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Minimum Wage Increases Make Restaurants More Likely to Fail

Every $1 increase in minimum wage makes mid-level restaurants 14 percent more likely to fail, Harvard economists say. Workers, business owners, consumers lose.

Megan Daniels / VWPics/NewscomMegan Daniels / VWPics/NewscomRules that make it more expensive to employ workers will cause fewer workers to be employed. It's a statement that's as true in an economics textbook as it is in the real world—as more than a few places are currently discovering—and a new study from Harvard University economists takes a stab at explaining how that relationship can affect not only workers, but businesses and consumers as well.

As the cost of labor increases, driven by higher minimum wages, there is a greater likelihood that restaurants will go out of business, study authors Michael Luca and Dara Lee Luca conclude. As one might expect, Luca and Luca found that lower quality restaurants—those more likely to rely on low-wage workers—are harder hit by higher wage mandates.

"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 a median rating), but has no discernible impact for a 5-star restaurant," they write.

The consequences here are far-ranging. It's unlikely that a worker with no experience is going to get hired at a 5-star restaurant, even for a low-level job, but destroying lower level restaurant jobs makes it harder for those same workers to climb the ladder from working at Outback to working at Fogo de Chão. This is an extension of the more-well-studied effects of minimum wage increases on fast food joints, where higher wages can do even more damage.

Obviously there are consequences for business owners as well. Restaurants have high rate of turnover to begin with, so increasing the likelihood of a mid-level restaurant's failure by 14 percent is no small matter. It may be enough to convince financiers to reallocate their capital towards high-end establishments or into other sectors of the economy, making it harder for anyone who does still want to open a restaurant to find willing partners.

That means fewer choices for consumers. Not everyone can afford to eat at a 5-star restaurant all the time (and, honestly, who would want to?), but higher minimum wages might force some mid-level options out of the market and make it harder for new ones to come online.

Things might be even worse than Luca and Luca suggest. For their study, they used data on restaurants in the San Francisco Bay Area from 2008 through 2016, a period of time that included several municipalities in the region raising their minimum wages. But even before that, the Bay Area was one of the most expensive parts of the country (and already had a higher-than-average minimum wage). If restaurants there were affected to the extent that Luca and Luca suggest, it makes me wonder what the consequences would be in a place like Colusa County, California, where the minimum wage will increase to $15 per hour in a few years. There aren't any 5-star restaurants in Colusa County, as you might guess, and the unemployment rate there, 22.8 percent in February of this year, is already one of the highest in the country.

Indeed, other studies on the consequences of raising minimum wages have found greater consequences. A forthcoming study by researchers at the University of Pennsylvania shows that a 10 percent increase in the minimum wage increases firm exit by approximately 24 percent, according to Luca and Luca.

As an aside, I'd also raise a minor point order about Luca and Luca's decision to title their paper "Survival Of The Fittest," which obviously invokes the theory of evolution, suggesting that there's some sort of natural process at work that's weeding out restaurants unable to compete. That's not really what they are studying, though, because there's nothing natural about these minimum wage increases.

Any vibrant marketplace would look familiar to Darwin, with firms better able to attract customers growing and expanding while those that can't compete struggle to survive. That's perfectly natural. Sudden spikes in mandatory wages are like an invasion of new species—what happened when humans first encountered the dodo, or a cataclysmic event like an asteroid impact—that shocks the system and causes mass extinctions. Species that were surviving and even thriving in the previous environment suddenly disappear without warning.

There's an element of natural selection at play in circumstances like that, sure, but that's hardly the sole explanation.

Unfortunately, we're likely to see more of these sobering conclusions to the recent surge in minimum wages as one of the largest real life economic experiments in American history plays out before our eyes.

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  • $park¥ leftist poser||

    As the cost of labor increases, driven by higher minimum wages, there is a greater likelihood that restaurants will go out of business

    That's because restaurant owners can't let go of their greed.

    "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 a median rating), but has no discernible impact for a 5-star restaurant,"

    Good. Places that sell shitty processed food that's unhealthy should be driven out of business.

  • timbo||

    Yeah

  • DarrenM||

    If they can't afford increasing the cost of doing business, they shouldn't be in business. /s

  • timbo||

    That is the simple argument of morons.

  • Hank Phillips||

    But what about the crapola restaurants that actually matter? Does government action driving Mom and Pop taquerias into bankruptcy also weaken entrenched oligopsonies like McDonald's, Chick Fil-A or Taco Bell?

  • Bender B. Rodriguez||

    Huh. Who saw this one coming?

