UC Berkeley Agricultural and Resource Economics Update

Title Agricultural and Resource Economics Update

Permalink https://escholarship.org/uc/item/6d36d01t

Journal ARE Update, 16(5)

Authors Anderson, Michael L. Magruder, Jeremy Martin, Philip L. et al.

Publication Date 2013-06-01

eScholarship.org Powered by the California Digital Library of California V. 16 no. 5 • May/Jun 2013

Does Yelp Affect Demand? Michael L. Anderson and Jeremy Magruder

eliefs on product quality play an of the display system at Yelp. com—a important role in shaping con- popular site that allows users to leave review forums increasingly sumer demand. For many , reviews of local businesses—to esti- supplement expert opinion and social B consumers face ex ante uncertainty mate the effect of positive Yelp rat- networks in informing consumers regarding the quality of the good and ings on restaurant customer flows. about product quality. We estimate the effect of positive Yelp.com ratings rely on imperfect signals to infer qual- Yelp reviewers assign businesses on restaurant reservation availability ity. Traditionally, expert opinion and ratings from one to five stars in whole- and find that an extra half-star social learning have helped consumers star increments. When a user searches rating causes to sell out resolve these information asymmetries. Yelp.com, Yelp presents a list of busi- 19 percentage points (49%) more For an expert’s take, consumers may nesses that meet the search criteria frequently, with larger impacts when consult Consumer Reports when buying or fall within the category of interest. alternate information is more scarce. an automobile or household appliance Figure 1 on the next page reproduces or they may read reviews by professional an excerpt from a sample search on critics when selecting a movie or choos- Yelp.com. Businesses are sorted accord- Also in this issue ing among dining options. Alternatively, ing to relevance and rating, and for consumers may confer with peers who each business the average rating is Immigration Reform 2013: own the automobile or who have eaten prominently displayed, rounded to the Implications for California at the restaurant. In recent years, how- nearest half star. The number of stars in the average rating is easily visible, ever, online sites that cheaply aggre- gate consumer reviews have recently particularly because the color of the Philip L. Martin...... 5 expanded and have begun supplement- stars changes at whole star thresholds. ing both of the traditional mechanisms. We downloaded the entire history Some Impacts of Recession on But are these sites playing an important of reviews from Yelp.com for each California’s Nursery and Floral role in determining consumer demand? restaurant in San Francisco, CA and Despite the theoretical potential recorded the date of the review, the of digital word-of-mouth to influ- rating assigned (1–5), and the reviewer’s Hoy Carman...... 9 ence consumer choices, it is difficult unique user identifier. We then recon- to estimate its impact on purchas- structed the average rating and total In the Next Issue... ing decisions. Products that receive number of reviews for each restaurant at positive reviews are ones that appeal to every point in time and matched these China’s Growing Role in consumers (i.e., they have high unob- data with reservation availability data Agricultural served quality), and these products from a large online reservation . would likely experience high even As Figure 1 demonstrates, Yelp aggre- by Colin A. Carter in the absence of positive reviews. In gates all reviews for a given business and Sandro Steinbach a recent paper published in the Eco- and displays the average rating promi- nomic Journal, we leverage a feature nently. However, when Yelp computes the average rating, they round off to Figure 1. Results of a Sample Search on Yelp.com the nearest half-star. Two restaurants that have similar average ratings can thus appear very differently on Yelp. For example, a restaurant with an aver- bean bag coffee house IPA San Francisco age rating of 3.24 displays a 3-star Show Filters average rating, while a restaurant with an average rating of 3.26 displays a 1. Bean Bag Coffee House 462 reviews 3.5-star average rating. In actuality, Category: Coffee & 601 Divisadero St Neighborhood: Western Addition/NOPA San Francisco, CA 94117 the true underlying quality of these (415) 563-3634 two restaurants is similar on average, stopping at the bean bag every morning on my way to . The bean bag coffee is NOT like that. allowing us to identify the effect of the They sell coffee that tastes like roasted, fiery, burning charred blackness, the way coffee is supposed Yelp rating on customer demand while 2. Mojo Bicycle Café 295 reviews controlling for unobserved quality. If Categories: Coffee & Tea, Bikes 639 Divisadero St Neighborhood: Western Addition/NOPA San Francisco, CA 94117 Yelp reviews have significant impacts (415) 440-2338 on consumer demand, then we should Would it be too much to ask for the baristas here to know a thing or two about coffee? I have had the same experience twice when trying to buy beans. It goes something like this. I pick up a bag observe a sharp increase in reserva- tions at each major rounding thresh- 3. 21st Amendment Brewery 1081 reviews Categories: Breweries, Pubs, American (Traditional) 563 2nd St old (e.g., 3.25 stars and 3.75 stars). Neighborhood: SOMA San Francisco, CA 94107 In the paper we use a technique (415) 369-0900 known as regression discontinuity to Been coming here regularly for a couple of years. Not too much to say except the are fantastic. My fave is the 21st Amendment IPA which is their house . The drawback is that they estimate the effect of Yelp. Here, we present several figures that graphically 4. House 1085 reviews Category: American (New) 545 Mission St summarize the results from the regres- Neighborhood: SOMA San Francisco, CA 94104 (415) 543-8900 sion discontinuity estimator. Figure 2

