Panel Paper: Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit

Saturday, November 10, 2018
8216 - Lobby Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Michael Luca, Harvard University and Dara Lee Luca, Mathematica Policy Research

The minimum wage has recently re-entered the forefront of policy discourse as federal proposals range from leaving it as is at $7.25, increasing it to $10.10 or raising it to as high as $15 per hour. While the federal minimum wage has remained stagnant since 2009, states – and more recently, cities – have increasingly set local minimum wages above the federal mandate. In the San Francisco Bay Area alone, there have been more than twenty local minimum wage changes over the past decade – with many cities targeting minimum wages of $15 per hour.

We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level in the Bay Area. Our analysis proceeds in two stages. First, we provide evidence that restaurants that are lower rated on the popular review platform, Yelp, are on average closer to the margin of exit and fail at higher rates than higher rated restaurants, irrespective of the minimum wage level. A one-star increase in rating is associated with more than a 50% decrease in the likelihood of going out of business. We then exploit the multiple city-level minimum wage changes in recent years across the Bay Area to implement a difference-in-differences design to investigate the effects of the minimum wage. We find limited evidence that higher minimum wages lead to overall increases in restaurant exit rates. However, we find compelling evidence that the impact of the minimum wage on the likelihood of exit decreases as the restaurant’s rating increases. Our results suggest that a $1 increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for the median 3.5-star restaurant, but no measurable impact for five-star restaurants. These effects are robust to a number of different specifications.

Overall, our findings shed new light on the economic impact of the minimum wage. Basic theory predicts that the minimum wage will cause firms that cannot adjust in other ways to cover their increased costs to exit the market. We find that lower rated firms -- which are already closer to the margin of exit -- are disproportionately impacted by the minimum wage. After a minimum wage increase, they are more likely to exit the market altogether and more likely to raise their prices.

Our analysis also highlights how data from online platforms can be used to better understand labor policy and the economy. Historically, datasets from the US Census Bureau and the Bureau of Labor Statistics (BLS) have formed the backbone of analyses looking to estimate the impact of the minimum wage in the US (e.g. Dube, Lester and Reich, 2010, Aaronson et al., forthcoming). Other analyses consist mainly of researcher-administered surveys (e.g. Katz and Krueger, 1992; Card and Krueger, 1994). While administrative datasets are critical to our understanding of the minimum wage and the economy more generally, the effects we identify in this paper would have been difficult to observe using standard datasets.