New Study Finds Higher Wages, No Disemployment from Local Minimum Wage Hike

15Now.orgA new working paper out of the Institute for Research on Labor and Employment at the University of California, Berkeley, significantly adds to our understanding of the impact of local minimum wage hikes by analyzing a previously untapped reservoir of economic data: online restaurant menus. “Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-based Restaurant Menus” compares prices at 884 restaurants in and around San Jose, CA before and after that city raised its minimum wage 25 percent, and found that yes, the higher labor costs are largely absorbed through price increases and turnover cost savings—and with no citywide disemployment effect or negative impact on restaurants close to the border.

We detect a statistically significant increase in wages for the combined limited- and full-service sector in San Jose at the time (quarter) of the minimum wage increase, but no such structural break in wages in the rest of Santa Clara County. We also do not detect a structural break in restaurant employment in San Jose or for the rest of Santa Clara County. These wage and employment trends are further confirmed by difference-in differences estimates. This finding of wage increases but no detectable employment effects motivates our analysis of whether restaurants absorbed the payroll cost increases through price increases.

… Our estimated price elasticities fall with restaurants that have larger workforces, suggesting the presence of more adjustment margins among larger businesses. In a novel finding, price increases were less where restaurants face greater local competition—as estimated using a restaurant density measure. Our overall estimated price elasticity of 0.058 is nearly identical to our preferred estimate of cost pressure elasticity (0.59). This result indicates that minimum wages are largely absorbed by price increases, as well as by turnover cost savings, even when the minimum wage increases in one swoop by 25 percent. Our study of border effects indicates that market spatial areas for restaurants are small, indicating that a citywide minimum wage does not negatively affect restaurants very close to the city’s border.

Given what we’ve seen thus far in Seattle, the results are less surprising than the fact that nobody had bothered to study this data before. Interestingly, the finding that larger restaurants raise prices less provides a statistical justification for wage laws that treat large and small businesses differently: large businesses simply have more flexibility in how they adjust to rising labor costs.

In any case, higher wages, no disemployment, and no negative impact on restaurants near the border. Hard to see the downside for San Jose’s restaurant industry from the city’s higher minimum wage.


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