Minimum wage and restaurants: What do we actually know?
In April of this year, Luca and Luca published a paper that examined whether increasing minimum wages caused restaurants to close. They used the San Francisco Bay Area as a case study, because there is variation in the minimum wages in California cities and because California does not allow a “tip credit”, where employers can pay servers less than the minimum wage on the assumption that tips will make up the difference. Luca and Luca found that increases in the minimum wage did cause restaurants to be more likely to close – but only restaurants with a less than 5-star rating on Yelp.
Several articles and op-eds have summarized the findings, some concluding that an increase in the minimum wage must decrease employment, others pointing out that since the effect is only significant for restaurants with lower Yelp ratings, they have no negative effect on the California dining scene. I thought that some of these summaries were missing Luca and Luca's point and disregarding other important but inconclusive research on the employment effects of increases in the minimum wage.
Let us set aside the elitism of assuming that restaurants that are not to the taste of Yelp reviewers are “lousy”, or the questionable assumption that Yelp reviewers are a nationally representative sample. But let us focus on the conclusion that these restaurant closures must lead to job losses, as is smugly concluded in Forbes. This is not necessarily true.
One possibility is that these restaurant closures are part of a cycle in which restaurants go in and out of fashion, with lower Yelp reviews reflecting a format and menu that has become dated, or staff that are uninspired. The lower-rated restaurants will close, but new ones may open. Luca and Luca examine that point by testing to see whether a similar number of restaurants opens and find that they do not; higher minimum wages seem to discourage new restaurants from opening.
Multiple studies dating back at least to the 1980s have looked at the effect of increases in the minimum wage on overall employment. Luca and Luca refer to this work and are attempting to add to it. While many of those studies focused on teenagers (because they tend to change jobs frequently so that they are early indicators of the employment market) those studies that do look at adult employment leave us with inconclusive results. Many find that there is no change in employment when minimum wages increase. Others, that employment increases. Others, that employment or the number of hours that employees are scheduled to work decrease. Many of these studies as well as the economic theories around minimum wages and employment changes are summarized here.
But the low-wage workers are, themselves, actors in a local economy. We do know that low-wage workers will spend all of an increase in their income. There are generally a lot of things that they have not been able to buy, so a larger paycheck goes to deferred purchases and necessities such as groceries. We might assume that the stores that provide these items will increase their staffing to manage the increased demand. Since the skills of low-wage workers tend to be less specialized than those of higher-wage workers, we might expect that some of those displaced restaurants workers will find employment at other local stores. See David Rolf, President of the SEIU local 775NW in Washington make that argument here.
What Luca and Luca have contributed to the conversation on minimum wage is some additional understanding of the mechanism through which minimum wage increases could affect employment -- the available number of employers. But we should not take their findings too far – it’s too early to say whether minimum wage increases actually harm the local economy.