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April 24 2017

Harvard Study: Higher Minimum Wages Trigger Restaurant Closures

by Patrice L. Onwuka

Anecdotal evidence tells us that minimum wage increases hurt low-skilled and low-wage workers. Now, a new study provides fresh evidence that they can cause businesses to shut their doors.

Researchers at Harvard Business School published a study that analyzes the effects  of minimum wages on restaurants in the San Francisco Bay Area. They found that wage increases trigger restaurants closures. However, the findings introduce a new phenomenon: Different quality restaurants fare differently after minimum wage increases are introduced.

Using online ratings websites, they analyzed ratings (as a proxy for quality) as well as the openings and closings of restaurants. They found that a $1 increase in minimum wages leads to approximately a 4 to 10 percent likelihood that restaurants will close.

Second, the impact of the minimum wage is strongest among lower rated restaurants. In other words, lower quality restaurants are more likely to close than higher-quality restaurants because the wage hikes speed up the process for poor-quality restaurants to close their doors:

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).

Some might argue that poorly performing restaurants probably should close. This evidence suggests that minimum wages nudges them to closing faster. Workers at these restaurants find themselves unemployed and consumers have fewer choices. However, it underscores that low-wage workers, those meant to be helped by minimum wage policies, are the very people who end up getting hurt.

Finally, they found that higher minimum wages deter entrepreneurs from opening new restaurants.

The San Francisco Bay Area has experienced 21 changes to the minimum wage over the past decade and the current minimum wage is $12.25, but set to increase to $15 by July of 2018. It will be interesting to see if the trends continue to hold, how many more restaurants in the Bay Area close and those that never open.

Higher-rated restaurants are likely to absorb increases to wages easier than lower-rated ones because they enjoy more flexibility to raise prices or make other adjustments. Customers are willing to pay more and perhaps wait a little longer for a meal they enjoy, whereas they have much less patience and willingness to shell out more for a mediocre meal.

There’s an element of survival of the fittest to this case study. Good or great restaurants are rewarded with customer loyalty and their workers are more secure. Poor and mediocre restaurants suffer when they are forced to raise prices because of minimum wage increases and customers stop patronizing their establishments. Those that may have been teetering are pushed out of business sooner.

The bottom line is that minimum wage increases do have an effect and it's on business closures.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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