eGullet is Watching You, Monsieur le Chef.

[robert brown]

Here’s a great opportunity for the eGullet France forum to gain fame and notoriety. There is now the potential for France to move up smartly in the national restaurant derby, possibly even regaining the top spot, thanks to a national government that has come to its senses about its restaurant culture and economy. On January 1, 2006, the value-added tax on restaurant meals will drop dramatically from 19.6% to 5.5%. The law limiting the number of hours a restaurant worker can work will be abolished. It is now 39 hours a week. The minimum wage has risen 11%, which is significant because 40% of restaurant workers are paid the minimum wage. However, the Government is making 1.5 billion euros available to offset the added cost.

We have had discussions here already as to what this lowering of VAT might do to the restaurants of France. Would the majority of owners keep the difference or pass it on? Might some owners use the money to offer better or more expensive products, expand choice, reduce debt, redecorate, or increase kitchen and dining room staff?

I propose that during the next two to three years we members who spend a fair amount of time in France each keep track of a handful of restaurants. Starting now, I think we should talk to chefs about what they plan to do, given the low VAT and the ability to have staff work longer and keep restaurants open more hours a week. Then after the day comes in 16 months, we should note what they do in terms of actual change. We should keep a record of whom we talk to and what restaurants we eventually will track. I think we could develop something extremely interesting and influential. If we start now, we can get a giant head start on the media, as this is sure to be a big story when the time comes. Please post your ideas and suggestions as to how to go about or organize this.

[Fat Guy]

This is a great idea, Robert. One thing I think should be tracked is menu prices. If the "Eurocreep" phenomenon is any indication, we should be at least somewhat fearful that the end-user cost of the VAT will sublimate into higher menu prices.

[robert brown]

Thank you, Steven. Even holding the prices constant is, for the owner, the same as raising his prices. I think for the first six months or year of the era of the 5.5 VAT, restaurants will look bad if they raise prices without any apparent value added to the diner. Of course, what is to stop them from adding caviar, lobster, etc. or offering a bigger menu at a higher price? I bet next to none will pass along the lower tax by lowering their prices. This is why it would be interesting to speak to many chefs in the coming months and ask them what they plan to do as of January 2006.

[Jonathan Day]

Robert, I'm signed up -- a great idea. Why don't we use this thread, or a special thread you start, to record our discussions with restaurateurs and others?

For those used to a sales tax scheme, as in the US, European value added taxes (VAT in English, TVA in French) works "backwards"; it is already included in the price of the good or service.

In a US state charging a 7% sales tax, a restaurant tab for $100 gets marked up to $107. In France, with its 19.6% tax, of the €100 bill you pay, €83.61 goes to the restaurant, €16.39 to the government. In the UK, with a 17.5% VAT rate, the restaurant keeps £85.10 of a £100 bill.

Under the 5.5% tax rate, the restaurant in France would keep €94.79 of a €100 bill -- a huge difference, as Robert points out. The restaurant could lower its menu price so that the meal you formerly paid €100 for now went for €88.21; it would pay its 5.5% tax (=€4.60) to the government and the restaurant would still pocket €83.61.

What I'm wondering is the extent to which restaurateurs will feel comfortable competing on the basis of price. This hasn't been the way things are done in France; it's only recently become common with branded consumer goods, where there's no doubt that the Sony Walkman you buy cheaply in Carrefour is the same one you buy in a smaller shop, and that the difference in price has nothing to do with the quality of the product.

[FaustianBargain]

hi robert, is there a reference for the changes you mentioned? like a url or something?

[kerriar]

Pace much of the above, Lalitha's question may be significant as I have a niggling feeling that the VAT rate reduction is for the moment simply an aspiration and no firm decision has been taken although I may have missed something in the summer newspapers. French restaurateurs have long been complaining about the very high rate they live with and the effect that this has on their customers (many other EU countries have a reduced rate) and have said that an increase in demand and employment will result from a tax break.

If the reduction comes to pass - and we all hope sincerely that this will be the case - it would be scandalous if the customer is not the ultimate beneficiary

[Jonathan Day]

Here's a link to an English language discussion on this -- scroll down in the page to find the story on restaurant taxes. As with so many Internet sources, this one has no date -- very irritating.

In digging around for up-to-date news on this I was astonished to discover that "restauration rapide" (fast food) incurs VAT at the lower, 5.5% rate in France! So much for French concerns about McDonald's.

