By Erielle Davidson
Wednesday, May 03, 2017
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.
Counterproductive
Advocacy for Minimum Wage Hikes
Why is this paper stunningly relevant? In an era where
liberal-minded folks see increasing the minimum wage as a key way to equalize
economic outcomes, studies such as this undercut the ignorant economics those
on the Left espouse. Basic economics tell us that increasing the minimum wage
will hurt not only firms by increasing their operational costs but also the
very workers they presumably fire in the process to keep those operational
costs down.
Luca and Luca’s paper offers an alternative approach to
examining the effects of minimum wage hikes. A large portion of research
related to minimum wage hikes examines the impact on unemployment. This
particular paper shows that not all firms adjust to hikes by merely raising the
prices of the goods and services they provide or firing a fraction of their
workers. Some firms shut down altogether, taking their job opportunities with
them.
The #Fightfor15 interest group, among others, is
therefore working primarily against its own very interests. The group touts
itself as seeking racial and economic justice through promoting a nationwide
$15 minimum wage. Since almost 40 percent of minimum-wage workers are either
black or Hispanic, Fightfor15 has joined forces with Black Lives Matter.
However, what Fightfor15 and BLM do not realize is that their missions undercut
each other, at least regarding expected economic outcomes.
The theory behind Fightfor15 is to give the people who
“do the real work” their just pay, and end higher salaries for companies’
higher-ups. While this measure sounds reasonable to the Left, it’s incredibly
ignorant of how pay processes ultimately work. If government forces companies
to pay workers a certain amount that exceeds traditional operational costs,
they will not simply shave managers’ pay. Instead, they will find ways to thin
their operational costs, usually by reducing the hours of certain workers or
directly firing others. Or, as indicated in the study published by Luca and
Luca, some smaller, less popular firms will simply shut down.
Whom Do Minimum
Wage Hikes Most Affect?
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.
While “racial and economic justice” through forced
minimum wage hikes sounds appealing, it just doesn’t work the way its
supporters suppose. In fact, quite the opposite. Slapping a $15 minimum wage
requirement on a large corporation might “feel good” to angry workers, but
those very workers are ultimately the ones who will pay the price.
No one ever said class warfare rhetoric made economic
sense. San Francisco will soon relearn that this summer when it raises its minimum
wage again.
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