Working Paper: NBER ID: w25806
Authors: Dara Lee Luca; Michael Luca
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 on average, 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 10 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). We expand the analysis to look at prices using data from delivery orders, and find that lower rated restaurants also increase prices in response to minimum wage increases. Our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.
Keywords: Minimum Wage; Firm Exit; Restaurant Industry
JEL Codes: C81; J31; J38; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minimum wage increase (J38) | likelihood of exit for median 3.5-star restaurant (C62) |
| Minimum wage increase (J38) | likelihood of exit for lower-rated restaurants (L15) |
| One-star increase in restaurant rating (C29) | likelihood of exit (J63) |
| Minimum wage increase (J38) | likelihood of exit for higher-rated restaurants (L15) |
| Minimum wage increase (J38) | likelihood of exit varies by restaurant rating (L15) |