Salt House is the kind of restaurant you're only going to find in Manhattan, SF or maybe Chicago. plots mean 7:00 p.m. reservation avail- The focus is on the cuisine where it should be. Even though the decor and staff are West Coast laid ability by Yelp rating. Panel A focuses

5. NOPA 2218 reviews on the window where restaurants Category: American (New) 560 Divisadero St have either 3 or 3.5 stars, and Panel B Neighborhood: Western Addition/NOPA San Francisco, CA 94117 (415) 864-8643 focuses on the window where restau- the right amount of meat/bread/condiments 3) Baked white bean appetizer - perfectly melded tomato rants have either 3.5 or 4 stars. There and feta topped with crunchy breadcrumbs that are perfectly juxtaposed against the beans I'm a fan. are clear jumps in the mean availability 6. Acme Burgerhaus 173 reviews at both the 3.5 and 4 star thresholds. Category: Burgers 559 Divisadero St Moving from 3 to 3.5 stars—which Neighborhood: Western Addition/NOPA San Francisco, CA 94117 (415) 346-3212 occurs when a restaurant’s rating crosses The fries were crisp and had plenty of garlic on them. * 1.95 draft beers. not quite as cheap as bean 3.25 stars—reduces the likelihood of bag but I can't get ostrich burgers at bean bag cafe. did I mention you can eat an ostrich here? Not availability from about 85% to about 7. Brickhouse Cafe 585 reviews 60%. Moving from 3.5 to 4 stars—which Categories: American (Traditional), Breakfast & Brunch, Bars 426 Brannan St Neighborhood: SOMA San Francisco, CA 94107 occurs when a restaurant’s rating crosses (415) 369-0222 3.75 stars—reduces the likelihood of breakfast or brunch. You can't go wrong with the Vanilla Bean French Toast. Oh, oh! There's also a question of the day, and if you answer it correctly you get 25 cents off your coffee. I'm not a coffee availability further to below 40%. Interestingly, for the most part, it 8. Radius 197 reviews appears that a step function is a good Category: American (New) 1123 Folsom St Neighborhood: SOMA San Francisco, CA 94103 approximation to the overall relation- (415) 525-3676 Special Offer ship between Yelp ratings and restaurant because they source everything from within a 100 miles. Obviously, exceptions are made for the availability. That is, restaurant avail- coffee beans, appliances, etc. Hopefully I'll have a chance to meet the restaurant personality of this ability appears to respond primarily 9. Ironside 280 reviews to the displayed rating, and not the Categories: American (New), Caterers 680 2nd St Neighborhood: SOMA San Francisco, CA 94107 underlying average review score (which (415) 896-1127 presumably measures the restaurant’s feel like they're missing a big opportunity to have smaller portions at lower prices. 3. The coffee! Ironside gets their beans from Four Barrel (delivered by bicycle messenger) so you'd expect their true quality from the perspective of

10. AT&T Park 1125 reviews 2 Category:Giannini Stadiums &Foundation Arenas of Agricultural Economics • University24 of W Californiaillie Mays Plz Neighborhood: SOMA San Francisco, CA 94107 Special Offer (415) 972-2000

and out for food, lol. Every Friday, two hours before a game starts [when doors open], they offer mystery grab bags. Though it was a Saturday game.. they offered mystery grab bags but it pretty much Figures 2a and 2b. Average Reservation Availability at 7 p.m. by Restaurant Yelp Rating

Panel A 1.0 Panel B 1.0 0.9 0.9

0.8 0.8

0.7 0.7

0.6 0.6

0.5 0.5

0.4 0.4

0.3 0.3

0.2 0.2 Average Reservation Availibility at 7 p.m. ReservationAverage Availibility at 7 p.m. ReservationAverage Availibility

