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In a move unprecedented among offshore financial centres, the Bermuda government has notified companies throughout the hospitality industry that some of their lowest paid workers must stop working in a matter of days and return home.  According to the Royal Gazette, the cleaners, porters and pot-washers had been employed under work permits that had been suspended following the implementation of a moratorium last year.

Labour market watchers in the Cayman Islands will be paying close attention as the action mirrors a proposal raised in the Cayman Islands by George Town MLA Ellio Solomon to designate certain jobs as “Caymanian only”.

Whilst the terms of the moratorium seem to imply that employers should have seen this coming and planned accordingly, the move could scarcely have come at a worse time for hospitality employers already blighted by inconsistent demand in a time of continuing economic turmoil.

The move is bound to attract the attention of employers in international business as it signals a clear willingness on the part of the Bermuda government to intervene directly in the employment market when it considers it to be in the public interest.

Whilst a skim of the comments to the Gazette piece demonstrates how controversial the move is among Bermudians and residents, with strong views entrenched on both sides, it remains to be seen how this will play out socially, economically and politically.

What seems certain is that employers will be forced to increase pay to the point that reliable Bermudians are attracted to the open positions (presumably none applied in the past or work permits would not have been issued).  That cost will either be passed on to the consumer in the form of higher prices, or absorbed by lower profits in the business.  Given the well-known decline in business the former seems more likely.

Basic economics tells us that an increase in price results in a decrease in demand (as well as an increase in demand for substitute goods – good news for the supermarkets!).

This is all a bit abstract.  To try and get a sense of the real impact, what I like to do is a “back of the envelope” analysis.

Let’s say a restaurant with 50 seats has 3 FTE’s affected by the new rules, working 8 hour days on average.  Let’s say to find replacement staff the restaurant needs to increase pay by $5 per hour.  That equates to an increase in costs of $120 a day (around $3,600 per month).  A 50 seater restaurant might average 40 covers per night (that’s equivalent to 100 on Fridays and Saturdays and 25 every other night).  Hence the cost of each meal would need to increase by $3, likely around 5-20% of the total price of a cover depending on the standard of restaurant.

Whilst those numbers are arbitrary (replace them with whatever numbers you like!), they help give a sense of perspective.  The real impact on the price of a meal/profit of the business is going to be between $1 and $5 per cover.

Restaurants at the lower end of the market (that could see a 20%+ increase in the cost of a cover) seem to be in for the roughest ride, especially since their customer base (lower and middle class diners) tends to be more price-sensitive and besides were among the first to start eating out less when the recession began to bite.  As such restaurants also tend to be less profitable, it is conceivable that some could be pushed out of business.

Restaurants at the higher end, whose prices will increase less, and whose diners are less concerned about price in any case, will likely be fine.

In terms of the local labour pool, it would be interesting to know how many people are willing and able to seek this kind of work at any pay rate.  What has tended to happen in my experience is that, whenever the government puts up a barrier to work permits on certain positions (hitherto informally), incumbent locals have tended to benefit from a feeding frenzy of demand as employers scramble to pay well over the odds for people with a track record in favour of paying a little over the odds for those with none.

Consider a comparison with the market for legal secretaries in the Cayman Islands.  If a local law firm offering a market salary for a legal secretary receives no applications from Caymanians, but nonetheless has a work permit application declined on the grounds that Caymanians are “available”, law firm A will simply increase the salary being offered until a Caymanian from law firm B applies.  They won’t pluck some unemployed Caymanian from obscurity and train them to become a legal secretary.  Since law firm B has lost an experienced legal secretary they are equally unlikely to create an entry level position.  That means either plucking another legal secretary from law firm C or making a permit application of their own.  Hence Caymanian legal secretaries with a strong track record are often paid well above the market rate (N.B. if you are one and you don’t think you are, call us!).

Whilst its hard to compare the market for highly skilled legal secretaries with that of unskilled pot-washers, employers in Bermuda’s hospitality industry should expect to see a similar dynamic play out.

In other words those hospitality employers with Bermudian employees should think about giving them a raise before scoffing at the misfortune of competitors whose chickens have come home to roost.

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