In a generic restaurant there are four players: owner, cook, waitress, dishwasher.
- The owner risked her capital to start a business–she is a capitalist and entrepreneur. She had to lease space, renovate, get licenses, and buy equipment, all before being able to generate revenue. And after all that she has to buy inventory (food) that will allow her to generate revenue. A typical restaurant can easily have $1000 worth of food in inventory before opening the doors (not including alcohol). With the idea being that it will turn into $4000 worth of revenue. The owner had to put up that $1000 in order to generate $4000, some of which has to pay rent and bank loans.
And all of this has to happen before she draws salary. It’s not uncommon for a restaurant to take a year before it posts a profit. (it typically takes three years for a vineyard to turn a profit). Chances are that during that year, the owner is living off her savings (capital) in the hopes the restaurant will be successful (generate profit). If customers don’t show up, the restaurant fails, she loses it all, and will be forced to give the food away to a charity and sell the equipment at auction.
That is risk. Without the evil capitalist there are no jobs, unless of course we all want to eat at the government cafeteria.
- The chef/cook is a skilled tradesmen. She risks her time, in that her ability to develop her skills impacts her future earnings. A year spent in a failed restaurant may make her worth less than a competing chef at a successful restaurant. But note that she’ll still be paid her hourly wage for showing up and cooking. This is opportunity cost, the lost potential. She needs to keep improving year after year in order to increase her earning potential.
I see this position as having shared risk. The restaurant will invest in a chef hoping she will bring in customers. The chef invests in both herself and the restaurant, hoping to improve her career. This is where you will see profit sharing and bonuses tied to performance. But you will also see the understanding that in skilled trades the “profit” is based on earning potential, not directly as income.
That is why with skilled trades it is expected that salary will increase with time, since their skill increases with time. After a year, the cook is worth more, and will demand more, but only if she improved her skills sufficiently. If customers don’t show up, the cook will still be paid, but her earning potential will likely be lower as a result. It is also possible that the restaurant doesn’t need more skill. If the cook wants more money she’ll have to move to a different restaurant.
Hence, the cook invests in herself. But this position is being increasingly eliminated in favour of pre-fab food out of a vacuum sealed package. Skilled cooks are expensive, machines to prepare massive amounts of gooey alfredo are not.
- The waitress works on tips (aka she is a salesman working on commission). She also bares some level or risk. However, her income isn’t so much dependent on the success of the restaurant, but instead on a combination of its popularity and her ability to sell. When she chose to work at that restaurant, she risked the marginal increase had she worked somewhere else. But unlike the chef, this does not impact her future earnings.
She thus has an agreement with the restaurant to share some of the risk. Showing up to work doesn’t get her paid. She needs to show up, have customers, and push the alcohol sales.
If customers don’t show up, the waitress won’t be paid, but her earning potential likely won’t change.
This position is also frequently eliminated in favour of walk up counters, and highschool students.
- Dishwasher*: He represents unskilled labour and thus risks nothing. If he shows up (sober), and washes the dishes, he’ll get paid. He is a valuable member of the team, and is paid accordingly. But his wage will be industry standard, and thus there isn’t an opportunity cost associated with where he works. He doesn’t get to improve his skills and thus his income. His salary is thus dependent on availability of other dishwashers. There are times when it’s hard to find dishwashers, so his salary will go up. Other times there are lots and his salary will go down. This is known as the law of supply and demand.
If customers don’t show up, he still gets paid. If the restaurant closes he gets the same job some where else. His salary and earning potential are entirely dependent on the health of the restaurant industry. Lots of restaurants means more jobs means more money. If a bunch close at the same time there will be too many available dishwashers and his salary will go down.
What’s important for this discussion is that the dishwasher doesn’t carry any of the risk, and thus doesn’t get any of the reward. If the restaurant closes the owner loses her capital, and with that the ability to open another restaurant. The dishwasher loses his job, but not his ability to go to another restaurant.
What’s even more important is that the dishwasher always has the opportunity to save and start his own restaurant is he wants to share in the profits. But with that comes actual risk.
*Dishwashers are awesome, and nothing here should be construed as disparaging remarks towards dishwashers.
