Study finds Minneapolis and St. Paul minimum wage increases led to loss of restaurant jobs

Minimum wage increases being rolled out in Minneapolis and St. Paul led to a decline in restaurant jobs before the pandemic, a study by the Federal Reserve Bank of Minneapolis found.

In 2018 and 2019, most low-wage sectors in the cities didn't see a statistically significant change in employment or hours worked because of the minimum wage increases, the bank's research said.

But a subset of one category — restaurant workers — saw a larger impact because they were making less to begin with, said Anusha Nath, a Minneapolis Fed researcher who conducted the study along with University of Minnesota professors Loukas Karabarbounis and Jeremy Lise.

About 80% of workers at limited-service restaurants, which includes fast-food joints, in both cities were making below $15 an hour in 2017, according to the study.

"So the restaurant sector in Minneapolis was very exposed to the minimum wage increase," Nath said.

The two cities commissioned the Minneapolis Fed to do a multi-year study on the impact of the wage policies. Some supporters of the higher minimum wage expressed skepticism at the initial report.

In 2017, Minneapolis became the first city in the Midwest to adopt a $15-an-hour minimum wage law. It has been rising in increments: businesses with more than 100 employees must pay at least $15 an hour by next July, while smaller firms have until 2024 to hit that level.

St. Paul didn't start forcing the minimum wage higher until last year with all employers required to hit $15 an hour by 2027. Still, researchers found similar trends there in restaurant job losses in 2018 and 2019 as employers likely adjusted, knowing wages had to rise.

The minimum hourly wage in the rest of Minnesota is now $8.21 for small businesses and $10.08 for large ones.

The Fed researchers included some preliminary data from 2020, but they noted the year was complicated by the pandemic and civil unrest.

Today, employers are raising wages on their own as they struggle to fill positions. Some workers have been more reluctant to work in-person jobs during the pandemic while others are facing child care challenges or have decided to quit their jobs altogether.

Last spring, Twin Cities-based Punch Pizza was one of a number of employers that decided to increase its minimum wage to $15 an hour, well in advance of when it would have been required to do so in Minneapolis and St. Paul.

In September, the average wage including tips for Minnesota workers at restaurants and bars was $16.40, a 9% increase in the past year and a 14% increase in the past two years, according to the Minnesota Department of Employment and Economic Development (DEED).

In the Minneapolis Fed study, researchers looked at wage and employment data from other cities in Minnesota that had been trending similarly to Minneapolis and St. Paul. Using that as a comparison, they calculated that in 2018 and 2019, hourly wages at full-service restaurants in Minneapolis rose 4% and at limited-service restaurants 9% more than they would have if there had not been a city-mandated wage increase.

At the same time, the number of restaurant jobs in Minneapolis declined by an additional 12% and 18%, translating into about 2,900 fewer jobs over those two years, the researchers calculated.

Eli Stein, lead organizer with Restaurant Opportunities Center of Minnesota, a worker's group that pushed for the $15-an-hour minimum wage increase, said the study is not an accurate assessment since it didn't account for impacts from the pandemic.

"In city after city, it's been proven that wage increases don't result in massive job loss," Stein added.

The left-leaning Economic Policy Institute also criticized the study, suggesting that the data and methodology couldn't distinguish between the effects of wage increases and other factors. It called the estimated job loss "implausibly large and well outside the range of existing research on the minimum wage."

Nath acknowledged the study found a larger job impact than some others elsewhere that have looked at rising wage minimums. But she noted, "Our findings are consistent with findings, for example from California, where there have been minimum wage increases in a lot of cities."

Mark Wright, senior vice president at the Minneapolis Fed, added that a lot of research on minimum wage increases has looked at either federal or state changes.

"And often the increases were pretty modest amounts — 25 or 50 cents here, a dollar there," he said. "What's been a little bit unusual about the recent set of wage increases that are happening at the city level is they're quite large."

Minneapolis' minimum wage for small businesses has gone from $7.75 in 2017 to $12.50 today; for large businesses $9.50 to $14.25.

Minneapolis Mayor Jacob Frey, who was just re-elected to a second term, was an early proponent of the $15-an-hour minimum wage in Minneapolis.

"As a local government, we have a responsibility to dig into these findings as we continue developing progressive policies to support local businesses and workers," he said in a statement about the Minneapolis Fed study.

St. Paul Mayor Melvin Carter said in a statement that the report "provides valuable information that will help shape investments in our community as we continue rebuilding."

This study is the first of a series of reports the Minneapolis Fed will produce on the impact of the minimum wage increases through 2028. While the first report did not address whether workers and employers were better or worse off as a result of the wage increases, that's a subject researchers plan to tackle in future reports.