How The Minimum Wage Hurts Entire Neighborhoods

This piece first appeared on Forbes.com.

There is a lot of debate around the minimum wage. Some see it as a fairly straightforward way to help low-income workers. Others emphasize the negative effect it has on employment. Fewer employment opportunities are bad in their own right, but the harmful effects of minimum wage increases are likely spilling over to entire neighborhoods.

There are two parts to this idea. The first is that minimum wage increases make it more likely that some businesses close. A recent study from Dara Lee Luca and Michael Luca examines minimum wage increases and restaurant closings (exits) in the San Francisco Bay area. They use data from Yelp to get a measure of restaurant quality and find that a $1 dollar increase in the minimum wage increases the likelihood of a lower quality restaurant (e.g. 3.5 star rating) closing by 10%. In contrast, the likelihood of a 5-star restaurant closing is not increased by a minimum wage hike.

This makes sense because many lower-quality restaurants are less profitable and closer to going out of business than a higher-quality restaurant which makes it harder for them to adjust to cost increases.

The authors also find that after a minimum wage increase, the exit rate of lower-priced restaurants increases more than similar yet higher-priced restaurants and that minimum wage increases deter new restaurant openings.

In addition to the direct job losses, the second way minimum wage increases can harm neighborhoods is illustrated by a study published by the American Enterprise Institute (AEI) examining how neighborhood amenities affect social behaviors and attitudes. It looks at how closely people live to six different types of public and commercial spaces—such as restaurants, bars, coffee shops, bowling alleys, parks, and libraries—and how this impacts their wellbeing. Only 23% of people live in “high-amenity communities” which means they are within walking distance of at least four of the six types of amenities.

The authors of the AEI study note that “…residents in high-amenity urban neighborhoods are twice as likely to say people in their community are “very willing” to help their neighbors compared to urban dwellers in low-amenity areas. High-amenity suburban residents are three times as likely to say the same compared to those in low-amenity suburban areas.”

They also find that people who live closer to neighborhood amenities are more trusting, less socially isolated, and express greater satisfaction with their community even after controlling for other potentially confounding characteristics such as age, income, ethnicity, and educational background.

Combining the results of these two studies has important implications. It’s not hard to imagine that many of the lower-priced, lower-quality restaurants that are adversely impacted by the minimum wage are in lower-income, lower-amenity communities. This means that minimum wage increases that result in restaurants closing can further isolate people who already have limited options for socializing with their neighbors . And as the AEI study suggests, this leads to lower well-being in those communities.

An example makes this clearer. About a half mile from my residence is a Mexican restaurant that I like with a four-star rating from Yelp. My wife and I occasionally walk there for dinner. There are several other Mexican restaurants in Tallahassee with a similar rating but this particular restaurant is the only one that is so close.

If this restaurant closed due to a minimum wage hike, I would be worse off: I would have to travel farther to get to a similar restaurant, drive instead of walk, and the food, though similar, wouldn’t be the same. For people who frequently attend the same neighborhood bar or restaurant, a closing also means losing relationships with staff and fellow patrons, i.e. “the regulars.”

Minimum wage hikes that result in fewer businesses are harmful for consumers, employers and employees in a way that most studies don’t consider. And since minimum wage increases also decrease restaurant openings and future job growth, neighborhoods that experience closings may not get any replacements.

People are social creatures who need spaces where they can interact with one another. Minimum wage increases that reduce the number of restaurants and other small businesses by artificially increasing costs also reduce the amount of spaces where people can socialize. To the extent that this occurs in communities that don’t have many spaces to begin with, minimum wage hikes are further isolating America’s least connected people.

Adam Millsap

Adam A. Millsap is the Assistant Director of the L. Charles Hilton Jr. Center at Florida State University and an Affiliated Scholar at the Mercatus Center at George Mason University.

The feature image is from Forbes.com.

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