3.15 2.75 2.85 2.95 3.05 3.25 3.35 3.45 3.55 3.65 3.75 3.25 3.35 3.45 3.55 3.65 3.75 3.85 3.95 4.05 4.15 4.25 Average Yelp Stars Average Yelp Stars consumers). Overall, we find that a half- important for restaurants excluded above the rounding threshold would star increase in Yelp ratings decreases from these prestigious rankings. We not be directly comparable to restau- reservation availability by 19 percent- again find that an extra half-star on rants below the rounding threshold. age points during peak dining hours. Yelp reduces reservation availability However, if specific restaurants If Yelp is providing information by 20 to 30 percentage points at all manipulate their reviews to fall right about new restaurants, that information three times for restaurants without above the thresholds, then some of should be most valuable among res- external recognition but that the Yelp restaurants above the thresholds taurants that are unfamiliar to patrons. ranking does not similarly advantage have “true” Yelp ratings (i.e., the We divide restaurants into familiar/ restaurants which have been externally ratings they would receive absent unfamiliar groupings along two dimen- accredited. These results support the manipulation) that are lower than sions. First, restaurants with fewer hypothesis that Yelp is most valuable their observed Yelp ratings. than 500 reviews are likely to be less when there is less external informa- To generate a significant drop in frequented and less well known than tion about restaurants, though other reservation availability at the threshold, those with more than 500 reviews. differences between the two groups of these restaurants must sell out virtu- For restaurants with fewer than 500 restaurants may also play some role. ally all the time, despite the fact that reviews, an extra half-star on Yelp The high return to positive Yelp they receive low ratings from true Yelp reduces reservation availability by 20 ratings naturally creates an incentive reviewers. It seems ex ante surprising to 30 percentage points depending on for restaurants to manipulate their that a restaurant that receives poor the reservation time. In contrast, for own ratings by leaving false reviews. reviews would be extremely crowded, restaurants with more than 500 reviews, Manipulation is feasible in this context though it is theoretically possible. for whom there is likely less hidden because Yelp is crowd-sourced—any Using a short theoretical model, we information about quality, there is no restaurateur can, in principle, leave show that although restaurants face discontinuous change at any threshold himself a 5-star review. Furthermore, incentives to manipulate Yelp ratings, associated with additional Yelp stars. the significant increases in business at it does not make sense for them to try A second test for whether the Yelp Yelp thresholds create a strong incentive to stay right above the Yelp round- effect is due to solving information for restaurants to attempt to manipulate ing threshold. The intuition is simple: problems groups restaurants according their ratings to fall above a threshold. given that a random stream of reviews to whether there are external sources of Is it possible that the increases in will change each restaurant’s average quality information. Here, we note that demand that we observe in Figure 2 at rating over any time period, a restaurant quality information is easily available Yelp rounding thresholds are the result which is just above a threshold has a for restaurants which have a Michelin of specific restaurants strategically very similar likelihood of just missing star or those which appear in the San manipulating their ratings so that they that threshold after new reviews come Francisco Chronicle’s annual Top 100 fall right above the rounding thresh- in as a restaurant which is just below Restaurants listing. In contrast, crowd- olds? If so, this would invalidate our the threshold. Both restaurants therefore sourced information may be more research , because restaurants

Giannini Foundation of Agricultural Economics • University of California 3 face similar incentives to try and push of each restaurant in a subsample of of consumed meals via two mecha- their Yelp scores into safer territory. 73 restaurants. Next, we assumed that nisms. First, it can redirect consumers We also present a variety of empiri- a restaurant has no reservation avail- to higher quality restaurants. Second, cal tests that consistently show no ability if the number of seats reserved it can induce lower quality restaurants evidence of any manipulation behavior for a given evening reaches its capacity. to shut down or improve their qual- that would cause restaurants to cluster Finally, we examined the average cus- ity in response to changes in customer just above the thresholds. For example, tomer flows that would be consistent demand. We provide direct evidence restaurants leaving fake reviews for with reservation availability rates of of the first mechanism, but we cannot themselves should have more 5-star 58% (the average rate above the Yelp speak to the second mechanism. With reviews and fewer reviews per reviewer. thresholds) and 39% (the average below the rapid spread of Yelp and other simi- We find no evidence that restaurants the Yelp thresholds) under different lar crowd-sourcing , this sug- with these types of characteristics assumptions about the of gests that market evolution may be an cluster just above the thresholds. arriving customers. Our calibrations important avenue of future research. Two questions emerge when con- suggest that the median restaurant sidering the effects of Yelp ratings on might experience an increase in cus- Suggested Citation: restaurant demand. First, do the effects tomer flows of 6% or more if its reserva- Anderson, M.L., and J. Magruder. 2013. represent the transmission of informa- tion availability drops from 58% to 39%. "Does Yelp Affect Restaurant Demand?" tion on restaurant quality or do they Modest changes in customer flows, ARE Update 16(5):1-4. University of California Giannini Foundation of represent a effect generated however, can have a significant impact Agricultural Economics. by Yelp’s ranking system? Second, on profits in an industry with high what changes in customer flows and fixed costs and high margins. A typi- profits are consistent with the observed cal mid-to-high-end restaurant with Michael Anderson and Jeremy Magruder are both assistant professors in the Department changes in reservation availability? $20,000 per week in sales and a margin of Agricultural and Resource Economics at Our estimates may not represent a of 68% on food and beverage sales, UC Berkeley. They can be contacted by e- pure effect of information regarding earns approximately $2,000 per week at [email protected] and jmagruder@ restaurant quality if the order in which in pre-tax profit. In comparison, a berkeley.edu, respectively. Yelp lists restaurants on its website 6% increase in customer flow trans- (e.g., in Figure 1) is a function of a lates into an additional revenue gain For additional information, the restaurant’s displayed average rating of $816 per week in pre-tax profit. authors recommend: rather than its true average rating. In Of course, the increase in profit will Anderson, M.L. and Magruder, J. that case, restaurants just above a Yelp be lower if the restaurant is capacity- 2012. “Learning from the Crowd: threshold would be significantly more constrained or if it has to expand Regression Discontinuity Estimates likely to be seen by consumers brows- staffing levels to maintain . of the Effects of an Online ing Yelp than restaurants just below a Nevertheless, the calibrations sug- Review Database,” The Economic Yelp threshold. However, we find that gest that a typical restaurant could Journal, 122(563): 957–989. the order in which Yelp lists restau- experience substantial gains in profit rants is not affected by the displayed when crossing a Yelp threshold. average rating (after controlling for In summary, the effects we estimate the restaurants’ true underlying aver- are large, and they indicate a valuable age ratings). We thus conclude that use of crowd-sourced information: increased information about restaurant because Yelp collects and aggregates quality causes higher-rated restaurants the experiences of a large number of to have lower availability, rather than patrons, Yelp provides a convenient any effect of increased visibility. forum to solve asymmetric informa- To gauge what changes in customer tion problems about the quality of flows could be consistent with our unfamiliar restaurants. Tightening result that an extra half-star on Yelp the link between restaurant quality causes a 19 percentage point decrease in and restaurant patronage may well reservation availability, we performed have positive benefits for society. a series of simple statistical calibra- Crowd-sourced quality informa- tions. First, we recorded the capacity tion may improve the average quality

