Due to the minimum wage increases, the number of restaurants in San Francisco closing their doors is increasing, and fewer new restaurants are opening, according to a new study.
In “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” Harvard Business school authors Dara Lee Luca and Michael Luca used data collected from the San Francisco Bay Area to “study the impact of the minimum wage” on the restaurant industry.
They are concerned with firm exit, the number of firms that ceased operations divided by the total number of firms that operated, during a set period.
The paper reports that twenty-one local minimum wage changes have already taken place in the Bay Area over the last 10-years. San Francisco’s higher minimum wage is not yet fully phased in.
It‘s current minimum wage is $13 an hour, while California sets the state rate at $10.50. Both minimum wage rates surpass the federal rate, currently $7.25, by a significant amount.
With tipped employees included under the requirements, San Francisco is phasing in even higher rates. A rate increase to $14 is set for July and another increase to $15 will follow next year, the rate the rest of California won’t reach until 2022. This will have an impact on the restaurant industry.
According to the working paper:
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. 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).
Using Yelp reviews to establish relative quality of each restaurant studied, the paper suggests that “lower-quality” establishments, that may already be struggling, are affected most by the changes.
“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,” they write.
While they acknowledge that lower quality restaurants fail more often than their higher quality counterparts, regardless of wage level, they find that the increased rates also prevent new restaurants from opening at a rate of 4-6% per $1 increase.
Using Yelp as their guide, they found that five-star restaurants were mostly unaffected by the changes. Restaurants rated at 3.5 stars were 14 percent more likely to fail with wage changes. The lower the star rating, the more likely it became that an establishment would fail.
They believe this is because higher quality restaurants are able to adjust to the changes while the lower rated establishments cannot.
H/T: Washington Examiner
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