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    Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit
    05 May 2017Working Paper Summaries

    Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit

    by Dara Lee Luca and Michael Luca
    This study examines the impact of minimum wage increases on restaurant closures in the San Francisco Bay Area, using data from 2008 through 2016 from the review platform Yelp. The study demonstrates that higher minimum wages increase closure rates among lower-rated restaurants, while higher-rated restaurants are largely insulated from changes.
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    Author Abstract

    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. The evidence suggests that higher minimum wages increase overall exit rates for restaurants. However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14% increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating) but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: April 2017
    • HBS Working Paper Number: HBS Working Paper #17-088
    • Faculty Unit(s): Negotiation, Organizations & Markets
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    Michael Luca
    Michael Luca
    Lee J. Styslinger III Associate Professor of Business Administration
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    • Wages
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