4 Giannini Foundation of Agricultural Economics • University of California Immigration Reform 2013: Implications for California Agriculture Philip Martin their arrival (shorter for unauthor- States if they are not certain employ- ized youth and farm workers) ers will hire them, so it requires all Congress is considering immigration • New guest worker programs for employers to check new hires using reform. California hope that a low-skilled farm and nonfarm work- the E-Verify system within five years. plan to legalize currently unauthorized ers and significant increases in the Employers with more than workers and make it easier for them to hire guest workers in the future will be number of H-1B visas available 5,000 employees would have to use enacted. The legalization and guest to foreigners with college degrees E-Verify within two years of enact- worker proposals being considered coming to the to fill ment, those with more than 500 should not increase farm labor costs jobs that require such degrees. employees within three years, and significantly. all others a year later. That is, most S 744 would also change the mix farm employers would have four years of legal immigrants. Today, 70% of before they have to check the legal the immigrants who receive so-called status of newly hired workers via “green cards” or immigrant visas the Internet. Employers would not qualify for them because family mem- have to check current employees. here were over 40 million foreign- bers already in the United States have When hired, non-U.S. citizens would born U.S. residents in 2011, sponsored their admission. S 744 would have to show employers a “biometric including 11 million (or over one add 125,000 immigrant visas a year dis- work authorization card” or immigrant T tributed on merit or economic grounds quarter) who were not authorized to be visa that includes a photo stored in in the United States. The United States and eliminate some family visas, rais- the E-Verify system and can be seen has been debating what to do about ing the economic share of immigrants. over the Internet by the employer. these unauthorized foreigners for the S 744 aims to be revenue-neutral, In states that put photos on driver’s past decade, and in April 2013 a bipar- with fines and fees covering an esti- licenses, new hires could present driv- tisan group of eight senators intro- mated $17 billion in additional federal ers’ licenses for the required photo. duced the Border , Economic spending over the bill’s first decade. After DHS submits a plan to secure Opportunity, and Immigration Mod- the -U.S. border, expected Enforcement and Legalization ernization Act (S 744). The Senate Judi- within six months of enactment, unau- ciary Committee in May 2013 began S 744 authorizes up to $6.5 billion in thorized foreigners who were in the to mark up S 744, the most compre- additional spending to “secure” the United States before December 31, hensive immigration reform bill since 2,000 mile Mexico-U.S. border. The 2011 could pay $500, any back taxes the Immigration Reform and Control border would be considered secure if they owed, and application fees to Act of 1986 (IRCA). The Senate is 100% of the border is under surveil- become “registered provisional immi- expected to vote on S 744 in June 2013. lance and 90% of those attempting grants” (RPI) for six years. This RPI S 744 has three key elements: to cross illegally are apprehended in status could be renewed after six years • More fences and agents on the areas that have had more than 30,000 for another $500 fee. Unauthorized Mexico-U.S. border and a require- apprehensions a year. There were foreigners would have two years after ment that all employers use the three such areas in 2012: Tucson, S 744 is enacted to apply for RPI status. Department of Homeland Security’s the Rio Grande Valley, and Laredo. After 10 years, if a series of enforce- (DHS) E-Verify system to check Currently, only employers in some ment indicators demonstrate that unau- the legal status of new hires, a bid states and those with federal contracts thorized migration is “under control” to deter the entry and employ- must use E-Verify, the Internet-based and the backlog of foreigners waiting ment of unauthorized foreigners system that allows employers to submit for immigrant visas is eliminated, RPIs • A 13-year path to U.S. citizen- data on newly hired workers to DHS could apply for regular immigrant ship for unauthorized foreigners to determine if they are legally autho- status by showing they have worked who arrived in the United States rized to work in the United States. (or were enrolled in school) and lived before December 31, 2011 and S 744 assumes that foreigners will be in the United States since register- remained “continuously since” discouraged from coming to the United ing. They would have to pay another

