The Restaurants Hurt Most by Minimum-Wage Hikes

A new study finds that the eateries most likely to suffer are those that diners already feel lukewarm about.

A waiter at a restaurant
Eric Risberg / Reuters

For restaurant workers, especially kitchen staff who don’t receive tips, a boost in the minimum wage is usually welcome. But restaurant owners don’t always see it that way. They often argue that raising the price floor for labor can cause businesses running tight margins—as many restaurants do—to shutter. A  new study from Harvard University in conjunction with Yelp found that while minimum-wage hikes can cause some restaurants to go out of businesses, that fate was much more likely for eateries that fail to please customers.

Dara Lee Luca, an economist at the Mathematica Policy Research, and Michael Luca, a professor at Harvard Business School, looked at over 35,000 restaurants in San Francisco and how they fared during the 21 minimum-wage hikes in localities in the Bay Area between 2008 and 2016. Using data from Yelp, some 2 million ratings, the researchers found an interesting relationship between restaurant’s star rating and restaurant closings.

The study is unique in two ways: First, it uses crowdsourced data, instead of government data, to quickly glean information about how the restaurant industry reacts to policy changes. Further, rating websites, such as Yelp, allow for proxies on restaurant quality and popularity.

The second is that, rather than looking at the impact of minimum wage on unemployment as many government reports might, the study focused on how restaurants with thin margins adjusted to wage-floor increases. One caveat, however, is that the minimum wage changes the researchers looked at were relatively new, so the impact should only be considered short-term.

In general, they found that restaurants with lower ratings are disproportionately affected by minimum-wage increases. For restaurants that had five-star ratings on Yelp, the highest rating available, a $1 increase in the minimum wage didn’t impact the restaurant’s likelihood of closing. But for a restaurant with a 3.5-star rating, that same increase in wages lead to a 14 percent increase in the likelihood that it would shut down.

The authors of the study say that they don’t see the study as evidence for or against changing the minimum wage but rather an interesting peek inside a much larger question: “While lower-rated restaurants are driven to exit by increases to the minimum wage, higher rated restaurants tend to be more insulated from such shocks. This helps to shed light on the likely impact of minimum wage increases on existing businesses,” the researchers wrote.

So while minimum-wage hikes might cause some businesses to close, the results of the study argue that it’s worth paying attention to which businesses they are. After all, it’d be too simplistic to assume that these public policies affects any industry uniformly.