Yelp ratings may be predictor of how restaurants fare after a minimum wage increase

Marketplace Contributor Aug 2, 2017
Share Now on:
HTML EMBED:
COPY
Research would suggest Calafia, a restaurant in Palo Alto with 3.5 Yelp Stars, is feeling the pinch of a higher minimum wage. Peter Maroulis/for Marketplace

Yelp ratings may be predictor of how restaurants fare after a minimum wage increase

Marketplace Contributor Aug 2, 2017
Research would suggest Calafia, a restaurant in Palo Alto with 3.5 Yelp Stars, is feeling the pinch of a higher minimum wage. Peter Maroulis/for Marketplace
Share Now on:
HTML EMBED:
COPY

Some restaurants owners have argued that raising the minimum wage may force them to close, or cut staff. Now a new study suggests that this only really happens to restaurants with lower customer satisfaction ratings as measured by Yelp.

In January the minimum wage in Palo Alto, California, increased from  $11 an hour to $12 an hour. “When the increase happened everybody was a little bit happy,” said Edita Buran, a waitress at local restaurant Calafia Cafe. 

But Buran has noticed that the restaurant has cut back on staffing for each shift. “It’s increasing the load on each person drastically,” said Buran. 

Buran works at a restaurant with three and half stars on Yelp. Restaurants in that category are 14 percent more likely to go out of business after a $1 minimum wage increase, said Michael Luca, professor of business at Harvard University and one of the authors of the study.

“Basically the five and four and a half star restaurants are completely insulated from changes to the minimum wage,” Luca said. “What we see though, is that two star and three star restaurant are heavily affected by changes in the minimum wage.”

Luca got raw data from Yelp about all the restaurants in the Bay Area where there have been a lot of city-level minimum wage increases. His theory is that restaurants with higher levels of customer satisfaction are able to pass on higher labor costs to their customers. Restaurants with lower ratings can’t do that.

“We’re on that cusp point,” said Pedro Castaneda, Buran’s  manager at Calafia Cafe. 

Paychecks have gotten fatter since the wage hike, but Castaneda said there are other factors contributing to the slowdown, like summer vacation.  He said the restaurant is holding on. “I think if it goes any higher we will definitely feel it,” Castaneda said.

But Castaneda doesn’t think the restaurant would actually close. “What would probably end up happening is we would have to either get someone who could do multiple jobs or rely on technology a little more to cut back our staff,” he said. 

Luca said he’s heard that one before. “I think it’s rare to find a business that thinks it’s going to close,” said Luca. But, he adds, if the restaurant has managed to stay open this long after the minimum wage increase, all signs are good.

If you’re a member of your local public radio station, we thank you — because your support helps those stations keep programs like Marketplace on the air.  But for Marketplace to continue to grow, we need additional investment from those who care most about what we do: superfans like you.

Your donation — as little as $5 — helps us create more content that matters to you and your community, and to reach more people where they are – whether that’s radio, podcasts or online.

When you contribute directly to Marketplace, you become a partner in that mission: someone who understands that when we all get smarter, everybody wins.

We’re here for you.

As COVID-19 reshapes our economy, our newsletter will help you unpack the news from the day.