Owners closed Rose Pistola after 21 years for a number of factors, including rising labor costs. (Courtesy of Rose Pistola)
Rising minimum wages are increasing the chance some restaurants in the Bay Area will close, but not just any restaurants -- mostly those with average and poor Yelp reviews.
These are the findings of a new paper published by the Harvard Business School titled "Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit." While the study links rising minimum wage, low Yelp reviews and restaurant closures, the authors say we should not conclude from their work that rising minimum wages are generally bad for the economy or employment. The story about the total effects of minimum wage is far more complex, with many positive and negative ramifications to consider.
Study authors Dara Lee Luca and Michael Luca looked at Yelp data from 2008 to 2016. During that time they found that lower Yelp ratings meant a higher probability of closing. Places with only 3½ stars, about average, were 14 percent more likely to close after a minimum wage increase of $1. Restaurants with five stars, a perfect rating, were not affected at all.
“The restaurants that are already struggling are more likely to be affected by shocks to their cost structure,” Michael Luca said.
Economists are excited about this paper in part because it uses a novel data set: Yelp reviews. Michael Luca says it was possible to link that data to minimum wages in a meaningful way because different cities across the Bay Area are increasing those wages at different times. This allows for many comparisons and to control for other factors that might be affecting restaurant closings.
“The Bay Area is basically a laboratory for understanding the minimum wage,” Michael Luca says. “There have been 21 different minimum wage changes during our study period.”
In the restaurant business, where margins are just a few percent, extra pressure like increased labor costs can send a place already on the edge overboard. Take Rose Pistola for instance.
Rose Pistola was an Italian restaurant in San Francisco’s North Beach neighborhood with a 3.5 rating on Yelp. Laurie Thomas owned the place, along with two other restaurants. Her two additional establishments are still in operation, but she closed Rose Pistola in February after a 21-year run. That is a long run. According to analysis in the Harvard Business School paper, places in San Francisco usually last around six years.
Rose Pistola was Thomas’ largest restaurant. It had an event space and took a lot of staff to run. She said the restaurant’s business model made more economic sense when you could pay people less.
“You know it was 20 years ago,” when they opened, she said, and there was “very low minimum wage, no health care requirements, no sick pay requirements.” Thomas added that even though increased labor costs made it harder on her business, she is happy that pay and benefits have increased for workers.
Thomas said the increased labor cost was just one of many reasons she had to close the restaurant. She said in recent years there had been less tourist foot traffic in North Beach, perhaps because people started heading to newly trendy neighborhoods like the Mission. Thomas said last summer’s season was especially slow, and then the January rains came, which further dampened business.
Restaurants similar to Thomas’ are in danger, according to Gwyneth Borden, executive director of the Golden Gate Restaurant Association.
“The full-service restaurant space in general, not just in San Francisco but throughout the country, is kind of in a crisis mode," Borden said.
American dining is changing. Borden said we are seeing the rise of more fast casual places with counter service and less staff. In San Francisco, there is also tons of competition. Maybe too much. According to 2010 census data, the city has about one restaurant for every 250 households. Borden said that is the highest per capita in the country.
Given all that, Borden said, “It's not particularly surprising that lower-starred restaurants on Yelp exit as minimum wage increases.”
It is also not surprising the Harvard paper’s findings are being mischaracterized and weaponized, as so often happens in the contentious minimum wage debate. Even the language used in the media to describe changes in minimum wage policies is politicized and polarizing.
Conservative bloggers are writing that the paper shows raising the minimum wage hurts those it intends to help, and also that it causes affordable restaurants to suffer and for their employees to have fewer job opportunities. The paper's co-authors said the study shows no such things. Paul Wolfson, a research associate at the Tuck School of Business at Dartmouth, agrees.
“From the paper I would say it's an interesting effect of the minimum wage,” Wolfson said. “I don't think I would go from that to say it is good or bad.”
In this case maybe rising minimum wages are just weeding out mediocre restaurants that will be replaced by ones better suited for the market. Maybe the extra money in workers’ pockets will boost the economy and create more and better jobs. Wolfson said the overall economic impact of minimum wage increases is difficult to suss out even after years of research on the topic.
“The state of the literature has been too narrow and hasn't been really the kind of quality you would want to make grand claims about the effects of the minimum wage,” Wolfson said.
He said he has probably read more papers on minimum wage than almost anyone. He co-wrote a book that analyzes and evaluates the state of the research called, “What Does the Minimum Wage Do?” He said economists have long focused on one thing, potential negative effects on employment, particularly for teenagers.
“It's been incredible tunnel vision,” Wolfson said, adding that it will be years before we have a clearer picture. To work toward that goal, economists are turning to the Bay Area, where all the different minimum wage increases are creating a kind of laboratory for real-world study.