A new Harvard Business School study found that minimum wage hikes lead to closures of small businesses. “We find suggestive evidence that an increase in the minimum wage leads to an overall increase in the rate of exit,” the researchers conclude.
The study, titled Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit, looks at “the impact of the minimum wage on restaurant closures using data from the San Francisco Bay Area” from 2008-2016.
Researchers Dara Lee Luca and Michael Luca chose the Bay Area due to their frequent minimum wage hikes in recent years. “In the San Francisco Bay Area alone, there have been twenty-one local minimum wage changes over the past decade,” they write.
The Lucas found that lower-quality restaurants (indicated by Yelp scores) were disproportionately affected by wage hikes, increasing their likelihood of closure relative to higher-quality, established restaurants.
“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,” says the study. “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).”
While “firm exit” was the focus of the study, the researchers also noted that there are often other consequences from wage hikes, such as worker layoffs, increased pricing and hour-cuts for existing workers:
While some studies find no detrimental effects on employment (Card and Krueger 1994, 1998; Dube, Lester & Reich, 2010), others show that higher minimum wage reduces employment, especially among low-skilled workers (see Neumark & Wascher, 2007 for a review). However, even studies that identify negative impacts find fairly modest effects overall, suggesting that firms adjust to higher labor costs in other ways. For example, several studies have documented price increases as a response to the minimum wage hikes (Aaronson, 2001; Aaronson, French, & MacDonald, 2008; Allegretto & Reich, 2016). Horton (2017) find that firms reduce employment at the intensive margin rather than on the extensive margin, choosing to cut employees hours rather than counts.
Such findings were backed up by Garret/Galland Research’s Stephen McBride, who highlighted in March the “minimum wage massacre.”
“Currently, rising labor costs are causing margins in the sector to plummet. Those with the ability to automate like McDonalds are doing so… and those who don’t are closing their doors. In September 2016, one-quarter of restaurant closures in the California Bay Area cited rising labor costs as one of the reasons for closing,” McBride wrote in Forbes.
“While wage increases put more money in the pocket of some, others are bearing the costs by having their hours reduced and being made part-time,” he added.
As noted by Red Alert Politics, the Bay Area is headed for a $15 minimum wage in July of 2018, though they’ve already seen over 60 restaurants close since September.
While it would behoove the Bernie Bros picketing for $15 an hour to take a look at this study, it’s entirely unlikely that such evidence would deter their entitled attitudes.