  • Finrod||

    Everyone that's competent in basic economics, which excludes the vast majority of politicians.

  • Chipper Mourning Will Grigg||

    Not everyone can afford to eat at a 5-star restaurant all the time (and, honestly, who would want to?)

    Um, me?

  • Diane Reynolds (Paul.)||

    Not me. The price to value ratio is rarely there.

  • Chipper Mourning Will Grigg||

    We are assuming price is no obstacle.

  • Agammamon||

    Even with price as no obstacle, I wouldn't want to eat at one all the time. Sometimes I just want someone to cook me a good meal but I don't want to have to dress up to eat the thing.

  • Diane Reynolds (Paul.)||

    Yeah, there are a lot of reasons I wouldn't want to eat in a 5 star restaurant all the time. Sometimes I like the atmosphere of the 'lesser' places.

  • Citizen X - #6||

    Paul prefers restaurants where it is encouraged to draw on the placemats.

  • Diane Reynolds (Paul.)||

    No crayons, no tip.

  • Zeb||

    And it better be good crayons, not those shitty Chinese knock off ones that just break.

  • Chipper Mourning Will Grigg||

    But he is usually asked to leave because of what he draws.

  • Citizen X - #6||

    "But the pony and the man love each other! Quit othering me for my advocacy!"

  • Citizen X - #6||

    Same here. If you cultivate a basic repertoire of culinary skills, you can eat very high quality food at home for cheap as hell. The only reason my family gets restaurant food anymore is if i'm feeling lazy.

  • Zeb||

    Yeah, when you actually know how to cook, most restaurant food is a letdown.

  • timbo||

    A grill and some marinade makes all restaurants a letdown.

    With the exception of lots of fried shit and some atmosphere.

  • Chipper Mourning Will Grigg||

    Oh, I totally agree with this. Restaurant choices are pretty limiting, especially if you have good imagination. I love to cook, but time is a huge constraint. Plus, the whole "I cooked, so you clean up" shtick doesn't fly in our household.

  • timbo||

    You PC bro?

  • LibertarianJRT||

    I lol'd

  • Not a True MJG||

    Nowadays I mostly appreciate a good restaurant for the pastry chef. I can make myself a dish'o'meat with sides that can be as tasty as a restaurant will serve me, but there are certain desserts I doubt I'd ever be able to equal, even if I put in the time and effort.

  • Zeb||

    Yes, there are certain things difficult to duplicate without special equipment or skills that take a lot of developing.

    I'd put fried food on that list too. I mean, I could do it at home, but then I'd have to deal with a gallon of used cooking oil which I might use 2 or 3 times before it gets too old. And pizza. I can make a decent pizza in my over, but it only goes to 500 degrees and that doesn't quite duplicate a real pizza oven.

  • DarrenM||

    I go to restaurants for the food. At 5-start restaurants you are paying for the service, the decor, the 'ambience', etc.

  • Zeb||

    Depends on the restaurant. And how literally you take "all the time".

  • geo1113||

    Progressive response: "If you can't afford to pay your employees a living wage, you don't deserve to be in business."

  • timbo||

    progressive thought bubble:

    "rich son-of-a-bitch" or some other delusional envious moron speak.

  • geo1113||

    It is very easy to find a speech by Bernie Sanders or Elizabeth Warren (who is the speaker at my son's graduation...oy).

  • Citizen X - #6||

    Where "living wage" is a variable that is always several dollars higher than the current wage.

  • timbo||

    What's the living wage in cuba? $20 per month right?

    So Obama, in his Marxist wisdom, actually said that opening up trade with cuba would allow companies like apple to expand their market there.

    And thus encapsulates the economic literacy of that idiot pimp and all of his worshipers.

    And the rest of DC no doubt.

  • Brandybuck||

    If I were a poor unskilled worker in San Francisco wanting a living wage, the first thing I would do is move out of San Francisco.

  • Diane Reynolds (Paul.)||

    One of the Seattle City Council members said this in a meeting on the matter, but I'm having trouble finding the quote.

  • Zeb||

    My response "my employees all seem to be alive".

    "Living wage" is such a load of shit. The global standard for absolute poverty is what, $2/day or something. There's your living wage. Anything above that is maintaining a lifestyle.

  • the wolf||

    "If you can't afford to pay your employees a semi-arbitrary wage that bears no relationship to their actual labor value or your revenue, you don't deserve to be in business."

  • Fist of Etiquette||

    I would rather order from touchscreens, and not just in fast food places. Touchscreens mean one fewer person I have to interact with, and while I'm doing it I can pretend I'm firing light sabres from the bridge of the Startrek Enterprise.