Giannini Foundation of Agricultural Economics • University of California 5 Figure 1. Change in Hourly Earnings of Hired Farm Workers, California, 2010–2012 H-1B visas to rise by 10,000 a year to a maximum of 180,000, depending on 14 California employer requests for H-1B visas, and 12 H-1B workers sponsored by their U.S. San Joaquin Valley 10 employers for immigrant visas would 8 not be counted against the quota. In an attempt to satisfy critics who 6 allege that the H-1B program allows 4 U.S. employers to replace U.S. work- 2 ers with H-1B workers, all employers 0 of H-1B workers would have to try 2009–10 2010 –11 2011–12 Percent Change in Hourly Change in Percent Earnings -2 to recruit U.S. workers for at least 30 days before hiring H-1B workers by -4 posting job openings on a web site -6 and certifying that they did not lay off $1,000 fee and pass a test of English eight years after enactment. To become U.S. workers to open jobs for H-1Bs. and civics and, after three more years, immigrants, agricultural RPIs would Spouses of H-1B workers could work these now-regular immigrants could have to pay an application fee and a in the United States if their country apply for United States citizenship. $400 fine, and the family members of origin provides reciprocal treat- Provisional RPIs would not be eli- of RPIs could apply for immigrant ment of the spouses of U.S. workers. gible for most federal means-tested visas when the farm worker does. Employers considered to be “H-1B welfare benefits, including Food Stamps dependent,” that is, having mostly H-1B and subsidized health under Guest Workers employees, would have to pay higher the Affordable Care Act. RPIs are The United States now has three major wages and fees and could be prohibited likely to be eligible to purchase health guest worker programs. The H-1B pro- from hiring additional foreigners with insurance on the state exchanges that gram admits about 100,000 foreigners H-1B or L-1 visas. Firms with more begin operation in 2014, but could a year with a college degree who enter than 30% of their U.S. workers on tem- not receive the federal subsidies avail- the United States to fill a U.S. job that porary visas would have to pay $5,000 able to those with low earnings. requires a college degree; about half for each new temporary foreign worker, There is a separate legalization pro- of H-1B visa holders are employed in and those with more than 50% foreign gram for unauthorized farm workers IT-services. The H-2A program admits workers would not be able to spon- that provides a faster path to immigrant an unlimited number of foreign farm sor more after 2016. So-called “body status. Unauthorized farm workers who workers, about 60,000 a year recently, shops” that bring H-1B workers into the did at least 100 days or 575 hours of to fill seasonal farm jobs after the United States and send them from one U.S. farm work in the 24 months ending U.S. Department of Labor (DOL) employer to another would have their December 31, 2012 could become RPIs certifies farm employers as needing access to foreign workers restricted— and receive blue or agricultural cards foreign workers. The H-2B program a blow to -based outsourcers. by paying an application fee and a admits up to 66,000 foreign workers The current H-2A program that $100 fine under a program that would a year to fill seasonal nonfarm jobs. admits foreign farm workers would be operate for a year after implementing Under S 744, more H-1B visas replaced by new W-3 and W-4 guest regulations were issued. The spouses would be made available and there worker programs a year after S 744 and children of RPI farm workers would be new guest worker programs is enacted. USDA would develop the could also register and receive permis- for farm and nonfarm workers. The regulations to implement the W-3 sion to live and work in the United number of regular H-1B visas would and W-4 programs and adjust the States in any job (not just farm jobs). increase from the current 65,000 a number of farm workers admitted. In order to become immigrants, year to 110,000, and the number of The W-3 program would be like the agricultural RPIs would have to do visas for foreigners who have earned current H-2A program and tie a for- at least 150 days of farm work a year advanced degrees from U.S. universi- eign farm worker to a particular U.S. for three years in the eight years after ties would increase from 20,000 to farm employer and job for up to three enactment of S 744 or 100 days of 25,000. A High Skilled Jobs Demand years. However, W-3 farm workers farm work a year in five of the first Index could allow the number of could work for another registered U.S.

6 Giannini Foundation of Agricultural Economics • University of California farm employer, known as a Designated Figure 2. Annual Mexico–U.S. and U.S.– Mexico Flows, 2005–2010 (1,000s) Agricultural Employer (DAE), after they completed their initial contracts. 600 Mexico–U.S. The W-4 program resembles the U.S.–Mexico Replenishment Agricultural Worker 500 program in IRCA that was never imple- mented. W-4 visa holders would need 400 an initial job offer from a DAE to enter the United States, but could “float” from 300 one DAE to another during the three People of Flow years that their W-4 visas were valid. 200 Both W-3 and W-4 visa holders could re-enter the United States for another 100 three-year term after spending at least 90 days outside the United States. 0 The number of W-3 and W-4 visas 2005–06 2006–07 2007–08 2008–09 2009–10 Source: Passel, 2012 would initially be capped at 112,333 a year, so that a maximum of 337,000 between 2011 and 2012, and the on W-2 workers and their employers. new guest workers could be in the increase was even greater in the San The Bureau would be charged with United States at any one time during Joaquin Valley, which has over half of determining the annual change to the the three-year period that currently the state’s farm workers (Figure 1). W-visa cap, devising methods to help unauthorized farm workers who receive Housing emerged as a major issue. employers who use guest workers to probationary immigrant status are Farm employers wanted to provide recruit U.S. workers, creating a meth- required to continue doing farm work. housing or a housing allowance only to odology to designate “shortage occupa- USDA could recommend an adjustment the W-3 workers who are tied to their tions,” and making recommendations to the number of W-2 and W-3 visas farms, but S 744 requires farm employ- on employment-based visa programs. during the first five years after enact- ers to provide housing or a hous- In order to hire W-2 workers, U.S. ment of S 744, and adjust the number ing allowance to both W-3 and W-4 employers in metro areas with an in consultation with the DOL after that. visa holders. U.S. workers employed unemployment rate of less than 8.5% Minimum hourly wages are estab- alongside W-3 and W-4 visa holders would register themselves and their lished in S 744 for six farm worker would not have to be provided with jobs and request W-2 visas for specific occupations. Beginning in 2016, housing or a housing allowance. foreigners. Foreigners’ families could workers across the United States must The amount of the housing allow- also receive W-2 visas, which would be be paid at least $9.64 an hour, grad- ance depends on whether the farm valid for three years. Up to 20,000 W-2 ers and sorters $9.84, and employer is in a metro or non-metro visas could be issued in the first year, dairy workers $11.37, and equipment county. In California, W-visa work- 35,000 in the second year, 55,000 in operators $11.87. The U.S. Depart- ers would receive $295 a month in the third year, and 75,000 in the fourth ment of Agriculture will set wages for metro counties and $225 a monthly year, and the number could rise further agricultural supervisors and animal in non-metro counties in 2013, if certain conditions are met. No more breeders. These minimum wages or $1.84 an hour in metro coun- than one-third of W-2 visa holders will be adjusted each year accord- ties for full-time workers and $1.40 could be employed in . ing to the Bureau of Labor Statistics’ in non-metro counties. Almost all Where will U.S. employers get low- Employment Cost Index by at least of California’s labor-intensive agri- skilled W-visa workers? Mexico-U.S. 1.5% and no more than 2.5%. is in metro counties. migration has been declining, and more California farmers should benefit A new W-2 visa program would Mexicans returned to Mexico, often from a national minimum wage for admit more low-skilled workers, with after being deported from the US, than guest workers that is significantly the number eventually determined by were admitted in recent years (Figure less than the average hourly earnings a Bureau of Immigration and Labor 2). A century ago, most of the state’s of California farm workers, which Market Research, located in U.S. Citi- farm workers were Asians. A combina- were $12.56 an hour in 2012. Aver- zenship and Immigration Services. Its tion of longer periods of U.S. employ- age hourly earnings rose sharply $20 million budget raised from fees ment and the opportunity to bring

