The minimum wage – or as legendary free-market economist Murray Rothbard called it “compulsory unemployment” – will result in more restaurants shutting their doors, says a new study by Harvard University economists entitled “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit.” With labor costs surging, driven by higher minimum wages, a greater number of restaurants will face ruination.
Study authors Michael Luca and Dara Lee Luca found that low-quality restaurants, which depend on low-wage workers, will be impacted the most. Since these businesses run on thin profit margins, the slightest bump in the minimum wage can lead to devastating consequences.
Many of the big chain restaurants can incur the extra cost, but lower-grade diners cannot:
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 a median rating), but has no discernible impact for a 5-star restaurant.
Raising the price of a hamburger or a burrito can only go so far. The initial response is to pass on the extra cost to customers. However, that will only be a remedy for a short period of time before more drastic actions are needed.
As this study suggests, there is a wide-ranging impact: everything from employment options to consumer choice.
The first unintended consequence is the allocation of capital in the open market. If a mid-level restaurant has a failure rate of 14%, venture capitalists, credit lenders and financiers may invest their capital in more high-level restaurants that can handle increasing costs of doing business. In the future, you may not see independent restaurants run by Phil and Jane down the street. It will be all national chains.
Do you know what that entails? Fewer choices for consumers with a hefty appetite. Also, remember, not everyone has the disposable income to spend their precious dollars on a high-end establishment.
Should a two-star restaurant survive, the likelihood of expansion is minimal. The diner will not hire more workers and will not open more stores. In fact, it may even slash hours or reduce staffing levels. Growth is non-existent for these restaurants – even big brands like Dunkin’ Donuts are suffering from lackluster growth amid ballooning labor costs.
Another unintended consequence is on a worker with no experience at all. Various low- and mid-level restaurants would take on these types of entry-level workers because they would not be paid the market wage rate. Without these kinds of companies available, younger workers cannot attain the necessary experience to compete for a higher wage.
Moreover, since they lack the skills and experience, a five-star restaurant is unlikely to hire them for the job. This is another problem that the minimum wage creates: when a business is mandated to pay a higher wage, they will seek out workers who already have the industry acumen, workplace skills, and full resumes. Why pay ten dollars for a novice waiter when you can pay the same for a veteran server?
The present trend in the food industry is automation. This is the biggest unintended consequence of them all, and it is being accelerated because of the Fight for 15 mob that demands a fifteen-dollar minimum wage. It is true that automation would happen no matter what, but experts agree that the rate of which it is occurring is only happening because of states adopting swelling minimum wages. Thanks to these movements, you will see more of Flippy, Big Mac ATMs, and self-serve kiosks than human cooks and cashiers.
As basic economics textbooks reveal, there are far more negatives than positives (if there are any) to the very concept of a minimum wage – even Keynesian economist Paul Krugman was against it in 1998:
Any Econ 101 student can tell you that higher wages reduce jobs and lead to unemployment.
The price of labor – like that of gasoline or wheat – is based on supply and demand.
Proponents of the minimum wage are well-intentioned, but as the adage goes: the road to hell is paved with good intentions. The minimum wage doesn’t serve any purpose other than endangering workers, closing companies and installing more technology.
In 1966, economist Milton Friedman lambasted Congress in a Newsweek op-ed for voting to increase the minimum wage:
Many well-meaning people favor legal minimum-wage rates in the mistaken belief that they help the poor. These people confuse wage rates with wage income.It has always been a mystery to me to understand why a youngster is better off unemployed at $1.60 an hour than employed at $1.25.
The rise in the legal minimum-wage rate is a monument to the power of superficial thinking.
Today, it would befuddle Friedman to think that a person is better off jobless at fifteen dollars an hour than employed at nine dollars.