Harvard 'Shock' Study: Each $1 Minimum Wage Hike Causes 4-10% Increase In Restaurant Failures

Tyler Durden's picture

A 'shocking' discovery was made when a pair of researchers at Harvard Business School decided to analyze the impact of higher minimum wages in San Francisco on restaurant failures...hint:  they went up. 

Entitled "Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit", this latest study on the devastating consequences of minimum wage was conducted by Dara Lee Luca and Michael Luca and concluded that each $1 increase in the minimum wage results in a roughly 4-10% increase in the likelihood of a restaurant going out of business. 

In this paper, we investigate the impact of the minimum wage on restaurant closures using data from the San Francisco Bay Area. We find suggestive evidence that an increase in the minimum wage leads to an overall increase in the rate of exit.

 

This paper presents several new findings. First, we provide suggestive evidence that higher minimum wage increases overall exit rates among restaurants, where a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit, although statistical significance falls with the inclusion of time-varying county-level characteristics and city-specific time trends. This is qualitatively consistent but smaller than what Aaronson et al. (forthcoming) find; they show that a 10 percent raise in the minimum wage increases firm exit by approximately 24 percent from a base of 5.7 percent. Differences in sample and specifications may account for the differences between our study and theirs.

Min Wage

 

Moreover, as we've pointed out the past, it's the low-income workers, the ones that minimum wage hikes are intended to help, that end up getting hurt the most when misinformed liberal politicians decide to meddle in labor markets.  But, as this new HBS study points out, low-income workers don't just lose their jobs when minimum wages are hiked...they also lose access to cheap casual dining options as lower-rated, cheaper restaurants are much more likely to fail when their costs are artificially raised.

Next, we examine heterogeneous impacts of the minimum wage on restaurant exit by restaurant quality. The textbook competitive labor market model assumes identical workers and firms who therefore are equally likely to share in the minimum-wage generated employment and profit losses. However, models that depart from the standard competitive model to allow for heterogeneous workers and firms suggest that a minimum wage increase would cause the lowest productivity firms to exit the market (Albrecht & Axell, 1984; Eckstein & Wolpin, 1990; Flinn, 2006). We show that there is, in fact, considerable and predictable heterogeneity in the effects of the minimum wage, and that the impact on exit is concentrated among lower quality restaurants, which are already closer to the margin of exit. This suggests that the ability of firms to adjust to minimum wage changes could differ depending on firm quality. Finally, we provide evidence that higher minimum wages deter entry, and hastens the time to exit among poorly rated restaurants.

Min Wage

 

And while we enjoy the affirmation of a conclusion that we've presented multiple times from such a reputable organization as Harvard, one which pretty much anyone could deduce with the application of just a moderate amount of common sense, for some reason the following scene from "Good Will Hunting' comes to mind.

"You dropped $150,000 on a fucking education you could've got for a $1.50 of late charges at the public library."

 

The full study can be read here:

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D Nyle's picture

Robot Lives Matter

knukles's picture

Like and uh, who funded this study, huuuuuuuuuuummmmh?
And by the way, was the data doubly seasonally adjusted for gay STD transmissions during Fleet Week?

Stuck on Zero's picture

I know that our liberal, compassionate politicians will sit up and take note of this study. Their response will be raise the minimum wage more.

red1chief's picture

How is it liberal to raise the minimum wage? Why shoud taxpayers give minimum wage workers welfare so they can live? I know you business guys will argue that welfare should be cut, but that isn't likely to happen. So the only sulution to spare the taxpayers is to raise the minimum wage so those workers will no longer qualify for welfare. I'm getting tired of hearing you guys talk about closures and robots, the fact is if the minimum wage is still lower than the workers' productivity there will be minimal impact. All robots? Closures? BS, bring it on!

wee-weed up's picture

That pair of Harvard Business School researchers will be unemployed in 3... 2... 1...

cheka's picture

minimum wage for megacorps, free market for everybody else.  beats both arguments

FireBrander's picture

Higher Wages = BETTER POOL OF EMPLOYEES!

Better employees = HIGHER EFFICIENCY!

Higher efficiency = YOU NEED FEWER WORKERS!

Fewer workers = LOWER LABOR COSTS!

Lower labor costs = MORE PROFITS!

Yes, there is a limit to how high the government can ARTIFICIALLY set wages, but if a $1 increase takes down your business, you were going to fail anyway...

