Bad Restaurants Are The Biggest Losers When Minimum Wage Rises, Study Finds

Restaurants with low ratings on Yelp are more likely to close in cities with a rising minimum wage, researchers found.

A minimum wage increase could be the final push that forces already low-rated restaurants to close, according to a recently released study of Yelp data by researchers.

Among Bay Area restaurants, a $1 increase in the minimum wage led to a 14% increase in the likelihood of 3.5-star restaurants closing their doors, but had no impact on 5-star restaurants, according to Harvard Business School professor Michael Luca and researcher Dara Lee Luca of Mathematica Policy Research, who led the study.

Overall, they found a $1 increase in the minimum wage increased the likelihood of a restaurant closing by 4% to 10%. Just a one-star increase in rating on Yelp makes a restaurant 50% less likely to go out of business.

Luca told BuzzFeed News that it is unclear why lower-rated restaurants are disproportionately affected by wage hikes. Perhaps higher-rated restaurants already pay above minimum wage and are not affected by increases, she speculated. Also, their more-satisfied customers may be more willing to accept a price increase if the restaurant passed along the costs.

As low-rated businesses fail at higher rates than highly-rated restaurants regardless of the minimum wage, a requirement to raise pay, "might just be the tipping point that drives them out of business," she said.

More than 35,000 restaurants in the Bay Area were analyzed between 2008 and 2016. During that time, there were 21 raises in the minimum wage in that area.

The study comes as some policy makers consider a national increase in the minimum wage, which has been $7.25 since 2009. On a state level, California and New York have approved boosting the minimum wage to $15 while other states have sought out to preemptively ban any wage increase.

By the researchers' estimates, a national minimum wage increase to $12 would close an additional 2% of restaurants, or 12,000 businesses, Yelp said in a blog. But the "vast majority" of these closings would be restaurants in the bottom half of the quality distribution and 4.5 and 5 star restaurants would see "virtually no closings."

Research has shown that modest increases to the minimum wage have had minimal or no impact on overall employment, while critics point to evidence that any job losses are concentrated in low-wage sectors.

Carl Bialik, Yelp's data science editor, told BuzzFeed News that the study doesn’t provide a simple answer about what raising the minimum wage would mean for consumer choice if restaurants close.

"The restaurant industry is very complicated in addition to being competitive, and many factors determine success or failure," he said.

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