United States | Leaving a bad taste

Higher minimum wages may make bad restaurants close

But do job opportunities vanish, too?

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|WASHINGTON, DC

WITH Republicans in charge in Washington, the federal minimum wage is unlikely to alter soon. But debate over the impact of local pay floors is as hot as ever. Little wonder: 18 states and 22 cities and counties raised their minimum wages at the start of 2017, according to the National Employment Law Project, a campaign group. Left-wing activists have for years pushed politicians to guarantee minimum pay of $15 an hour, more than twice the federal minimum of $7.25, which last went up in 2009.

A new working paper by Dara Lee Luca of Mathematica Policy Research and Michael Luca of Harvard Business School looks at the impact of higher minimum wages from a new angle. Traditionally, scholars have focused on whether or not minimum wages reduce employment. But the Lucas asked something else: does it force firms out of business? In particular, they looked at the restaurant industry—about half of minimum-wage workers toil over food—in the San Francisco Bay Area, which contains 15 of the 41 cities and counties that have changed their minimum wages since 2012. Their analysis relies on data from Yelp, a restaurant-review app favoured by millennials.

The Lucas found that a restaurant has, on average, a one-in-250 chance of closing in any given month. Whether or not the odds change when the minimum wage rises seems to depend on the quality of the eatery—or at least, on its Yelp rating. Restaurants with a coveted five-star score are barely affected; but less impressive joints are suddenly more likely to close (see chart). Restaurants with a middling rating are about 14% more likely to shut down when the minimum wage goes up by a dollar. (The authors also show that rating is distinct from price—in other words, a glorious but cheap takeaway has less to worry about than sellers of pricey but tasteless fare).

The result can be spun multiple ways. If those scholars who say that overall restaurant employment is unaffected by higher minimum wages are right, the implication of the new paper is that pay floors somehow force up the quality of restaurants. So long as one minimum-wage worker is much like another, a laid-off waiter will be able to find a new job somewhere serving better grub.

If those scholars are wrong, however, then the new paper supports what sceptics have said all along: that higher minimum wages, by threatening the viability of some firms, dent employment opportunities for the low-skilled. That should be food for thought.

This article appeared in the United States section of the print edition under the headline "Leaving a bad taste"

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