Is the Cheesecake Factory a blessing or a curse for labor markets?

Feeling full.
Feeling full.
Image: Reuters
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Your most recent meal at the Cheesecake Factory may have been a triumph of the modern industrial era, or its undoing.

The first waves of industrialization were remarkable because they made consumer goods, cloth and eventually cars—goods that were once luxuries—cheap and accessible to the masses. This latest next wave of technology is doing the same for services. Formerly high-end services like fancy cruises or personal trainers can now be provided at scale for cheaper. The same goes for restaurant meals. Once eating out at a full service restaurant was a rare luxury. In 1984, 75% of dinners in the US were consumed at home, by 2014, fewer than 60% were. Americans may eat more meals out, but they spend about the same share of their income on restaurant food. To some extent, this reflects more women working (and therefore not cooking at home) and the expansion of fast-casual restaurants, but it also indicates eating at full-service restaurants is no longer a rare luxury for Americans.

Like before, this is all being driven by technology. Take the Cheesecake Factory, a chain offering a large, diverse menu and big portions for relatively low prices. That’s possible due to various advances in information technology and intangibles. The menu is standardized and optimized for maximum benefit at minimum cost. Kitchen managers from all over the country are educated on how to prepare the new dishes, resulting in lower prices and a more consistent dining experience. Information and communication technology makes it possible to optimize user data and to communicate with staff quickly, driving down costs. National marketing and brand recognition drive more customers. And ingredients are cheaper when you’re buying in bulk for 200 restaurants. But gaining this productivity involves paying big fixed costs, such as setting up the infrastructure to collect data. National chains are better positioned to pay these fixed costs than a small, local restaurant, and once the big chains invest in technology they can reap the economies of scale and dominate the market.

But cheaper service goods pose costs to the economy. Some economists are concerned these uber-productive firms are reducing competition, pushing up prices far above their costs (even if consumer pay less than they used to) and creating a market where only a few firms employ everyone, further eroding labor’s power in the market and pushing down their wages.

A new paper, by professors at Princeton and the University of Chicago, takes a hard look at the costs and how much national chains are changing the economy. The economists used firm-level data from across the US and made a few surprising findings. They estimate, as did others, that there are fewer firms within the service industry because of the domination of  the big chains, particularly in employment. But if you consider the entire economy, there isn’t more labor market concentration because the most productive firms have become more specialized, whereas before big firms like General Electric employed people in multiple industries. So while they dominate employment in individual industries, fewer big firms dominate the whole economy.  The economists estimate most of the market concentration has happened in services, wholesale, and retail.

If you work in one of these industries, the odds are increasing that you work for one of a few large companies. But all the new market power comes from big firms moving into more small towns, not necessarily from big firms dominating local labor markets. Employment has actually become less concentrated at the local level. If you lived in a small town 20 years ago you might work for the one or two local restaurants and now you might work at Olive Garden, Applebees, or the Cheesecake Factory. As a result, local labor markets have actually become more competitive—even if on a national level there are fewer employers in the service industry. (It’s not clear, however, how this impacts wages, a subject unaddressed by the paper). This trend may also reduce risk because a national chain can spread risk across different regions, while a locally owned business is more captive to local markets.

Their evidence suggests, like earlier phases of industrialization, that technological advances that bring firms data and new ways to communicate offers consumers more for less and improves productivity without much harm to the economy. However, concentration does not always result in lower prices. Hospitals have also become more likely to be owned by chains, often affiliated with universities, and the cost of health care has continued to increase. The economy also has become more winner-take-all, where firms with more resources are able to invest in technology and dominate the market, driving out smaller competitors.

What that will mean over the long-term for entrepreneurship and dynamism is uncertain. If this trend continues, we could live in a world where prices are low but most new recipe innovation comes from places like the Cheesecake Factory test kitchen instead of local chefs. That may depress innovation in the long run, as well as our taste buds.