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

44 Pages Posted: 11 Apr 2017 Last revised: 13 Aug 2018

Dara Lee Luca

Mathematica Policy Research

Michael Luca

Harvard Business School

Date Written: August 1, 2018

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 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

Luca, Dara Lee and Luca, Michael, Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit (August 1, 2018). Harvard Business School NOM Unit Working Paper No. 17-088. Available at SSRN: https://ssrn.com/abstract=2951110 or http://dx.doi.org/10.2139/ssrn.2951110

Dara Lee Luca

Mathematica Policy Research ( email )

P.O. Box 2393
Princeton, NJ 08543-2393
United States

Michael Luca (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=602417

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