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

Dara Lee Luca () and Michael Luca ()
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Dara Lee Luca: Mathematica Policy Research
Michael Luca: Harvard Business School, Negotiation, Organizations & Markets Unit

No 17-088, Harvard Business School Working Papers from Harvard Business School

Abstract: 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. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit at all observed minimum wage levels, and are disproportionately driven out of business 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 on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). Looking at data from delivery orders, we find that lower rated restaurants also increase prices in response to minimum minimum wage increases. Overall, our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.

Pages: 44 pages
Date: 2017-04, Revised 2018-08
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Citations: View citations in EconPapers (4)

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