Minimum Wage Affects Restaurant Success- to a point

Minimum Wage Pressure

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This is a fun study.  First, let’s talk about the two folks who performed this research.  A husband and wife.  Who like to visit restaurants.  And, wanted to know whether a change in the minimum wage really does cause restaurants to close.

The other reason why it’s fun?  Because this study is not a related to Rick Berman and the plethora of fake institutes he purportedly runs.  All of which are funded by lobbyists for industries  that exploit the minimum wage (restaurants, hotels, bars).  Invariably Berman reports results that are widely distributed and uniformly incorrect.

Why are restaurants almost always the test industry?  Because this sector employs the largest share of minimum wage employees in the US.   And, it is the second largest private-sector employer group.  So, besides being susceptible to minimum wage pressures, it can serve as the “canary in the coal mine” (an early indicator) of wage pressures (at the lower end of the spectrum) that may obtain in the rest of the US economy.

So, let’s consider what Drs. Dara Lee Luca (Mathematica Policy Research) and Michael Luca (Harvard Business School) examined. The Luca’s analyzed about a decade’s worth of Yelp ratings (these are consumer comments and evaluations that are posted- openly- on the internet) and restaurant closures over the same time period.  35,173 restaurants that operated in the San Francisco Bay area were included in this study.  (This region was chosen because Yelp literally blankets the restaurants there.)  The actual research involved comparing the closures of restaurants with the timing of minimum wage hikes- in other words, did a change in minimum wage cause the restaurant to close?  The researchers did not consider the issue of unemployment or job availability in this study.

First, we need to recognize a basic fact.  About ½ the ratings provided to Yelp are five stars.  About 1/3 of the restaurants earn 3 or fewer stars.

Second, let’s consider the obvious finding from the study.  Menu prices had no correlation with a restaurant’s Yelp rating.  (That may have been already evident from the above paragraph.)  And, the data does not indicate that low-end restaurants are more profoundly hurt by changes in the wage requirements.

Minimum Wage Affects Restaurant Success- to a point

The tenure of the restaurants (how long they survived) was about 6 years (some 30% of the total census had ceased operations during the study period, with 70 months being the average tenure), earning an average Yelp rating of 3.6, with menu offerings of about $ 22 per person.  This data compares favorably with the fact that more than ½ of all restaurants fail in their first year– so these restaurants passed the initial acid test.

So, what else did the Luca’s find?  Obviously, an increase in the minimum wage will hurt someone somewhere.  The question is which someone and where.

For restaurants that were above average (3.5 Yelp stars), a rise in the minimum wage of $ 1 meant the chance of restaurant failure increased by 14%.  But, that was not true for the restaurants that achieved the 5 star rating.

In other words, the restaurants that didn’t provide great service or food that met the expectations of the diner were fairly susceptible to wage pressures.  But, when the restaurant consistently afforded diners great service, the minimum wage was of little impact.

So, they really found out that higher wages accelerate the failure of marginal restaurants.  But, given the tremendous churn in the restaurant business, these failures are often – and rapidly- replaced with newer restaurants.

Moreover, those establishments with the higher ratings were also more profitable.  And, being more profitable means the restaurant is more shock-resistant, more able to withstand the buffet of higher wages, among other factors.   (The restaurants are also more resilient against changes in rent, which is another key factor behind restaurant failure.)

If you believe in survival of the fittest- then these results should make you feel great.

Oh, and less worried about any change in minimum wages.

It also bolsters my case that we need to impose fees [taxes?] on any moderate-to-large size enterprise that pays wages that require their employees to suck at the public teat [food stamps, SNAP, Medicaid, AFDC, etc.] while claiming to be profitable.  It is not our job [the US Citizenry] to subsidize employees so the owners of an offending institution can profit. Roy A. Ackerman, Ph.D., E.A.

 

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