Do minimum wage hikes get rid of bad restaurants?

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 on average, 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 10 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). We expand the analysis to look at prices using data from delivery orders, and find that lower rated restaurants also increase prices in response to minimum wage increases. Our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.

That is from a new NBER working paper by Dara Lee Luca and Michael Luca.  Obviously this will not be good for jobs, yet part of me believes that creative destruction in the restaurant sector is undersupplied…

Comments

I was told that a disproportionate number of fast food workers had a criminal record since it's hard for them to get a job in a large regular organisation. I'm not sure it's in society's interest to have them thrown out of work. Bad food seems a small price to pay to give them a shot at reintegrating.

So letting the ex-criminal fast food workers do a bad job, i.e., serve bad food to a customer will help them re-integrate. At what, doing a poor job at another business?

Who said they'd do a poor job? It could be just a foot in the door they needed.

We're talking about bad restaurants here, not bad employees. Fast food shows no sogn of going belly up generally, though specific fast food outlets may fold due to poor sales- which very often means they're in bad locations, poorly managed, fail health inspections, etc. The quality of the employees (other than the managers) is not usually a major issue.

In an extremely high-failure industry like non-chain restaurants, any transfer of wealth from owners to workers is going to have a disproportionate effect because of the incompetence of many owners in cashflow management.

If, on the other hand, McDonalds increased their lowest pay level by $1/hr, you would see considerably fewer exits because their cashflow is far more predictable, the location owners are more experienced, and there is a larger profit per location to buffer the transfer of wealth against.

Also, McDonalds has the money to invest in things like order kiosks and automation that reduce their reliance on human workers.

Obligatory “these are all franchises” comment.

Why do so many small restaurants fail? You say it’s cash flow management, but what specifically tends to drive those issues?

If you work at McDonald's, you are by definition a cuck.

If there were restaurant regulators, and they operated as current bank regulators do, then they would set a much lower minimum wage for a 5 star restaurant than for a 3 star restaurant, and an incredibly high minimum wage for any poor one allotted a 1 star only.
https://subprimeregulations.blogspot.com/2011/10/we-can-count-ourselves-lucky-golf-is.html

Where were you in 2008, under a rock?

FDIC - Forever Demanding Increased Capital.

Don't want to pay the higher risk-based FDIC assessments (insurance premiums)? Hit The Easy Button! Improve bank condition to satisfactory safety and soundness conditions/practices.

The FDIC needs the money. When a bank goes insolvent and the chartering authority (national or state) too late revokes the charter, the FDIC is by law assigned to come in, take control, make whole/pay (to the $250,000 limit) insured depositors and try to collect FDIC (insurance and receivership outlays) and other creditors' monies from the bankruptcy estate. Some see it as akin to shooting the wounded.

Unlimited immigration would prevent any declines in the housing market.

And fuel increased demand for consumer credit, as suddenly legal immigrants apply for credit cards.

If labor cost is so important for the final price, that means the food cost is not that important . Restaurant owners against minimum wage are just signalling their food is very low quality.

As a consumer, I'd like to see on Yelp if the restaurant pays the workers the minimum wage or not. This parameter would be more informative about food quality than beautiful women and expensive cocktails.

"If labor cost is so important for the final price, that means the food cost is not that important ."

What? How does that follow? It just means that the profit margin is tiny. If they're charging $150 for a price fixe meal, and $50 of that is labour costs and $95 of that is ingredients, then bumping up labour costs just 10% eliminates their profit. It's not because the food cost is low -- it's because they don't have much margin to work with. You'd see restauranteurs try to guard against this by passing 100% of the increased labour cost onto the consumer, but there's a point at which they lose too many customers.

For most restaurants, their costs are about 1/3 cost of food/ingredients, 1/3 labor, and 1/3 overhead (rent, utilities, etc.).

Does Yelp's extortionate business model muddle the quality of the data in this study?

"this will not be good for jobs": what a clumsy way of saying it will be bad for workers.

No, he's saying, the critical factor for restaurant success at the mid to low end is customers with very little money to spend because they get paid so little.

If you don't have any money, you shouldn't be throwing away your money on eating out, anyway.

Please explain that to my daughter. She doesn't seem to believe me.

'Do minimum wage hikes get rid of bad restaurants?'

Sure doesn't seem to have an effect on McDonalds, KFC, Taco Bell, etc.

Those aren't bad, exactly. They deliver consistent, focus-tested, and reasonably tasty food at a low price. In the pre-Yelp days they were a very low risk choice.

'They deliver consistent....'

