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September 1, 2022

As everything from food to energy becomes more expensive, diners are also tipping their servers more – making the historically high-turnover sector a little more attractive to workers.

Higher tips inspired by inflation are driving workers back into the restaurant industry, Danny Meyer, founder of Union Square Hospitality Group, which owns Shake Shack and several other restaurants in NYC, told CNBC on Tuesday.

“Inflation has cut both ways in our industry… There’s no question that menu prices are higher than they’ve ever been,” Meyer said in an interview with Jim Cramer on Mad Money. For hospitality workers, this means “if you have a tipping model in your restaurants, servers make more money than they’ve ever made before.”

The opportunity to make more money in tips now — compared to times of low inflation — may slow the Great Resignation in the sector, where quitting has reached epidemic levels.

As of June of this year, recreation and hospitality – specifically lodging and food services – saw the highest quit rates across all US industries, coming in at 5.7%, according to the Bureau of Labor Statistics. A total of 788,000 Americans quit a job working in the food service industry out of a total of 4,237,000 workers across all sectors.

For Meyer, this means employees are returning to work at his restaurants. “For the first time [since the COVID pandemic hit], we’re actually at the same level in terms of our talent count as we were in 2020 when we first had to stop doing business, ” he said.

The COVID-19 pandemic brought the restaurant industry to a standstill, and although the industry has been steadily recovering, restaurants are still struggling to fill vacancies. Outside of Meyer’s Union Square Hospitality Group, the industry still had 6.1% fewer workers in May 2022 compared to pre-pandemic levels, the National Restaurant Association reported.

Danny Meyer famously announced seven years ago that his restaurants would phase out tipping, as he believed it contributed to unequal pay, wage instability, racism, and a myriad of other problems. However, Meyer reversed course on this policy in June 2020 when restaurants began reopening their doors, saying he was unwilling to deny any additional compensation that might be available to workers in a time of economic crisis.

Union Square Hospitality Group announced last week that Chip Wade is succeeding Danny Meyer as chief executive officer. Meyer will remain on the group’s board in addition to serving as Shake Shack’s board chairman.

Inflation shifting consumer habits

Meyer is not the first to claim that inflation could bring an end to the Great Recession.

Randstad, a global employment services provider, said in July that rising living costs and worries about the future were curbing people’s willingness to quit their jobs.

“There is still movement, absolutely, but it is slowing down,” Randstad chief executive officer Sander van ‘t Noordende told Bloomberg.

Paul Donovan, an economist at UBS, also suggested that higher oil prices could have some “strange indirect effects” including a slower job turnover rate and an end to layoffs.

Donovan said in a February note that for the TikTok generation of 16- to 24-year-olds in the US — a group that has been reluctant to re-enter the workforce — “gasoline is a disproportionate amount of spending… Higher oil prices may encourage return to the conventional job market.”

Plastic menus

While high inflation appears to be slowing down the Great Resignation in hospitality businesses in general, it may also be helping one group in the sector more than most.

As the cost-of-living crisis bites, cash-strapped consumers are downgrading from white tablecloths to plastic menus. In the second quarter ended June 30, sales at Applebee’s and IHOP grew 6% and 8%, respectively, among households earning $75,000 a year, Dine CEO John Peyton said in an analyst call on Tuesday.

The bump “suggests to us that guests who often dine at more expensive restaurants are finding Applebee’s and IHOP because of their well-known value position,” Peyton said.

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