Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit
February 20, 2019
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 wage increases. Overall, our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.
Michael Luca is the Lee J. Styslinger III Associate Professor of Business Administration at Harvard Business School, where he teaches a course on experiments for managers, and a course on behavioral insights. Professor Luca’s current work focuses on digital data and platforms, analyzing a variety of companies including Yelp, Amazon, and Airbnb. Professor Luca also works on issues related to the design of information disclosure, focusing on the behavioral foundations of how people make decisions.