Minimum wage hikes cause exit of labor-intensive restaurants and entry of capital-intensive ones

See Industry Dynamics and the Minimum Wage: A Putty-Clay Approach by Daniel Aaronson, Eric French, and Isaac Sorkin. Author affiliations are Federal Reserve Bank of Chicago, UCL and IFS, and the Federal Reserve Bank of Chicago and the  University  of  Michigan. Here are the abstract and conclusions:

"We document three new findings about the industry-level response to minimum wage hikes.   First,  restaurant  exit  and  entry  both  rise  following  a  hike.   Second,  the  rise  in entry and exit is concentrated in chains.  Third, there is no change in employment among continuing restaurants.  We develop a model of industry dynamics based on putty-clay technology  and  show  that  it  is  consistent  with  these  findings.   In  the  model,  continuing  restaurants  cannot  change employment,  and  thus  industry-level  adjustment  occurs through exit of labor-intensive restaurants and entry of capital-intensive ones.  We show these three findings are inconsistent with other models of industry dynamics."

"We present new evidence on the effect of minimum wage hikes on establishment entry, exit, and employment among employers of low-wage labor.  We show that small net employment changes in the restaurant industry may hide a significant amount of establishment churning that arises in response to a minimum wage hike.  To capture these dynamics, we develop a putty-clay model with endogenous entry and exit.  The key feature of the putty-clay model is that,  after entry,  technology and input mix is fixed for the life of the restaurant.  After minimum wage hikes, inflexible incumbents are replaced by potential entrants who can optimize on input mix.  Thus, the model is capable of predicting both restaurant entry and exit in response to a minimum wage hike.

Furthermore, we show that the putty-clay model generates employment and output price responses to minimum wage hikes that are consistent with those reported in the literature. In particular, putty-clay yields sluggish employment responses to minimum wage hikes, with a short-run disemployment effect of around -0.1 that grows to -0.4 in the long-run.   Similarly, the model predicts that restaurant prices are immediately and fully passed onto consumers in the form of higher prices, again consistent with the literature.

Other  models,  such  as  those  that  incorporate  adjustment  costs,  can  reconcile  some  of these facts but not others, especially the simultaneous rise of exit and entry.    As such, we believe putty-clay models could be potentially useful for understanding the response to other labor market policies, including taxes, hiring subsidies, and ring costs and we view our paper as a novel contribution in that we provide micro level evidence on the empirical relevance of putty-clay in an important policy setting."