of each member of the hotel staff would increase by an equal amount, (however, this may not necessarily be the case). Feasibility studies must be objective with emphasis placed on costs.

Given accurate information on markets, prices, wages, etc., the commercial profitability of a hotel is not difficult to estimate. It should be clearly understood, however, that any measure of the projected income and expenses for a hotel is nothing more than an elaborate combination of estimates. Such calculations rest upon such elements as estimated operating costs and estimated earnings from sales among other things. To the extent that any of the above are in error, then the final estimated profit (or loss) will be wrong. Hazardous as it is, it is an improvement over the intuitive method which some would employ without any attempt to measure the factors involved. The results presented above derived from an estimated statement of income and expenses at various levels of occupancy for a Commonwealth based hotel which in turn was based on the uniform standard of hotel accounting and depicted operating estimates only to the level of “house profit” or that revenue remaining available for debt service, land lease expenses, taxes and dividends for the owners.

The analysis was used as an example only to illustrate the income and expenses associated with the hotel to the level of the house profit potential and an estimate of the departmental expenses believed to be associated with such a project operating at an average annual occupancy of 80 percent with an average guest room ratio of 1.8. Net profit was not calculated since such fixed costs as debt service, land lease payments, etc. are not known.

The analysis assumed achievement of the estimated income from operations as well as competent and efficient management and covered a typical twelve month period after opening and after a reasonable period to gain operating experience. The room rates and food and beverage sales were not increased to offset the increase in personnel costs. While such increases would normally occur – they obviously cannot be increased to a level which would make the hotel non competitive.