PS> The average burger flipper here makes ~$9hr....I KNOW FOR A FACT...that if you pay me $18hr...I CAN DO THE WORK OF 3 OF YOUR CURRENT (NEAR BRAIN DEAD, CLINTON VOTING) $9hr EMPLOYEES!

 

 

Mr. Universe's picture

You all realize it's just the smoke and mirrors of inflation and currency debasement at work.

In 1964 the minimum wage was $1.25 and hour payable in silver coin currently valued at $20.47. Not only have minimum wage earners been hosed big time, the rest of us have moved into higher tax brackets paying more with ever inflated FRNs.

Donald Trump's picture
Donald Trump (not verified) Mr. Universe Apr 19, 2017 12:53 AM

The libtards think the other way around:

Higher wages -> higher taxes. Doesn't matter that businesses will fail and currency will devalue... they want their Share.

Even blondes start to get it:

This Model is Not Too Happy about Paying Taxes

http://dailywesterner.com/news/2017-04-18/this-model-is-not-too-happy-ab...


MillionDollarButter's picture

+1 Robot Lives Matter.

This shit is our future.  Screw the luddites.  We just need to get fake money out of the game.

Donald Trump's picture
Donald Trump (not verified) FireBrander Apr 19, 2017 12:54 AM

Higher wages -> Better pool of employes. LOL, say that to those bosses who have their workers unionized. Better wages and more laziness, coz unions cover their lazy asses.

Higher wages -> fuck that

Me thinks I'll save money by bringing a robot instead

 

casapi's picture

idiot, lay off the pipe

Cruel Aid's picture

Probably a paid soros troll

Economy-X's picture

Wages have always been artificially depressed by capital. Market value is not due to objective factors that nobody control; market value is a result of POWER. When a buyer meets a seller the supply and demand relationship between them determines WHO has the POWER to set a Price.

Here is how. If I need a product, let's say a house, and there is a substantial oversupply I can push the price down and down until the elasticity of demand base level is met and I get a seriously undervalued house compared to if supply and demand were equal. Just like post-2008 fo example. Now the suppliers of houses selling at a loss will not like this situation. Therefore they will stop building new houses until demand finally catches up with supply. As it does prices will go up and up. Once supply meets demand we will know the true value of the house, and neither buyer or seller will have more power to set the price of the exchange good.

Basic economics 101. Now lets apply this to wages. Supply of labour outstrips demand consistenly in every economy all over the world, as the growth in population outstrips economic growth. Since supply and demand do not meet, and the oversupply favours capital, then capital has MORE POWER to set the price of labour. This is especially in the case of unskilled labour where the oversupply is greatest. Thus the lowest paid wages in a capitalist labour market are always artificially depressed due to POWER.

Only when supply and demand are exactly equal does the real value of things emerge. Everything ZH has been telling you about minimum wages is FALSE and a failure to understand basic economics!!!

Mtnrunnr's picture

stop trying to argue with your book learnings. seriously though, you're right.

The Fonz's picture

 I am getting pretty tired of this broken story from Zero Hedge. There is plenty of money, it's just that it's not going to the employees. It is going to the people at the very top and the claim that increasing minimum wage is going to destroy jobs is predicated on the idea that those who have taken far too much for themselves will shut down their business instead of take less for themselves.

Business owners will not shut down their businesses becuase they have to share the income from it more fairly. They will choose to continue to make money. In business wages are a result of bargaining power. Somehow Zero Hedge seems to think that if the peons get bargaining power it is a terrible thing, however those at the top weild incredible leverage to attain their bloated wages at the expense of the entire system as well. Zero Hedge reveals it merely hates the poor with articles like this while ignoring these very same forces at play at the top of the power structure in every company everywhere.

cheka's picture

indeed.  started off good....then faded into idiocy

Mtnrunnr's picture

thank you sir. On one hand ZH decries concentration of wealth and on the other hand they bash minimum wage. Just like during the industrial revolution that resulted in the Great Depression, when workers lose the competetive advantage to robots they MUST be protected. otherwise too much capital gets stuck in the stock market (sound fimilar?) that inexorably leads to war and catastrophy. It isn't like rich people are going to stop their businesses. and OH YEAH, if you make employees work less hours guess what, THEY HAVE MORE FREE TIME AND THE SAME AMOUNT OF MONEY. so fuck off. corporate profits drop. boo fucking hoo. I hope all the corporate fat cats get drawn and quartered for their sick profiteering and war mongering.

truthseeker47's picture

For the convenience of your position you completely ignored the business owners who are working hard but barely making enough to keep it going as it is.  Maybe YOU should try running a business; it will give you a different outlook.  I used to run a business and I gave it up just because I don't like the government telling me how to run my business.

