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Harvard Research: Minimum Wage Hikes Put Non-Elite Restaurants Out of Business

A recent study conducted by researchers at Harvard Business School concluded that minimum wage laws increase the likelihood that non-elite restaurants will go out of business.

The study, which was conducted by the husband-and-wife team of Dara Lee Luca and Michael Luca, looked at data on “tens of thousands of restaurants in the San Francisco area.” They concluded that lower-rated restaurants are disproportionately more likely than four or five-star restaurants to go out of business as a result of minimum wage laws.

The evidence suggests that higher minimum wages increase overall exit rates for restaurants. However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted by increases to the minimum wage.

Their data on the San Francisco-area restaurants studied concluded that a $1 increase in the minimum wage increased the likelihood of a restaurant going out of business by four to 10 percent. A 10 percent increase in the minimum wage led to a 24 percent increase in the likelihood that a restaurant would go out of business.

This paper presents several new findings. First, we provide suggestive evidence that higher minimum wage increases overall exit rates among restaurants, where a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit, although statistical significance falls with the inclusion of time-varying county-level characteristics and city-specific time trends.

The research revealed that lower-quality restaurants were more likely than five-star restaurants to go out of business in response to minimum wage laws. Economically, this is somewhat intuitive, because four and five-star restaurants aren’t constrained by minimum wage policy as they typically pay their wait staff well and diners often leave generous tips.

Our point estimates suggest that a one-dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).

This is an important conclusion because it reveals that minimum wage policies often hurt those that they are intended to help. Minimum wage hikes put employees of lower-rated restaurants at risk of losing their jobs. Owners of lower-rated restaurants are put at risk of having to shut down their businesses in response to the mandated increases in the cost of labor. And patrons of lower-rated eateries can lose dining choices.

Those who eat out at the top of the food chain, the elite 4-and-5-star restaurants might never even notice.

Tom Ciccotta is a libertarian who writes about economics and higher education for Breitbart News. You can follow him on Twitter @tciccotta or email him at tciccotta@breitbart.com

 

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