Industry Dynamics and the Minimum Wage: A Putty Clay Approach
We document three new findings about the industry level response to minimum wage hikes. First, restaurant exit and entry both rise following a hike. Second, the rise in entry and exit is concentrated in chains. Third, there is no change in employment among continuing restaurants. We develop a model of industry dynamics based on putty clay technology and show that it is consistent with these findings. In the model, continuing restaurants cannot change employment, and thus industry level adjustment occurs through exit of labor intensive restaurants and entry of capital intensive ones. We show these three findings are inconsistent with other models of industry dynamics.