Mtnrunnr's picture

if Corporations are forced to return more capital in the form of wages their business models become uncompetetive therefore it is actually a better environment for small businesses.

True Blue's picture

Good god you guys certainly brought the stupid with you. Raising minimum wage does not help anyone earning minimum wage and punishes everyone else who did not see a commensurate wage hike because it causes price inflation to cover the increased cost. In almost no time, the person earning minimum wage sees prices increase until they are right the fuck back where they started: small businesses are shuttered by rising costs and an inability to compete against a giant corporation that can afford to take a hit to the bottom line -especially as they simply raise prices on the rest of us to cover it and/or further offshore jobs to cut the product cost. Just as Corporations do not pay taxes (YOU do when you buy their product in the form of higher prices) it is the consumer and the little guy that gets screwed by the basic economic illiteracy of this feel-good stupidity. 'Minimum wage' is minimum wage and will always buy what minimum wage buys. Net purchasing power of the person earning minimum wage will increase by exactly zero and will actually probably effectively decline as the higher wage shuts down more businesses, increases competition for jobs, and closes entry level positions to people with only entry level skill sets. And what about the people who have 5, 10, or 20 years into a job -do they get a raise? Or do they just get to eat the higher prices in the grocery store, the auto parts store etc. and sink lower into poverty as the minimum wage creeps up to the wage they worked half a lifetime to attain; bringing the cost of fucking living with it? What about seniors and people on fixed incomes?

If raising minimum wage actually worked the way you insipid morons think it does -then how come it has never 'been enough' the past 10 times they already raised it?

Mtnrunnr's picture

there are so many fallacies here. you assume that people who work 5-10-20 years aren't making minimum wage. I've got news for you. I sold shoes for 2 years and got a grand total of a $.10 wage hike. I was the best fucking salesman in the goddamn store (working 29 hours a week while volunteering another 10 hr a week asking for full time, beating those working 40hr), and top 10 in the fucking nation and they were paying me $10.10 to move $1,500 of running shoes. they went out of business because they gutted the floor and lost their salesforce of college educated and local professinal runner/salesmen because we got tired of their bullshit. that is the danger of minimum wage. it incentivizes stupidity and seeing how little work you can do. when there is no room for improvement like moving up people lose hope. side note, at the place I worked when they got bought out two of the older employees started stealing from the cash register. You sir, clearly have not worked in the retail environment. anyone who has and posesses half a brain (which I assume you do) can see how utterly fucked it is. the ONLY way forward is to get educated salesman on the floor and to pay them or else Amazon takes all those jobs. ever wonder why bestbuy is doing well? Every time I go in there some nerd knows every fucking thing about the 150000 computers they have. its a value add and for some reason bestbuy is the only one recognizing that. 

True Blue's picture

So -first off you were earning more than minimum wage, and presumably living a lifestyle higher than minimum wage. Presumably you took the job specifically because it was paying excess of minimum wage. Suddenly, burger flipping pays the same and the price of everything (rent too, supply -meet demand) has gone up. Happy?

Second: you were selling fucking shoes retail; working for someone who also had to pay rent, buy inventory, make payroll (including matching your Social Security contributions, so add 7.5% to your hourly cost) paying for insurance, worker's comp. accounting costs, franchise purchase costs, etc. etc. and paying you $80 per day -whether shoes were being sold or not. (By the way, assuming only a 30 hour work week, the owner was paying you approx $1,212.00 per month in addition to matching your soc sec and employee expenses like Comp -and you 'brought in' $1,500 in sales that obviously couldn't have happened without you specifically -right? And how much of that $1,500 was profit anyway?) Bear in mind, they also had to pay every other employee (+ expenses in addition to wages.) Exactly how much more of the business owners ass do you feel entitled to?

Professional runner??? Really? Who paid you to run and how much? And if you were such a consummate professional runner -why work retail there Mark Spitz? Were your celebrity endorsements bringing in the crowds like Hair Jordan or whatever?

How much value did you add to their business? They are shoes; and it doesn't exactly take a particle physicist to get a pair of size 11 from the stockroom. Based on riot videos all over the web -shoes aren't exactly a hard thing to make people literally kill eachother for, much less sell to someone. Educated salesmen? How much 'education' does it take to ring up a pair of Reeboks and put them into a plastic fucking bag?