Giannini Foundation of Agricultural Economics • University of California 7 The agricultural provisions of S Figure 3. Unauthorized Share of Workers 2010 744 benefit currently unauthorized farm workers at the expense of future guest workers. Currently unauthor- ized farm workers and their families can become legal immigrants and leave the farm work force within five years, while future guest workers will have lower wages and perhaps fewer protec- tions than current guest workers. Farm worker advocates and farm employers negotiated the agricultural provisions of S 744, and both have said they will strongly resist efforts to change what they describe as a “delicately balanced compromise.” If enacted, they should provide California agriculture with United States: 5.2% of workers are unauthorized a legal work force at current costs. Very Highest (8.6%-10%) (4 states) Above Average (6.1%-7.4%) (5 states) Suggested Citation: Average (4.2%-5.6%) (12 states) Below Average (2.0%-3.9%) (18 states) Martin, P.L. 2013. "Immigration Very Lowest (<1.7%) (12 states) Reform 2013: Implications for California Agriculture." ARE Update 16(5):5-8. family members may bring more Asians be paid to guest workers. Even if farm University of California Giannini to the United States as guest workers. employers have to pay a housing allow- Foundation of Agricultural Economics. ance of up to $2 an hour, the $9.64 Implications for Agriculture that must be paid to guest workers in Philip Martin is a professor in the Department About three-fourths of the hired work- 2016, plus a $2 an hour housing allow- of Agricultural and Resource Economics at ers on U.S. crop farms were born ance, is less than the average hourly UC Davis who can be contacted at plmartin@ abroad, and over half of all farm work- earnings of crop workers in California ucdavis.edu. ers are not authorized to work in the in 2012, which were $12.56 an hour. United States. Although most unau- Third, S 744’s agricultural provi- For additional information, the thorized workers are employed in non- sions should provide labor certainty author recommends: farm jobs, California has a higher-than- for California farmers, and give them Calvin, L., and P.L. Martin. 2010. average share of unauthorized workers advantages over farmers in lower-wage The U.S. Produce Industry and than most other states (Figure 3). The areas of the United States. The capac- Labor: Facing the Future in a state’s share of unauthorized farm ity to hire legal guest workers for up Global Economy. USDA. Economic workers is also higher than average, to six years at $9.64 an hour, with Research Report No. (ERR- which explains why California farm- wage increases limited to 2.5% a year, 106). November. www.ers.usda. ers have been in the vanguard of those should make it easier to plan invest- gov/Publications/ERR106/ advocating for immigration reform. ments in labor-intensive agriculture Hertz, T., and P.L. Martin. 2012. If S 744 is enacted with its cur- and secure financing for them. Cali- Immigration and Agriculture. rent agricultural provisions, there are fornia farmers should benefit by the Choices. www.choicesmagazine.org/ likely to be three major changes. First, switch from a national minimum wage choices-magazine/theme-articles/ immigration-and-agriculture. the hired farm work force is likely to for guest workers rather than state-by- become mostly legal, comprised first of state wages. The current Adverse Effect Martin, P.L. 2013. Immigration and currently unauthorized workers who Wage Rates (AEWRs) that must be paid Farm Labor: Policy Options and become legal blue card holders and to legal guest workers in 2013 range Consequences. American Journal later legal guest workers. Second, labor from $9.50 an hour in some southern of Agricultural Economics 95(2): 470-475. http://ajae.oxfordjournals. costs should be stable, since average states to $12 in Oregon and Washing- org/content/95/2/470.full. hourly earnings in California are well ton; the California AEWR is $10.74. above the minimum wage that must