  • timbo||

    I would rather have a pretentious douche with a man bun explain his knowledge of wine to me.

  • Zeb||

    Second least expensive bottle is always the way to go.

    I suppose pretentious hipster knowitallism is big in restaurants these days, but at a nice, upmarket restaurant, I expect the server to go almost unnoticed.

  • timbo||

    These days?

    The only server that should ever go noticed is a really good looking chick in something tight.

  • Chipper Mourning Will Grigg||

    Eugene's therapist is also a touchscreen. He selects what he wants to work on from a set of icons that include: mom, the college ex-girlfriend that he still thinks about too much, Philadelphia, always needing to be first, or the recurring nightmare about Crusty.

  • Fist of Etiquette||

    I'm so well adjusted the therapists ask me for advice.

  • Ska||

    At least I can start tipping 5% when food service min. wage in a restaurant effectively doubles.

  • timbo||

    Doesn't work that way.

    You will be derided on the national news for retroactively making their pay the same.

  • Longtobefree||

    The really nice thing about service workers getting "a living wage" is that tipping will no longer be part of the transaction.

  • JayWye||

    THAT is why these cities are enacting high min.wages;
    most tips are NOT declared as wages,so they don't get taxed.
    When tipping is eliminated through the guise of a "living wage",then ALL the money the worker gets is taxed.
    That is what the legislators see,they don't see the small businesses going out of business,and will blindly chalk up the decrease in tax revenues to "poor economic conditions","poor business management",or some other hogwash,I mean excuse..

  • esteve7||

    Yeah but then those businesses SHOULD fail if they can't pay their workers A LIVING WAGE!

    /Prog

    (Seriously... my prog friend with no skills is upset that entry level jobs pay so little.... "people are worth more than that"...... so much economic illiteracy, but then again you have to be to be a Sanders supporter)

  • ChipToBeSquare||

    Potential side effect: big corporations absorb the hit or find a way to adapt, small businesses fail. Ask them why they love corporations so much more than small businesses

  • geo1113||

    When my proggie bud starts railing on corporations and says we need more regulation, I always ask him why he hates small businesspeople.

  • timbo||

    To which he shakes for bit, looks around, says but...but.. and then exits the room with a f*ck you!

  • geo1113||

    No. He rolls a joint.

  • timbo||

    At least he has figured out the future.

  • Zeb||

    "people are worth more than that"

    Well, I'm not trying to buy the whole person, just a little bit of their time and labor.

  • geo1113||

    Ha...eloquently said, Zeb,

  • timbo||

    Even if I employed the whole person, I have not bought him . I have invested in him with a reasonable expectation of ROI. If my investment was a good one, I decided to invest more in him in hopes of retaining his services. I decided to invest in him and he agreed to my offer.

    Then he turned into a complaining piece of shit who always took a little free food when he could and after twenty more of those jerks came and went, I bought a robot that does the work of 30 of those jerks.

  • Chipper Mourning Will Grigg||

    Zeb talking to a hooker:
    "How much for just the pussy?"

  • timbo||

    In reality for most men, that is a better investment.

  • Brandybuck||

    $15 an hour for the whole person won't even get you a decent hummer.

  • Unicorn Abattoir||

    I just know that Big Robot is behind the drive for a $15 minimum wage.

  • Brandybuck||

    I've run across quite a few restaurants in the SF Bay Area that are essentially mom-n-pop only restaurants. Pop is in the kitchen, Mom is waiting tables and doing dishes, and that's it. It takes an hour to get your food. They may not be hiring any help, but at least they aren't paying them below minimum wage, that that's all that counts in the Bay Area!

  • Zeb||

    And I guess pretty soon it will only be that, high end stuff and corporate chains. Then they can go back to bitching about "food deserts".

  • Brandybuck||

    And that's exactly what they want!

  • Slocum||

    "They may not be hiring any help, but at least they aren't paying them below minimum wage"

    Are you sure? There's no law that says Mom & Pop restaurants have to net enough profit that the owners earn at least minimum wage for every hour they put in. Family owned restaurants and food trucks may turn out to be a common way to get around minimum wage laws. If a $15/hr minimum is imposed on poor areas, I'd expect that to be about the only kind of restaurant that could survive.

  • Hank Phillips||

    Vive la Botique!

  • DrZ||

    Sure thousands of people will be out of work in California, but it does not matter because no one will see them. Those that are not fired will be used as an example of how much nicer it is to have someone set an artificial, non-market wages for you regardless of the value you bring to a business.