Yes, computer or technology sales require some proficiency or education about the products -but not all that much frankly (and most of the information they recite is exactly what the specs tag says.) And even Best Buy is losing ground to NewEgg, Amazon, et al because it isn't cost effective to buy a store, pay massive overhead and then pay some monkey $10+ per hour to sell shit (when they aren't stealing it) that sells itself online -without "salesmen" at all.

And yes, I worked retail -in High School as a part time job (minimum wage was something on the order of $3.65/hour by the way) -I was never stupid enough to try to make it a 'career.' (Although my mother did somehow buy and fully pay off a house and two cars working for the Wal-Martians for 15 or 20 years, but she's like "cold Ramen noodles and water" cheap.)

You sir, have a lot of growing up to do.

Mtnrunnr's picture

I didn't want to make it my career.

A) there are no fucking jobs. I eventually got one in my field making $25 an hour.

B) 10.10 is less than the $15/hr that is being proposed, and in Boulder, CO it is less than minimum wage (when adjusted for inflation) than places like rural NC. C) I'm no professional but I worked with professional runners, they all quit.

D) I never said I was a partical physicist, I'm actually a research biologist so fuck you.

E) if you go buy the cheapest pair of shoes you can from a kid who knows nothing about shoes you're going to injure yourself. you're probably wondering why your knees hurt all the time.

F) There is tech in running shoes, as an example, did you know that if you need medial support that the Brooks Adrenaline 13 was a better shoe than the adrenaline 14, sized half a size larger, and has a different foam in the post? No? well that little bit of info you can't find on the web and will cause you to waste your hard earned money on a shit shoe that some highschool drop out can't tell the difference between.

G) I was NOT being given benefits. no health, PTO, Savings, anything.

you were working retail so long ago that you have lost touch with reality. You're showing your age old man. 

True Blue's picture

Wow. Your inane lack of anything resembling a grasp on reality is startling.

Congrats, you're making $25.00 an hour -if the minimum wage goes up to $15 per hour, have fun living in the people's republic of Boulder when everything you want to buy costs 20%-30% more fuckwit. Also, enjoy seeing more bearded panhandlers who cannot find jobs; given that nobody can afford to hire anybody as it is already. Yeah, make them pay even MOAR per hour -that'll stimulate some Help Wanted signs. And none of the costs I mentioned added benefits of any kind to the equation.

Good luck junior.

BeanusCountus's picture

"Share their incomes more fairly"? Damn, you have never been there. How much will employees give of their savings if my company goes down? How much debt will they take on to allow the restaurant to succeed? Debt that forces them and members of their family into bankruptcy? You.. just.. don't... get... it.

Vlad the Inhaler's picture

Not when it comes to small business.  Not by a long shot.

Minimum wage is not supposed to be living wage.  If it were, then what sort of work can high school kids and seniors etc do who just need to earn a little extra money?  Entry level is entry level. the minimum is the minimum.  If people who need real jobs are stuck working minimum wage then there are much larger problems with either the economy as a whole, or their own life choices, or both.  In which case we need to look for a solution elsewhere.

Mtnrunnr's picture

actually yes it was intended for that function. highschool children we meant to be in school. if their parents make minimum wage the children don't have to work. god forbid.

Vlad the Inhaler's picture

Screw that, when I was in HS I wanted to buy a car, my parents could not afford to buy me one, so I worked two summers in a row and saved up.

Mtnrunnr's picture

thats nice. so did I. but I'm not talking about you am I? I'm talking about working poor familes who's children have to work because if they don't they don't get toilet paper.

FireBrander's picture

25 years ago you were correct...but today, the minimum wage is Blue collar work...the new "starter wage" is collecting returnable cans/bottles from trash cans.

In a NON_FUCKED_UP economy, the "minimum wage" should be the line between employment and exploitation..I don't know that number...but 25 cents an hour is exploitation and $50hr is way too high...the right number is in there somewhere...

Vlad the Inhaler's picture

The right number is what employers and employees agree upon.  If supply and demand give too much power to the employer, government policy needs to foster an environment where there are a greater supply of jobs for employees to choose from.  I'm not saying low wages and lack of jobs are not a problem, I'm saying that government mandates are not the solution.  The other half of the equation is that prices for essentials like housing, food, and health care are way too high, which is traced back again to government meddling.

FireBrander's picture

The real problem isn't "sharing it fairly"...the real problem is SHIFTING EMPLOYEE COSTS ONTO THE BACKS OF TAXPAYERS by allowing:

>Medicaid to provide health care.