[robert brown]

I stumbled on this because Delta gave out the Riviera Times on my flight back to NY. I should have saved it. The article presented the facts as a fait accompli. When I get a chance, I'll dig around as I hope others will. In France, fact has a habit of reverting to something other than.

Jonathan, let's see how we can seperate this out in a distinctive way.

[FaustianBargain]

Here's a link to an English language discussion on this -- scroll down in the page to find the story on restaurant taxes. As with so many Internet sources, this one has no date -- very irritating.

In digging around for up-to-date news on this I was astonished to discover that "restauration rapide" (fast food) incurs VAT at the lower, 5.5% rate in France!  So much for French concerns about McDonald's.

Thanks for the link, Jonathan. Restaurants where you can have food 'to-go', i.e. you dont have to sit down to eat, has lower tax...less value added. It has been 5.5% for a while now, iirc. This was the reason I asked for the source url. There was much trashing of this issue by French restauranteurs and chefs during the American Food Revolution at Raymond Blanc's Le Manoir some months ago. Also, right now the govt restricts workers to 35 hours/week. Does increasing it to 39 hours/week make a lot of difference? It is an open secret that restaurants pay their employees 'under the table' when they work for more than 35 hrs/week. Sir Terrance Conran bemoaned the fact that his restaurants in France barely make past the red line and noted that it is quite impossible for restaurants to make a profit in France if they follow the laws strictly.

I never understood, even then, how VAT affects the restauranteurs as its a final consumption tax. Whether it is 5.5% or 19%, it is still the burden that the final consumer bears. Maybe the restaurants will gain more customers with the lower vat, but it would do little to improve their figures through volume sales. The 35 hours/week was a little more worrying. 39hrs/week doesnt make much of a difference, does it? But its good, nevertheless. Odd, the whole thing. However, I have to add that from all accounts I have heard, the French deliver more value for money across the channel than in London, for example. And that it is more affordable.

[menton1]

My best guess is that the VAT drop will not lower prices at all in France. In Europe, the tax is already included in the price. (As are the tips!) Many consumers say they like this, psychologically; I guess it feels a little better because there is no math to do and you don't realize what the tax actually is. In the US, this is mostly forbidden. All pricing must show the base price, the tax, and the total. This doesn't feel as good because you can actually see the taxes, feel badly about it, and yet it also makes for a more informed consumer. What a dilemma!!

Interesting about the restaurant workers' hours-- I remember how the French complained when the office workers' work week hours were shortened!! Robert, do you know if the restaurants will have to pay an overtime-type wage to the workers over the 39 hours?

I didn't think that France thought that they had to "move up" in the restaurant ratings-- don't they feel that they are already at or near the top?

One last point-- It is one thing to rate the top genre of the restaurant field-- however, in the middle grouping, the non-Michelins, the un-acclaimed middle-of-the road bistros, neighborhood places, the family operations-- France has no equal. At any moment, unexpectedly, in a little place in a little town, you can get a superior, most memorable meal.

[Carlsbad]

Restaurant owners may argue that any reduction in the VAT is going for higher employee costs. I'm curious whether the minimum wage gone up 11% all at once just recently or was that over time? And had it remained the same for a long period of time before the increase? What is the minimum wage is France anyway? It's interesting that the fast food industry has the lower tax. Perhaps the big chain fast food places have a little more influence over the politicians.

[robert brown]

My chef friend told me that in the restaurant business, the maximum number of hours a week has been 39, with 35 hours applying elsewhere. The 11% increase is for minimum wage earners regardless of overtime. I don't remember if the author addressed the situation with overtime. Let's keep trying to get the definitive word on all this. I'm sure it's easier with this than with the swimiming pool security regulations that recently went into affect!!!!!!!!1

[tighe]

Recording anecdotal information on how restaurants adapt to these changes will be very interesting, only sorry that I won't be able to contribute. If the data were available, there is potential for a fascinating empirical paper on how these changes impact prices, employment, etc.

The minimum wage has risen 11%, which is significant because 40% of restaurant workers are paid the minimum wage. However, the Government is making 1.5 billion euros available to offset the added cost.

Two, two, two sources of economic inefficiency for the price of one! A great case study for the next time I teach principles of micro....

[robert brown]

Tighe, what might the implications be of these two inefficiencies?

[tighe]

Tighe, what might the implications be of these two inefficiencies?

←

Impossible to say what the net effect of the two would be on employment levels/prices in the French restaurant industry without some empirical analysis over time.

