April 18th, 2017

The unintended effects of hikes in the minimum wage

Unintended, yes. But effects such as these should not be unexpected:

San Francisco’s higher minimum wage is causing an increasing number of restaurants to go out of business even before it is fully phased in, a new study by the Harvard Business School found.

The closings were concentrated among struggling, lower-rated restaurants. The higher minimum also caused fewer new restaurants to open, it found.

“We provide suggestive evidence that higher minimum wage increases overall exit rates among restaurants, where a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit,” report Dara Lee and Michael Luca, authors of “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit.” The study used as a case study San Francisco, which has an estimated 6,000 restaurants in the Bay Area and is ratcheting up its minimum wage. Restaurants are one of the largest employers of minimum wage workers.

Now, you might say that this is market forces at work, with the bad restaurants being winnowed out. Then again, minimum wages are not set by market forces; they are set to override them. The purpose? To help workers at that level to earn a more viable income. But of course, if the sources of their wages close up shop, and fewer such workers are employed, you have a smaller pool of workers earning a bit more.

The pie is the pie; it’s just sliced into fewer pieces.

13 Responses to “The unintended effects of hikes in the minimum wage”

  1. Big Maq Says:

    Restaurants are notoriously low margin and difficult businesses.

    Average net profit (before tax) is between 2% and 6%.
    http://smallbusiness.chron.com/average-profit-margin-restaurant-13477.html

    Labor averages 25% to 40% (lower tends to be low-service fast food).
    http://smallbusiness.chron.com/common-food-labor-cost-percentages-14700.html

    Min wage in SF increased 6.1% from 2015 to 2016, and looks to increase another 7.7% this year, then 7.1% in 2018.
    http://sfgov.org/olse/minimum-wage-ordinance-mwo

    If a restaurant is labor efficient (i.e. 25% of their cost), the SF increases represent 1.5% + 2.0% + 2.0% = a 5.5% increase in labor (to keep it simple assuming majority is wages) to about 30.5% by 2018.

    That 5.5% eats up nearly all of the the profit margin of a higher margin restaurant at 6%.
    .

    “The pie is the pie; it’s just sliced into fewer pieces.” – Neo

    I get where you are coming from on this.

    Just want to say that the left very much views the world as a fixed pie to be divided “fairly”, and is exactly from where minimum wage is justified.

    The reality of capitalism is that it is a pie expanding process.

    Thus, it should be looked as a set of expanding circles, where the profit of a business is but a thin edge of that circle, but the full circumference is the total value provided.

  2. Geoffrey Britain Says:

    Laissez Faire Capitalism = Robber Barron Oligarchies

    Regulated Capitalism = Crony Capitalism

    Socialism = Venezuela

  3. T Says:

    “Just want to say that the left very much views the world as a fixed pie to be divided “fairly” [Big Maq @ 3:26]

    . . . and the dirty little sercet is that socialist policies limit economic growth and artificially create such a fixed pie which then justifies “fair” regulation and division by a central government.

  4. J.J. Says:

    The minimum wage in Australia is $15 Australian dollars an hour. When we were there, four years ago, the cost of restaurant meals was quite high compared to the U.S. A burger with chips (fries) and a drink was usually $25 or more in the typical fast food place. Many Aussies accept it as fairness in wages, but I talked to a few who hate it because it drives restaurants out of business or creates inflation. We found Oz to be a generally high priced place and the high minimum wage may well have been a big part.

  5. neo-neocon Says:

    Big Maq:

    I wasn’t talking about the entire pie—i.e. the economy.

    I was just talking about the market for restaurant-going in a particular city at a particular time—say, San Francisco this year. If government makes it more expensive for restaurateurs to operate, something’s gotta give.

  6. The Other Gary Says:

    Now, you might say that this is market forces at work, with the bad restaurants being winnowed out.

    The artificially high minimum wage “winnows out” restaurants with smaller profit margins, some of which are really good. Like those great small joints that offer large portions of tasty food for a low price.

    I love those places. But the Great Planners have decreed that these low-price cafes, sandwich shops, burrito stands, Vietnamese pho eateries, burger joints, cheap Chinese places, inexpensive pizza/Italian food, etc shall be no more. Thanks, big-government lefties.

  7. I R A Darth Aggie Says:

    Alternative pull quote:

    While the de jure minimum wage can be set arbitrarily, the de facto minimum wage is always zero.

    Of course, people at that wage level for the most part don’t actually live in San Fran. But that’s a different can of worms.

  8. Yankee Says:

    In general, we should expect some prices to start going up for many retail and service businesses, including hotels, restaurants, convenience stores, and all other places that depend on fairly large numbers of low-paid employees.

    Many states have raised their minimum wage (like to $11 for MA), and the overall rate for unemployment is low as well. That means higher costs and fewer people around to hire. So some employees can be a little more selective about where they work, and employers have to offer people a little more to retain them. Guess who pays for it all (and then still complains, even when they support higher wages).

  9. Yancey Ward Says:

    Darth Aggie has already made the comment I always put on minimum wage essays- the real minimum wage is always zero.

  10. huxley Says:

    One of the last straws for me in San Francisco was discovering that some restaurants tacked on an extra 4% fee to the bill for employee healthcare mentioned only in a small print disclaimer at the bottom of the menu.

    http://abc7news.com/archive/6109192/

  11. Richard Aubrey Says:

    More low-skill people on government benefits have to vote for those providing the benefits.

  12. Ray Says:

    Keep in mind that these are the same people that say increasing the cost of cigarettes reduces the consumption of cigarettes, but increasing the cost of employment has no effect on employment.

  13. Big Maq Says:

    @Neo – understood, and wasn’t referring to your comment directly.

    Where’s Brian E when you need him… he’s usually the one here replying to my comments about how wrong that thinking (“free markets”) is, and how government needs to be involved in “fixing the problem”. 😉
    .

    @huxley – ugh… right… everything is going the way of the airlines, cell companies, and medicine – the “price” is not “the (final) price”.

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