Discussion paper

DP11097 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.


French, E, D Aaronson and I Sorkin (2016), ‘DP11097 Industry Dynamics and the Minimum Wage: A Putty-Clay Approach‘, CEPR Discussion Paper No. 11097. CEPR Press, Paris & London. https://cepr.org/publications/dp11097