    Those who are laid off are likely to become welfare recipients and this is good for the Democratic party: the more impoverished people that are out there, the more that this party will fight for them. After all they are more compassionate than rationally thinking people.

  • John B. Egan||

    Silly nonsense. Not only is Seattle doing well with its aggressive minimum wage increases, but so is San Francisco:

    http://www.seattletimes.com/se.....imum-wage/

    The simple truth is that if a business is that tight that it can't survive while paying staff enough to live on, they have no place being in business. I don't understand why it's so hard for Libertarians to accept that simple principle of Darwinian Capitalism. You cannot create a healthy society by balancing profits on the backs of slave wages. Absolute nonsense.

  • MarkLastname||

    You can live in less than minimum wage; most of the world does it.

    And the term 'slave wage' is just daft. If you choose to work for someone, you're not a slave. If you get paid nothing, it makes you a volunteer.

    And your Darwinism analogy is even dumber. Minim wages are arbitrary floors imposed by the state, not nature or the market. You may as well be throwing squirrels out of an airplane at 3000 ft and declaring 'well if they can't grow wings and survive it's just survival of the fittest.'

  • ChipToBeSquare||

    SF is pretty damn Darwinist. Have you guys solved your homelessness problem yet? Or is your wage floor (and other price controls + zoning laws while we're at it) forcing low-skilled people to rely on government handouts?

    Maybe some of those people whose value is less than your minimum could pick up some skills at a low wage job and towards higher wages, and either get off the streets or never end up there in the first place. As it is few businesses find a low-skill, high-risk worker to be worth the minimum, but I bet some would gladly bite for a lower price. Maybe the sense of purpose created by a job, no matter how menial, would also keep some of them away from drug use

    As it is, SF has a permanent underclass of the low-skilled, as do most blue cities, which strikes me as a pretty Darwinist outcome. Somehow the left thinks this is fine because they're willing to throw some government money at them so they don't starve. The minimum wage was specifically designed to price the "undesired" classes (minorities) out of work in favor of whites, and it's still having that impact today. The progs of that era did love themselves some eugenics

  • ChipToBeSquare||

    And I addressed it above, but the minimum wage (and almost every regulation you can think of) favors corporations over small business. Wal-Mart will get along just fine. Your favorite non-chain restaurant will have some difficulty paying their workers

  • Glide||

    The simple truth is that if a businessperson's budget is that tight that it they can't survive while paying staff enough to live onproviding others with their best work in exchange for its market value, they have no place being in businesstaking up unearned resources. I don't understand why it's so hard for LibertariansJohn B. Egan to accept that simple principle of Darwinian Capitalism.

  • zombietimeshare||

    "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 a median rating), but has no discernible impact for a 5-star restaurant," they write."

    "If socialists understood economics they wouldn't be socialists."
    ― Friedrich A. Hayek

  • Peter Schaeffer||

    Higher wages for poor workers and fewer jobs for illegals. Looks like a win-win to me.

    A few years ago, Michael Dukakis, the Democratic presidential candidate in 1988, specifically advocated raising the minimum wage to reduce illegal immigration. Quote from Dukakis on the subject.

    ""If we want to reduce illegal immigration," they wrote, "it makes sense to reduce the abundance of extremely low-paying jobs that fuels it.""

    No less a libertarian than Alex Tabarrok stated

    "I will give Dukakis and Mitchell this, their logic is impeccable"

    Of course, Alex Tabarrow favors low-wage jobs for illegals...

    Will raising the minimum wage reduce the number of low-wage jobs?

    Yes, and that is a very good reason for raising the minimum wage now.

  • MarkLastname||

    Sigh, you're too dumb to help, I won't even bother explaining it.

  • ChipToBeSquare||

    I'm curious how he came to such a genuinely stupid conclusion so I'll bite:

    Do you think illegal immigrants, in California especially, are getting jobs because they're going in demanding the $10 minimum wage? Why would any business owner see an advantage in hiring someone who is undocumented if that indeed were the case?

  • JayWye||

    LOL. If one looks around,they will find that illegals have moved up the ladder into higher paying jobs like construction and trades,even factory work. So eliminating low paying jobs doesn't reduce illegal immigration.

    the concept behind low-paying jobs is that certain jobs are only worth so much,and they aren't intended to be one's sole source of support,they're intended to be starter jobs,part-time jobs for college students,housewives and retirees,etc. They're jobs for workers to learn basic skills,prove they have a decent work ethic,and incentive to get more job skills and move up the ladder.

