Restaurants With Low Yelp Ratings Suffer Under Higher Minimum Wages

Minimum wage increases in the San Francisco Bay Area have had an impact on the local restaurant industry, according to a study released by Harvard Business School. Restaurants with low or middling Yelp reviews have become more likely to go out of business. Places with high reviews have been unaffected. The study doesn't attempt to determine whether the wage increases have been good for employees or the local economy overall.

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Economists are getting more data to understand the effects of minimum wages that have gone up in some states. In the San Francisco Bay Area, wage increases have made it more likely that restaurants will close, mostly those with certain online reviews that are middle-of-the-road or just bad. This is according to a new study published by the Harvard Business School. And as KQED's Sam Harnett reports, these findings don't prove that wage increases have hurt employment or the economy overall.

SAM HARNETT, BYLINE: Part of the reason economists are excited about this paper is because it uses a novel dataset - Yelp reviews. Michael Luca coauthored the paper with his wife Dara Lee. He says the study was made possible because different cities across the Bay Area took the leap and increased minimum wage.

MICHAEL LUCA: The Bay Area is basically a laboratory for understanding the minimum wage. There have been 21 different minimum wage changes during our study period.

HARNETT: 2008 to 2016 - during that time, they found that lower Yelp ratings meant a higher probability of closing. Places with three and a half stars, about average, were 14 percent more likely to close after a minimum wage increase of one dollar. But restaurants with five stars, a perfect rating, weren't affected at all.

LUCA: The restaurants that are already struggling are more likely to be affected by shocks to their cost structure.

HARNETT: In the restaurant business where margins can be just a few percent extra pressure like increased labor costs can send a place already on the edge overboard. Just ask Laurie Thomas. She recently closed a restaurant with a three-point-five-star rating on Yelp.

LAURIE THOMAS: We lost enough money that it didn't make sense. 2016 was brutal.

HARNETT: Thomas shut down 1 of her 3 restaurants, Rose Pistola, after 21 years in business. That's a long run in San Francisco where places usually only last around six years. Thomas's restaurant was big and required a lot of staff, which made more economic sense back when she opened.

THOMAS: You know, it was 20 years ago - right? - very low minimum wage, no health care requirements, no sick pay requirements.

HARNETT: Thomas is happy wages have grown for workers even though it was a contributing factor in her decision to close. Restaurants similar to Thomas's are in danger, says Gwenyth Borden, director of the Golden Gate Restaurant Association. American dining is changing, she says. We're seeing the rise of more fast casual places with counter service and less staff.

GWYNETH BORDEN: The full-service restaurant space in general not just in San Francisco but throughout the country is kind of in a crisis mode.

HARNETT: The Harvard Business School paper shows increasing minimum wage puts pressure on some of these restaurants. And as so often happens in the contentious debate over minimum wage, pundits are drawing conclusions to suit their purposes. They're saying minimum wage increases hurt the economy and kill jobs. The paper's coauthors say the study shows no such things. Dartmouth professor Paul Wolfson agrees. The findings are limited to restaurant closures.

PAUL WOLFSON: From the paper, I would say it's an interesting effect of the minimum wage. I don't think I would go from that to say it's good or bad.

HARNETT: In this case, maybe rising minimum wages are just weeding out mediocre restaurants. Maybe the extra money in workers' pockets will boost the economy. We don't really know. Wolfson says the overall impact of minimum wage increases is difficult to suss out especially because for years, economists have focused on one thing - potential negative effects on employment, particularly of teenagers.

WOLFSON: It's been incredible tunnel vision.

HARNETT: Wolfson says it will be years before we have a clearer picture on all this. And the only way we're going to get there is with more novel studies on places like the Bay Area where increasing minimum wage is creating a convenient laboratory to gather real-world data. For NPR News, I'm Sam Harnett in San Francisco.

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