The Impact of Increase in Minimum Wages on Consumer Perceptions of Service: A Transformer Model of Online Restaurant Reviews

Abstract

We study the impact of a mandated increase in minimum wages on consumer perceptions of multiple dimensions of service quality in the restaurant industry. When faced with higher minimum wages, firms might reduce employees, resulting in poorer consumer service. Alternatively, higher-paid workers might be more motivated to improve consumer service. Using a combination of human annotation and several transformer models, we estimate the incidence of discussion of several service quality attributes (and their valence) in a textual dataset of 97,242 online reviews of 1,752 restaurants posted over two years. We exploit a natural experiment in the County of Santa Clara, wherein only the city of San Jose legislated a 25% minimum wage increase in 2013. By comparing restaurant reviews in San Jose with those of synthetic controls, we find an improvement in the perceived service quality of San Jose restaurants. Specifically, we find reduced negative discussion of the courtesy and friendliness of workers. This decrease is present in independent restaurants, and not in chains. This finding appears to be consistent with agency theory based predictions of greater incentives to improve service in independent restaurants. We discuss alternative mechanisms for our results. We also discuss implications for consumers, restaurants, and policymakers.

Keywords: Service quality, minimum wages, text analysis, transformer models, natural experiments, agency theory