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Harvard study: Higher minimum wage kills off affordable restaurants, doesn’t hurt pricey ones

If you love eating at fancy restaurants, you won’t notice at all if the minimum wage rises sharply in your area.

If you eat at Outback Steakhouse, well, that Outback Steakhouse might not be there much longer.

A new study on “firm exit” by Harvard University economists Michael Luca and Dara Lee Luca found that not all restaurants are created equal when it comes to artificial wage hikes:

The evidence suggests that higher minimum wages increase overall exit rates for restaurants. However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted 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), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).

Eric Boehm at Reason notes:

It’s unlikely that a worker with no experience is going to get hired at a 5-star restaurant, even for a low-level job, but destroying lower level restaurant jobs makes it harder for those same workers to climb the ladder from working at Outback to working at Fogo de Chão. …

Restaurants have high rate of turnover to begin with, so increasing the likelihood of a mid-level restaurant’s failure by 14 percent is no small matter. It may be enough to convince financiers to reallocate their capital towards high-end establishments or into other sectors of the economy, making it harder for anyone who does still want to open a restaurant to find willing partners.

He also notes that the study focused on the Bay Area between 2008 and 2016, which “already had a higher-than-average minimum wage” before a string of municipalities started jacking theirs:

If restaurants there were affected to the extent that Luca and Luca suggest, it makes me wonder what the consequences would be in a place like Colusa County, California, where the minimum wage will increase to $15 per hour in a few years. There aren’t any 5-star restaurants in Colusa County, as you might guess, and the unemployment rate there, 22.8 percent in February of this year, is already one of the highest in the country.

Read the study and Reason post.

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