Minimum Wage Increases and Employer Performance: Role of Employer Heterogeneity

Abstract

Despite a large minimum wage literature that analyzes employee outcomes, there is less evidence on firm performance, prices, and quality. Exploiting staggered changes in U.S. minimum wages during 2000–2008 and census data on more than 29,000 hotel properties, we find that doubling the minimum wage as currently debated would reduce average hotel revenues by 6% per year and their occupancy rates by 3.1%. Responses vary by employer quality and organizational form. Although luxury hotels pass through cost increases to their customers with no impact on their revenues, upscale hotels facing more price-sensitive customers reduce prices but still suffer losses in occupancy rates and revenues as they struggle with preserving the expected quality level. They are also most likely to see quality downgrades from their segment. The lower-end hotels also pass through cost increases to their customers but, unlike luxury hotels, face significant declines in occupancy rates and revenues. Overall, the performance effects of minimum wage increases are nonmonotonic across quality. We also find negative impacts on hotel entry rates, although the performance and entry effects appear to be short lived. Furthermore, the negative effects of minimum wages dominate in states without right-to-work regulation, suggesting the need for a more comprehensive approach to labor market regulation. This paper was accepted by Victoria Ivashina, finance. Funding: M. Ayyagari received financial support from National Science Foundation Research (U.S) [Grant SES-1660755/1660749]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4650 .