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Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit

Author

Listed:
  • Dara Lee Luca

    (Mathematica Policy Research)

  • Michael Luca

    (Harvard Business School, Negotiation, Organizations & Markets Unit)

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 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 minimum wage increases. Overall, our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.

Suggested Citation

  • Dara Lee Luca & Michael Luca, 2017. "Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit," Harvard Business School Working Papers 17-088, Harvard Business School, revised Aug 2018.
    • Handle: RePEc:hbs:wpaper:17-088
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    References listed on IDEAS

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    2. Yuci Chen, 2019. "What Do Establishments Do When Wages Increase? Evidence from Minimum Wages in the United States," Working Papers 19-31, Center for Economic Studies, U.S. Census Bureau.
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    4. Nikhil Vellodi, 2018. "Ratings Design and Barriers to Entry," Working Papers 18-13, NET Institute.
    5. Ekaterina Jardim & Emma van Inwegen, 2019. "Payroll, Revenue, and Labor Demand Effects of the Minimum Wage," Upjohn Working Papers 19-298, W.E. Upjohn Institute for Employment Research.

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