  • PazLeBon||

    It does seem a bit blatantly obvious to me to be honest. I have been a small business owner enough times to understand that employment costs and all the extras are one of the biggest obstacles to overcome. Not just restaurants but most of the small business industries. These minimum wages need to be aimed at certain size companies, allowing choice for workers who might well prefer to work for a slightly lower wage for a mom n pop business that treats them as individuals in a family.

  • Sorgfelt||

    If a business does not pay its employees a living wage, it needs to fail. That's capitalism. Those employees need to find a better job before they starve. Requiring a living minimum wage serves those who can't set up a proper union. Whatever you say about unions and minimum wage laws, those provide checks and balances on a free market which tends to concentrate wealth at the top without them. If you look at our economy for the last 120 years, it should be obvious that totally free and unregulated markets do not help workers or the economy. Freedom means that I also have a right to exercise my freedom to do collective bargaining.

  • Don C.||

    You've never owned a restaurant then. (i've owned 3 bar/restaurants) There is NO mom & pop family restaurants that are unionized! Margins are WAAAY too thin! This is why in a family restaurant the entire family works there.

  • ChipToBeSquare||

    First: When a government policy is the cause of a business failing, that's not capitalism

    Secondly: Why do you prefer corporations over small businesses? Wal-Mart and Chik-Fil-A will find a way to survive. Smaller businesses will have trouble. I guess some people are just corporatists though

    Third: Pricing out the low-skilled concentrates wealth as well and gives them virtually no chance at upward mobility. That's cruel, and as a progressive you should care that it disproportionately impacts minorities

    Fourth: I look at our economy over the last 120 years and see an absolute miracle, an amazing increase in the standard of living for virtually everybody. Here's a simple test of that fact: we're taller and heavier than we used to be because we eat better. We eat better because we're wealthier and have more access to healthy (and unhealthy) food than previous generations. Technological innovation and competition driven by the market helps to offer us cheaper and cheaper food as well. Even the poor have access to cheap food, with the tradeoff being that things like McDonald's aren't healthy (but they're sure healthier than starvation). I cannot think of any cause for this miracle other than market forces, but if you can somehow make an argument the government caused any of that, I'll hear it. The USSR had trouble feeding its populace during this same time period

  • Hank Phillips||

    Not to rain on your nice parade, but when I look on the past 1.2 centuries I see These States being sucked into the ooze of coercive collectivism at a slower rate than the rest of the world. Relatively speaking it looks like progress. But what actual change we can point to is largely a result of libertarian spoiler votes frightening looter lawmakers into cutting back on the rate at which they were accustomed to replacing freedom with slavery. We perhaps passed a point of inflection at 1972, and this recent election may be the change in direction we've all been working toward. Swapping the anvil of socialism for the life-saver of buoyancy can't happen fast enough to suit me.

  • Slocum||

    Requiring a living minimum wage serves those who can't set up a proper union.

    Are you aware that in California, unions carved out exemptions from minimum wage laws:

    http://www.latimes.com/local/c.....story.html

  • Glide||

    If a business does not pay its employees a living wage, it needs to fail. That's capitalism.

    And as we all know, the living wage marks in McAllen Texas, Moulton Alabama, and American Samoa are all exactly $15/hr.

  • Don C.||

    You didn't need an MBA to see this coming a mile away. It never ceases to amaze me just how stupid politicians are and how idiotic people are voting for this nonsense. Restaurants are the last employers left who will hire anyone, and they can legitimately work there way up - front or back of the house. Guess that will end soon as well..

  • Hank Phillips||

    Increasing the probability of business failure is A LOT like decreasing the life expectancy of folks earning a living there. It creates an economic hazard in much like curtailing a population's access to energy decreases life expectancy and is by definition a health hazard. What kind of government uses coercion to increase poverty and death?

  • ace_m82||

    All of them.

  • Redcard||

    So increasing the minimum wage leads to fewer wage earners. That is basic economics.

    If it then leads to restaurants closing down ($1 = 14% improved chances of a closing), and that's basic economics, what happens to the demand?

    The demand rises (or the supply diminishes), right? Again, basic economics. Which allows remaining restaurants to be more profitable, or provide opportunities for new ones to open to meet it.

  • Redcard||

    So increasing the minimum wage leads to fewer wage earners. That is basic economics.

    If it then leads to restaurants closing down ($1 = 14% improved chances of a closing), and that's basic economics, what happens to the demand?

    The demand rises (or the supply diminishes), right? Again, basic economics. Which allows remaining restaurants to be more profitable, or provide opportunities for new ones to open to meet it.

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