Thursday, April 20, 2017

Maybe Jazz Shaw and John Hinderaker Should Read a Report Before Promoting its Result, Part II

     Several days ago, both John Hinderaker and Jazz Shaw promoted a story from the Washington Examiner, which in turn covered a new Harvard Business Report study on the effect of San Francisco's $15 minimum wage increase on the restaurant industry.  Yesterday, I observed that the report contained a key passage that essentially countered Mr. Shaw's and Mr. Hinderaker's assertion that "basic economics says the increase in the minimum wage is bad."  Today, I want to look at the actual results of the report, because a nuanced reading shows that neither Mr. Shaw nor Mr. Hinderaker's points are validated.

     Here is the first of two excerpts:

This paper presents several new findings. First, we provide suggestive evidence that higher minimum wage increases overall exit rates among restaurants, where a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit, although statistical significance falls with the inclusion of time-varying county-level characteristics and city-specific time trends. This is qualitatively consistent but smaller than what Aaronson et al. (forthcoming) find; they show that a 10 percent raise in the minimum wage increases firm exit by approximately 24 percent from a base of 5.7 percent. Differences in sample and specifications may account for the differences between our study and theirs. 

Next, we examine heterogeneous impacts of the minimum wage on restaurant exit by restaurant quality. The textbook competitive labor market model assumes identical workers and firms who therefore are equally likely to share in the minimum-wage generated employment and profit losses. However, models that depart from the standard competitive model to allow for heterogeneous workers and firms suggest that a minimum wage increase would cause the lowest productivity firms to exit the market (Albrecht & Axell, 1984; Eckstein & Wolpin, 1990; Flinn, 2006). We show that there is, in fact, considerable and predictable heterogeneity in the effects of the minimum wage, and that the impact on exit is concentrated among lower quality restaurants, which are already closer to the margin of exit. This suggests that the ability of firms to adjust to minimum wage changes could differ depending on firm quality. Finally, we provide evidence that higher minimum wages deter entry, and hastens the time to exit among poorly rated restaurants.

     The report's conclusion is hardly breathtaking.  According to the report, somewhere between 4 and 10 restaurants per hundred will close as a result of the increase in the minimum wage.  And, that number may fall when other variables are added to the mix.  In addition, so far only the lower rated restaurants are impacted.  And considering the minimum wage is just going into effect, it's possible the techniques used by higher rated restaurants to limit the impact will be passed down to the lower rate restaurants -- which is a standard development in the market economy.

     In fact, the findings are consistent with the literature.  As this report conceded: even studies that identify negative impacts find fairly modest effects overall, suggesting that firms adjust to higher labor costs in other ways.   Most economists would call a 4-10% closure rate (which has the potential to be lower when other factors are considered) of marginally efficient restaurants modest.

     And a final point: the authors make no mention of San Francisco's restaurant bubble.  That means that we could simply be seeing correlation, no causation.

     What can we conclude from this little exercise:

    First: Jazz Shaw doesn't read for comprehension.
    Second: Jazz Shaw shouldn't be allowed to write about economics.
    Third: Jazz Shaw will continue to do so, largely because he thinks he's an expert.

     And so, we will continue to point out just how wrong he is.