>Section 8 to make the rent payment.

>SNAP to secure the food budget.

All of these "Social Programs" are NOT for the "poor">..THEY ARE COPORATE WELFARE!

Not sure where this went, but California lawmakers were pushing a bill to charge employers for each employee that qualified for welfare...It was something like each EMPLOYED welfare recipient was costing the state ~$5000 in welfare costs.

 

Economy-X's picture

Dead right. Market value is all about POWER to determine prices 95% of the time. Occasionally when supply and demand mett (which never happens in the low-skilled labor market) true market value emerges.

The rest of the time either one or the other, the buyer or the seller, has more power to set the price depending on whether supply overshoots or undershoots demand. Basic economics seems to be beyond ZH on this issue.

 

Also, funny how ZH's anti-Establishmentism disappears when convenient, so that Harvard, an institution completely compromised by money and elite power netoworks is suddenly a "reputable institution". Next they will be saying the Federal Reserve is an impartial market actor!!! Well done ZH, your losing credibility and the future holds less readers and more idiots.

Anteater's picture

This is bullshit. Every study is based on, and gets funded by, a PREMISE. The premise poisons the study. The study is necessarily too short, has far to little data to be statistically significant, and is without longitudinals or correction factors for local retail bust. Restaurants are standing room only at lunch in Seattle, and don't even serve dinner, their made their profits in 8 hours. I'm sure the same is true in Berkeley, or any of the other up-trend cities. And what it does is raise food prices, and crack-spreads opportunities for mobile kitchens, now more people are eating out, and the neighborhood stabilizes.

But some Edu with tenure has a bead on a followup grant, knowing they can extort an even bigger study out of the Gov, which is pushing liberal memes in order to increase food prices, in order to increase sales taxes and businees excise taxes, and they don't need some Edu dingaling with an 8th-grade level statistical survey poisoning the punchbowl.

Welcome to UNELECTED Scientocracy.

meditate_vigorously's picture

Is there really anyone who think we don't have enough restaurants? Let them fail. Maybe America will remember how to cook and eat family meals.

Umh's picture

No shit Sherlock. On the other hand the clueless do not have clue.

coast1's picture

There are alot of people on ZH coment section that are book smarter more than I am...But from my learning, even with all the doom and gloom articles, may I share a laymans view?   There is one thing I hear in common from everyone, printing money will cause inflation....so, for people who buy and rent houses, will they lose rent money?  maybe not short term, people need to pay their rent...Car loan defaults?  we already know the answer to that.  EBT cards going up?  yes.... sales on items that are not necessary?  hmmm...  ANyway, I dont know anything, I just thought I would ask you smarter people what you think of my kindergarten level economic theory.  It seems to me that inflation has already been here, but if they raise the debt ceiling and keep printing money, the inflation is gonna go thru the roof....thx for your time guys...luv ya

Future Jim's picture

All right now, just calm down.

cheka's picture

yeah coast.  inflation is a lock.  laugh at any/all deflationists.  their victories are far and few

red1chief's picture

Raising the debt ceiling is just allowing the government to borrow money that is already being spent to avoid a default, and propagandists try to avoid that fact. Cutting spending is a different matter from raising the debt ceiling, and a failure to raise the debt ceiling (default) would be much more costly to taxpayers over the long run. I know you didn't hear it here first, but after some posturing the debt ceiling will be raised. I don't know what all the hoopla is about.

e_goldstein's picture

Yes, a 6% year on year increase in the money supply is significant inflation.

Start here for your research:

http://www.shadowstats.com/alternate_data/inflation-charts

 

 

Mtnrunnr's picture

interestingly, printing money only leads to inflation if the velocity of money stays constant or goes up. because all the money that was printed stayed in the hands of the few and was tied up in investments (home values and stocks increasing in value) the velocity of money actualyl went down. thats why Deflation is occuring in goods that the average person can actually buy. 

Twee Surgeon's picture

So these people at harvard are like Rocket Scientists then ? That is very comforting. Thank the Lord they are able to tell us peons how real world shit really works, despite having never been in it. They are like our Psychic overlords and we must bow down before them. Give thanks for the Harvardians.

coast1's picture

I think the people at harvard were saying everything is beautiful in 2007?

Twee Surgeon's picture

Because it was.......for them. They are Plate Spinners and very good at it, but still just performers, like the Federal reserve.

https://www.youtube.com/watch?v=Zhoos1oY404