The variations between the individual locations can be quite large, however - to the extent that one would think that the bad ones would go out of business on that basis alone.

'In the pre-Yelp days'

They were heavily marketed, which remains true today. The actual quality of an individual chain restaurant apparently plays little role in which ones stay in business and which don't.

If you're looking for a consistently poor take on any issue, go to "clockwork_prior ".

Truly a magnificent comment, underlining yet again the exemplary quality of the commenters here, whose probing insights are amazing.

Said the site's most prolific commenter.

Fired/etc from a public affairs position at GMU decades ago. Now dedicated to hilariously inept efforts to discredit Dr Cowen and Tabarrok. Completely obsessed with former employer to the point of stalking. Spends almost entirety of time outside of work stalking former employer’s employees who have a public following.

No doubt the source of his grudge is his projection of changes at GMU onto two professors with a public profile. Personification of something lost, unhealthy obsession for decades with public figures as a symbol instead of human...

You have a mental illness. You need to seek the help of a psychiatrist immediately. Your pattern of behavior almost inevitably escalates into violence. Most typically your behavior pattern is seen in male domestic violence against a female partner.

But, in cases in which a male has zero romantic attachments and struggles to form relationships due to sexual impotence, this pattern is projected onto an entity with which the male has an ersatz emotional relationship. In this case, GMU.

You often tout the wonders of German healthcare. I strongly encourage you to use it immediately, and contact family and let’s them know you may be committed soon.

Actually, in accordance with German law, the administrators of this website should take his various IP addresses and provide it to local law enforcement. He has shown a pattern of violent mental illness and should be committed as protection of himself and his targets of delusion.

German law is very strong in social control and opinions. He could be detained within 24 hours for mental illness and kept against his will until his natural death. In America I would object, but he’s chosen that social model.

Paul Romer is proposing some creative destruction to prevent a tragedy of the commons: a new, progressive tax on platform companies (e.g., Facebook and Google) that harvest user information to sell targeted digital ads. The new tax would be applied to revenue from sales of targeted digital ads. The purpose would be to induce those companies to switch to an ad-free subscription model: by doing so, the companies would avoid the tax entirely. Obviously this will not be good for platform companies that persist with the targeted ad model, yet part of me believes that creative destruction in the platform business sector is undersupplied: a progressive tax applied to revenue from targeted digital ads would discourage consolidation (a progressive tax would result in a higher tax on the combined revenues of the consolidated companies and may even induce large companies to break themselves up into smaller ones) and make it easier for new companies to enter the market so consumers have more choice. Is there a greater need to reduce the number of middling restaurants by raising the minimum wage or a greater need to induce platform companies to change their evil ways? I say the latter. https://www.nytimes.com/2019/05/06/opinion/tax-facebook-google.html

"It is the job of government to prevent a tragedy of the commons. That includes the commons of shared values and norms on which democracy depends."

If someone said that about immigration or multiculturalism instead of social networks...

+1

Radical! It's funny because the ad model came around when facebook, and mostly video platforms, chose to be publishers. What could they have been? Proper technology companies. Proper consumer traffic managers. Proper academic revolutionaries. Even E-trade hasn't figured out how to show actuals. No health care company has ever properly defined a deductible as a down payment. What's the effect of consumer whiplash? Bad behavior. What's more, ads of facebook are the most transparent pricing mechanism in the history of pricing.

"part of me believes that creative destruction in the restaurant sector is undersupplied…"

I was going to say "don't restaurants already fail at astronomical rates" but according to this research, less than 1/5 of new restaurants fail in their first year (a lower failure rate than most other new businesses), so maybe Tyler is correct.
https://www.forbes.com/sites/modeledbehavior/2017/01/29/no-most-restaurants-dont-fail-in-the-first-year/#5f9690534fcc

I can't decide if "creative destruction... is undersupplied" is either the funniest euphemism I have heard in a while, or the most obfuscatory! There has got to be a way to port this over to a Ross Douthat column...

Do 5 star restaurants pay at materially over minimum wage?

My guess is no -- but their tips make their earnings considerably higher than minimum wage (and higher than the earnings of the staff who work in the kitchen but who do not collect tips, an inequity which a few restaurants have tried to combat by instituting a no-tipping policy, but with little success).

"a few restaurants have tried to combat by instituting a no-tipping policy, "

A policy that inevitably results in mediocre to poor wait staff, since all of the good servers will gravitate to the higher paying tipped restaurants.

My understanding is it's minimum wage + some kind of equity buy-in.

The potential tips at fancy restaurants (!= better) are still high enough to justify it.

The situation is under control.