Heartless economists like myself typcially believe that minimum wage increases are a bad idea because they decrease employment and increase prices, but government wage subsidies would have the opposite effect theoretically. What can be said is that administering the minimum wage regulation and the subsidies at least doubles the administrative inefficiency and the government could achieve the same outcome by simply eliminating the minimum wage and making transfer payments to restaurant workers.

[tighe]

Question: I believe I heard/read at some point that family enterprises were exempt from minimum wage/maximum work time regulations in France and that this is why there were so many small restaurants and hotels run my husband/wife teams, sometimes with other family help. True?

Obviously these kinds of places wouldn't be impacted by the changes discussed here.

[robert brown]

It's the social charges that business owners complain about the most. Letting the worker keep more of his take home pay amounts to a subsidy, at least in the short-to-medium term. There is also an acute labor shortage in the restaurant industry. What would best correct that?

[tighe]

It's the social charges that business owners complain about the most. Letting the worker keep more of his take home pay amounts to a subsidy, at least in the short-to-medium term. There is also an acute labor shortage in the restaurant industry. What would best correct that?

←

I'm certainly no expert, but from what little I know, analyzing the French labor market is fraught with hazards because it is distorted by myriad regulations and subsidies. Correct me if I'm wrong, but France has many regulations that make it exceedingly difficult to lay off workers and employ part-timers. This seems like it would be particularly brutal in the restaurant business.

In a well-functioning market, a shortage of workers would raise wages (likely making minimum wages unnecessary, BTW) which would attract more workers to the industry from lower-paying jobs. If the problem is really that there's a shortage of well qualified workers, then, in my opinion, it would be better for government to subsidise training/education, but my guess is that already happens in France to great extent. Reducing benefits to the (voluntarily) unemployed would also help.

[robert brown]

It's very hard to lay off workers after they have been working for several months, as I understand it. A two-star chef in the Alpes-Maritimes has been advertising for a dishwasher. Some restaurants/hotels will fire people when they return from vacation with the person in question unaware of what will happen when he or she returns. How's that?!!!

[Carlsbad]

I was going to comment of this "free market" stuff, but then I remembered this is a food forum.

[Jonathan Day]

The minimum social charges for a French worker -- and these are paid by the employer -- amount to roughly 45% of salary. So for a worker to take home €10 per hour, the employer pays €14.50. This leads many employers to pay some workers in cash, "under the table".

[robert brown]

Carlsbad, if what you want to write is of any relevance to the discussion, be my guest.

[tighe]

The minimum social charges for a French worker -- and these are paid by the employer -- amount to roughly 45% of salary.  So for a worker to take home €10 per hour, the employer pays €14.50. This leads many employers to pay some workers in cash, "under the table".

←

Which implies that a 11% increase in the minimum wage is actually a 15% increase to the employer, plus ou moin. Ouch.

I'm also all for anyone expressing dissenting points of view about any statements I've made.

Edited September 14, 2004 by tighe (log)

[Carlsbad]

Although I still don't think this is the place for such a discussion, I'll just ask a few questions. How much is the minimum wage in France? How long had it been the same before the 11% increase? Is the increase all at once or over time? Obviously, if the minimum wage had been the same for a long time, the increase might have been long overdue and could even be insufficient for the workers making minimum wage to keep up with inflation (as has been the case in the U.S.) What is included in the social charges? Do they include pension, and if so does the worker pay additionally? Do they include worker's compensation and/or some kind of disability insurance in case the worker is injured? Do they include unemployment compensation if the worker is layed off? The merits of an increase of 11% in the minimum wage and the social charges are hard to judge without all the information.

When this was a more proper discussion about lowering the VAT on restaurants and what they will do with the extra money coming to them, rather than a discussion of "free market" fantasies, I made the point that restaurants will not lower prices necessarily, since they can argue that they have higher costs because of the increase in the minimum wage. The elite restaurants seem to be packing people in at ever-skyrocketing prices, so why would they lower prices? Indeed, the significant reduction in the VAT, if realized, would probably more than cover the increases in wages for most, if not all restaurants. And the French Government seems to be easing the burden a bit on the businesses until that reduction comes with the 1.5 billion Euro subsidy.

[Jonathan Day]

What is included in the social charges?  Do they include pension, and if so does the worker pay additionally?  Do they include worker's compensation and/or some kind of disability insurance in case the worker is injured?  Do they include unemployment compensation if the worker is layed off?

All of the above and more e.g. medical insurance (the patient pays a bit for services and prescription drugs, but not much), and life insurance. Most middle-class people top up their pensions with a private plan, and private medical insurance is available, again as a top-up for the state system.