Raising the minimum wage is necessary to kill off deadweight business

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An honorable member of the Coffee Shop Has Just Posted the Following:

Raising the Minimum Wage: A McDonald's-Killer, Not a McJobs-Killer

A new paper finds that fast-food restaurants are more likely to close when the minimum wage increases. The good news? New ones swoop right in to take their place.

Increasing the minimum wage might not lead your local McDonald's to fire its cashiers. But it might mean that a 5 Guys will one day replace it.

That's the upshot of a new working paper from the Federal Reserve Bank of Chicago that puts an intriguing twist on the age-old minimum wage debate. Most studies on the subject tend to focus on jobs (and, as regular readers of this site may know by now, those studies often come to wildly different conclusions). But this time around, researchers Daniel Aaronson, Eric French, and Isaac Sorkin also decided to look at what happened to the fast-food restaurants themselves in three states—Illinois, California, and New Jersey—after they raised wages.

While the hikes had a "small" impact on jobs, the economists found, they had a substantial impact on businesses. In states where employers were asked to pay their workers more, fast-food restaurants were more likely to close. At the same time, new restaurants became more likely to open, at least in Illinois and New Jersey. In California, the story was slightly different. More fast-food joints shuttered up, but there wasn't a significant jump in openings. As a result, employment fell, but as the paper notes, the reduction "was small and sometimes indistinguishable from zero."

In the end, some business owners couldn't figure out how to shoulder a heavier payroll. And when they cleared out, new businesses swooped in to fill their void. Goodbye McDonald's. Hello 5 Guys, or Chipotle, or Chick-fil-A.

Meanwhile, at restaurants that stayed open, employment barely budged (as the paper puts it: "we find little evidence of a consistent net employment effect"). When all was said and done, the job market seems to have stayed mostly level.

All of this raises an interesting question: Why would more fast-food spots suddenly start opening right after wages rise? The study's theory, essentially, is that it's tough to teach an old McDonald's new management tricks. Brand new restaurants can be flexible about their business model. But once set, that model can be hard to revamp. So if management is used to paying its cashiers and fry cooks $7.25 an hour, it might never figure out how to clear a profit while paying them $9. A new burger joint, on the other hand, can set itself up to earn money immediately (and take advantage of the hole in the market left by the failed competition).

Which is to say, a higher minimum wage might not kill jobs. But it could kill off an old way of doing business.


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