8 Giannini Foundation of Agricultural Economics • University of California Some Impacts of Recession on California’s Nursery and Floral Industry Hoy Carman

Sales Trends As shown in Figure 1, total sales The recession following the burst The California floral and nursery sec- of California nursery and floral of the housing bubble in 2007 tor’s ties to the real estate industry, and increased steadily from $2.71 bil- had a disproportionate impact the unique nature of its crops, con- lion in 1995 to a record $3.97 bil- on California’s nursery and floral tributed to uninterrupted sales growth lion in 2007. Sales then decreased to industry. Combined sales of nursery between 1993 and 2007. This growth about $3.37 billion in 2010 before and floral products dropped from continued despite the major challenges recovering to $3.69 billion in 2011. second to fourth among all California presented by shipping restrictions Nursery and floral products’ share agricultural , and from related to pests and diseases, increased of total California agricultural sales 12.2% to 7.8% of total California competition from imported , increased from 9.6% in 1995 to a high agricultural sales. A sharp reduction the impact of increased energy costs of 12.5% in 2002 and then, with the in the number of California retailers on production and transportation, exception of 2006, decreased steadily handling nursery and floral products limited and expensive water supplies, to 7.8% in 2011. Combined sales of will have long-lasting impacts on both and less-than-ideal weather condi- nursery and floral products dropped producers and consumers. tions. As a result of plunging house to fourth place among all California prices and recession, the combined agricultural products in 2011, fol- sales of nursery and floral products lowing dairy, grapes, and almonds. dropped in 2008, 2009 and 2010 Nursery and floral products’ decreas- before recovering slightly in 2011. ing share of total California agricultural Data from USDA’s annual publica- sales beginning in 2002 is due to two tion, California Agricultural Statistics, major factors. Most important, for most alifornia’s nursery and floral indicate that nursery production and of the period from 2002 through 2007, industry will feel the effects of sales typically ranked third among the rate of growth for other agricul- Cthe “housing bubble” and the all California crops (following dairy tural products outpaced the growth economic recession following its 2007 and grapes), while floral crops usually for nursery and floral products. Then “burst” for many years. These effects ranked around tenth. When combined, with the onset of recession, combined are evident throughout the industry, nursery and floral production typi- nursery and floral sales decreased ranging from the production of cally ranked second in value of pro- while some other major California and material to structural aspects of duction among all California crops. commodities enjoyed increasing sales. product distribution. While there are no readily available empirical studies of Figure 1. California Nursery and Floral Sales: Percent of Total Agricultural Sales, Total the demand for nursery and floral prod- 14.5 4.5 Nursery Percent ucts, it is widely accepted that housing Total Current Sales 4.0 and consumer income are important 13.5 3.5 determinants of their demand. 12.5 Thus, the economic downturn 3.0 beginning in 2007, characterized by 11.5 2.5 increasing unemployment, reduced 2.0 consumer incomes, decreasing 10.5 1.5

home prices, shrinking equities and Nursery (%) Share Total of 9.5 billion) CA Sales Cash ($ Total foreclosures, would be expected to 1.0 adversely affect the demand for nurs- 8.5 0.5 ery products. This article uses indus- try data to outline industry changes 7. 5 0.0

and to speculate on some possible 2010 2011 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 implications of these changes. Year

