Harvard Study: Minimum Wage Hikes Cut Entry-Level Jobs, Harm Poor Minorities Most

Researchers discovered that a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of any given restaurant folding.

By Erielle Davidson. She is an economic research assistant at the Hoover Institution.Excerpts:

"Harvard Business School recently released a working paper titled “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” discussing the effects of minimum wage policies on companies’ survival. For those with any shred of economic understanding, the results were predictably dismal.

The paper focused specifically upon the restaurant industry in San Francisco, using data from the review platform Yelp to track the activity and performance of individual restaurants. Researchers Dara Lee Luca and Michael Luca discovered that a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of any given restaurant exiting the industry entirely. In economic terms, minimum wage hikes quicken a restaurant’s “shutdown” point.

Luca and Luca found this effect to be more pronounced among the restaurants with lower ratings while essentially nonexistent among five-star restaurants. A $1 increase in the minimum wage increased the likelihood of a 3.5-star exiting by roughly 14 percent, while having zero effects on the restaurants with five-star ratings. In other words, minimum wage hikes disproportionately affect the restaurants that are already struggling in popularity."

"When we discuss hikes in minimum wage, we must consider exactly whom such policies affect. California has the largest restaurant industry in the country, clocking in at 4 percent of the United States’ total gross domestic product, and one of the highest proportions of non-white restaurant workers. Indeed, Latinos make up more than 50 percent of California’s restaurant workforce alone. Thus, it’s not far-fetched but instead entirely accurate to recognize that groups such as Fightfor15 actively work against their own interests of “racial and economic justice.”

Economists have found minimum wage hikes to be unhelpful in reducing inequality and followed by more low-income workers being laid off, a great number of whom are people of color. The first of a series of scheduled minimum wage hikes in Seattle in 2015 resulted in a 1 percent drop in the employment rate of Seattle’s low-wage workers and preceded the worst job decline for the city since the 2008-09 recession.

According to a 2014 report, only 17 percent of Seattle workers previously making under $15 per hour before the hike were white. The rest were Asian (20 percent), Black (28 percent), and Hispanic (22 percent). Undoubtedly, these folks were disproportionately hurt by the reduction in employment that followed the hikes."