09/21/2021

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

The minimum wage has recently re-entered the forefront of policy discourse as federal proposals range from leaving it as is, or increasing it to $10.10 or even higher. Some proposals include raising the federal minimum to uncharted territory of $15 per hour. 1 While the federal minimum wage has remained stagnant since 2009, states – and more recently, cities – have increasingly set local minimum wages above the federal mandate of $7.25. In the San Francisco Bay Area alone, there have been twenty-one local minimum wage changes over the past decade.

In this paper, we investigate the impact of the minimum wage on restaurant closures using data from the San Francisco Bay Area. We find suggestive evidence that an increase in the minimum wage leads to an overall increase in the rate of exit. However, this masks important heterogeneity. At any minimum wage level, lower quality restaurants, as proxied by their ratings on the review platform Yelp are more likely to exit. Moreover, lower quality restaurants are disproportionately affected by minimum wage increases. In other words, the impact of the minimum wage on exit is more pronounced among lower-rated restaurants.

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