Minimum wage increase and firm productivity: Evidence from the restaurant industry

Abstract

The purpose of this paper is to examine the effects of increasing the federal minimum wage on productivity in the restaurant industry. Based on the equity theory and fair-wage hypothesis, this study empirically investigated the relationship between the federal minimum wage and restaurant productivity. The results revealed that increasing the federal minimum wage immediately enhances restaurant productivity for up to two years. The results further indicated that both full-service restaurants and low-wage restaurants benefit from the positive effect, while there is no significant effect on limited-service restaurants and high-wage restaurants. The results suggest that restaurants should cope with minimum wage policies by focusing on implementing initiatives that can maximize enhanced work efforts and productivity. More importantly, the results further highlight that restaurants should consider either continuously raising wage levels or raising them every two years to consistently obtain enhanced motivation and productivity.