More broadly speaking, sustained "tight" labor markets and higher wages might have the benefit of cleansing the economy of weakling enterprises, leaving behind only better, stronger and well-managed companies.

I am waiting for the study that looks at manager-owner's leisure time being reduced by the increase of minimum wages.

We were visiting Ireland just after the financial crisis, and a the B&B owner was saying that she could no longer get a Polish. Yeah, not a sausage, but a Polish maid. She had been reliant on the tour guide (who operated a youth hostel on the side) to get her some Polish. But, for some reason, he couldn't do it any longer. She said that her life had been great because of the abundance of cheap labor, and she had taken several trips. But, now, because she had no Polish, she would have to clean the bathroom and make the beds.

Excellent comment as per usual, Bill.

The vast majority of employees work for sole proprietorships with zero employees.

Fantastic insight as always.

You either have a problem reading, or a problem understanding, or both.

I can spell it out for you. At t(0) employer has 1 employee who is a Polish, and does some work and takes vacation and at t(1) employer has not Polish and has to work.

I guess your problem is that you don't expect managers to work.

Do non-living wages get rid of the living? Abortion rates declined a combined 11% during Reagan, Bush 41 and Bush 43. During Reagan’s term, the number of billionaires quadrupled from tax cuts. The GOP appears adept at billionaires but ineffective at pro-life. Abortion rates fell 23% with living wage Clinton and another 26% with living wage Obama.

This study isn't very helpful. The great majority of restaurant meals are consumed at zero star restaurants. This study is only concerned about the elites.

We're not talking Michelin stars. My local McDonalds are between 1 and 3.5 stars on Yelp.

Here's good news about restaurants including Kith and Kin in Cowen's neighborhood (D.C.). I am especially intrigued by Mashama Bailey, who is the chef at a restaurant in Savannah (no awards this year for chefs in Charleston). What these (Beard) awards reflect is diversity, diversity not only in food but those who prepare it. As for low pay in restaurants, one shouldn't forget that working in the kitchen (as opposed to wait staff collecting tips) is often a form of apprenticeship. Many great chefs/restaurant owners today got their start, and learned how to be a chef and operate a restaurant, by working for low wages in restaurants.

One imagines Tom and Sara side by side in a heavy, stifling bar where behind them the tables are all dressed up, the staff walk around with faces marked by worn acne, tired from shaving, hallowed from foresight, where under one’s palm the wood is knotted, while the other’s covers broad indents, finally, the creature somnolence is broken by concurrent chuckling. At what? Perhaps a joke about a humming bird, or empire, or baking. Each washes over, Tom a driver who has opened his window, Sara, remembering.

Nice. Politically-driven minimum wage hikes don't get people fired.... they simply eliminate bad restaurants!

I suppose it's just a variant of the "Obamacare didn't throw people off of their health insurance" lie... but it does sound fresh!

Is the star rating system correlated with quality? Or is it correlated with popularity, prestige, or some other factor?

In my experience it varies quite a lot.

Personally I'd prefer that restaurants with a lot of health citations fold.

It's probably more like, it drive firms whose quality-to-cost ratio is lower than average out of business. People will pay more for a higher quality meal, up to a point, if cost is very high relative to perceived quality they will not pay for it. Likewise, a cheap meal can still have a high quality relative to cost, even if the overall quality is objectively lower. In other words, in some circumstances, a higher minimum wage could lower objective quality of restaurants by causing restaurants to cut costs by using cheaper ingredients - or by selecting in favor of low-cost, higher quality relative to cost restaurants. I.e. selecting for "Five Guys" over "Benihana"

I did a quick check and found the low-rated restaurants around here were fast food places and 'fast-casual' chains (Applebees, Buffalo Wild Wings, Macaroni Grill, Bob Evans). Unambitious restaurants with mainstream food for low and moderate income customers. It's no surprise that high minimum wages would tend to drive such places with price-sensitive customers to the brink while having a much smaller effect on high-end places with a wealthier clientele.

Seems simpler to assume that lower-ranked restaurants were competing on some dimension other than quality (of the type that gets high ratings). Like, value/$, perhaps? Or location? Seems easy to imagine places that are "meh" but are a good deal or a shorter walk. When the price goes up, the good deal is less good and the walk seem more worth it.

If bad restaurants go out of business won't people just go to a non-bad one?

I'd be interested in seeing the average basket price for the 'low-quality' restaurants included in the analysis.

It is possible that the overall price is lower (perhaps serving lower income customers). So while the restaurants may be bad by certain definitions may be the best options available at certain price points.

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