Harvard Business School recently released a working paper titled “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” discussing the effects of minimum wage policies on companies’ survival. For those with any shred of economic understanding, the results were predictably dismal.
The paper focused specifically upon the restaurant industry in San Francisco, using data from the review platform Yelp to track the activity and performance of individual restaurants. Researchers Dara Lee Luca and Michael Luca discovered that a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of any given restaurant exiting the industry entirely. In economic terms, minimum wage hikes quicken a restaurant’s “shutdown” point.
Luca and Luca found this effect to be more pronounced among the restaurants with lower ratings while essentially nonexistent among five-star restaurants. A $1 increase in the minimum wage increased the likelihood of a 3.5-star exiting by roughly 14 percent, while having zero effects on the restaurants with five-star ratings. In other words, minimum wage hikes disproportionately affect the restaurants that are already struggling in popularity.
Why is this paper stunningly relevant? In an era where liberal-minded folks see increasing the minimum wage as a key way to equalize economic outcomes, studies such as this undercut the ignorant economics those on the Left espouse. Basic economics tell us that increasing the minimum wage will hurt not only firms by increasing their operational costs but also the very workers they presumably fire in the process to keep those operational costs down.
Luca and Luca’s paper offers an alternative approach to examining the effects of minimum wage hikes. A large portion of research related to minimum wage hikes examines the impact on unemployment. This particular paper shows that not all firms adjust to hikes by merely raising the prices of the goods and services they provide or firing a fraction of their workers. Some firms shut down altogether, taking their job opportunities with them.
The #Fightfor15 interest group, among others, is therefore working primarily against its own very interests. The group touts itself as seeking racial and economic justice through promoting a nationwide $15 minimum wage. Since almost 40 percent of minimum-wage workers are either black or Hispanic, Fight for 15 has joined forces with Black Lives Matter. However, what Fightfor15 and BLM do not realize is that their missions undercut each other, at least regarding expected economic outcomes.
Read the rest at: Harvard