Giannini Foundation of Agricultural Economics • University of California 9 have no measure of the breakdown of Table 1. Annual Taxable Sales and Number of Outlets, California Florists and Farm and Stores, 2000–2011 sales by product line for any retailers. Changes in store numbers and Florists Farm and Garden Stores annual sales for California florists Year Number* Sales ($1,000) Number* Sales ($1,000) between 2000 and 2011 are dramatic 2000 5161 983,396 3601 2,060,713 (Table 1). The number of California 2001 5338 988,022 3711 2,059,040 florists increased from 5161 in 2000 to 2002 5474 998,781 3834 2,135,472 a peak of 6427 in 2008 (24.5 %), with 2003 5572 1,005,452 3943 2,266,142 store numbers increasing in 2008 even 2004 5703 1,077,694 4061 2,386,377 as sales began to plunge. Annual florists’ 2005 5708 1,133,896 4188 2,662,956 sales decreased over 34% from 2007 2006 5825 1,172,658 4188 2,930,230 to 2008, 41.9% from 2008 to 2009, 2007 6160 1,203,148 4285 2,965,697 and another 2.5% from 2009 to 2010. 2008 6427 793,882 4715 2,751,233 Total sales by California florists 2009 5070 461,349 5133 2,216,767 in 2010 were only 37.4% of their level just three years earlier in 2007. 2010 4950 449,893 5427 2,269,297 Large numbers of florists began clos- 2011 4798 464,761 5600 2,392,542 ing in 2008, with total numbers Source: California State Board of Equalization. Taxable Sales In California, annual reports, 2000 – 2011. decreasing 25.3% by 2011 (from * Number of licenses, July 1 of each year. 6,427 in 2008 to 4,798 in 2011). Annual nursery and floral product sales absolute and relative terms, the most Sales for California lawn and garden decreased 4.7% from 2007 to 2008, then dramatic impacts of the recession stores increased from just over $2.06 decreased 9.0% from 2008 to 2009, and housing problems occurred at billion in 2000 to a high of over $2.96 and 2.2% from 2009 to 2010. Finally, the level. Increasing unemploy- billion in 2007 and then decreased combined farm level nursery and floral ment and reduced consumer incomes over 25.2% the next two years before sales increased 9.5% from 2010 to 2011. combined with increased competition increasing 2.4% in 2010 and 5.4% in from alternative outlets to make retail 2011 (Table 1). However, the number Channels of Distribution florists an “endangered species.” of lawn and garden stores increased Nursery and floral products take a At the same time, a collapse in home each year from 2000 through 2011 variety of paths in moving from the put substantial pressure on even when total sales decreased. California producer to final custom- specialized farm and garden stores Note that average per store sales ers, depending on the product and and retail nurseries. Data from taxable peaked for both florists and lawn and the nature and location of the cus- retail sales reports and the directory of garden stores in 2006 ($201,315 and tomer. Due to the bulky nature and firms licensed to sell nursery products $699,373, respectively), decreased perishability of the products, most help to outline the changes occurring. and reached a low in 2010 ($90,887 of the channels tend to be relatively Retailers and Taxable Sales: The and $418,149, respectively) and then short. For example, some produc- California State Board of Equalization recovered with increased sales per ers have established retail outlets reports sales by type of retail outlet store of 6.6% for florists and 2.2% per adjacent to their growing opera- and the number of outlets. There are store for lawn and garden stores. tions, especially in urban areas. two retail store types for which nurs- Firms Licensed to Sell Nursery Nursery operations supplying ery and floral products are the major Products: Firms must be licensed by inputs to other growers (trees, vines products sold: florists and lawn and the California Department of Food and other materials) tend to deal garden equipment and supplies stores and Agriculture to sell nursery prod- directly, or sometimes through a sales (listed as farm and garden supplies ucts in California and licensed firms intermediary. Even large multiproduct stores through 2008). An increasing are listed in the annual Directory of retailers who deal through wholesalers share of nursery and floral products Nurserymen and Others Licensed to Sell and jobbers often receive shipments are sold in other store types such as Nursery Stock in California. The firms directly from the nursery producer. , big box retailers (Home by category were tabulated for 2003 While farm level sales of nursery Depot, Lowes, K-Mart, Costco, etc.), and 2011 in a previous report and data and floral products decreased in both and food and variety stores, but we for 2013 were tabulated for this report.

10 Giannini Foundation of Agricultural Economics • University of California The data in Table 2 show a signifi- Table 2. Number of California Firms Licensed to Sell Nursery Stock cant reduction in the number of retail- by Category and Total: 2003, 2011 and 2013 ers between 2003 and 2011 with a slight Jobbers recovery in 2013. There were also less and Greens and Incidental dramatic decreases in the total numbers Year Wholesalers Brokers Landscapers Producers1 Retailers2 Retailers3 Total of middlemen (wholesalers, jobbers 2003 853 476 454 2999 2715 3756 9821 and brokers) as well as landscapers and producers from 2011 to 2013. 2011 880 460 463 2959 736 2158 5848

Structural Changes 2013 854 447 421 2833 842 2180 5834 Source: California Department of Food and Agriculture, Directory of Nurserymen and Others Licensed Changing sales and reductions in to Sell Nursery Stock in California. the number of firms producing and 1 A producer is a commercial producer who grows and sells a total of $1,000 or more of nursery stock in marketing California nursery and one year. 2 An incidental retailer is an operator of a retail sales outlet for nursery stock that is handled incidental floral products point to some rather to other merchandise. Retailers such as Home Depot, Wal-Mart, Lowes and supermarkets are in this basic structural changes with impli- category. cations for both producers and con- 3 A retailer is an operator of a sales outlet that has no growing grounds except small areas devoted to the production of plants for local distribution and those producing less than $1,000. sumers. First is the sharp reduction in the number of California florists sales to consumers) as well as inciden- associated with more market power and their total sales associated with tal and specialized nursery retailers. in the hands of surviving retailers. the recession. The number of flo- The number of retailers licensed rists in 2011 dropped 1629 (25.3 to sell nursery stock decreased from a Suggested Citation: %) from the peak of 6427 in 2008 total of 6,471 in 2003 to 3,022 in 2013, Carman, H. 2013. "Some Impacts of Recession on California’s Nursery and while sales decreased $753.26 mil- a 3,449 (53.3%) reduction in number Floral Industry." ARE Update 16(5): lion (62.6 %) from 2007 to 2010. of outlets. Given much smaller reduc- 9-11. University of California Giannini The change in farm sales of floral tions in wholesale nursery sales, the Foundation of Agricultural Economics. products was much less dramatic. surviving retailers are larger on average

California farm-level floral product and probably have smaller operating Hoy F. Carman is a professor emeritus in the sales reached a high of $1.036 bil- margins than was typical for florists. Department of Agricultural and Resource lion in 2007. Sales then dropped to This very significant reduction in Economics at UC Davis. He can be contacted by $1.015 billion in 2008 and further to the number of California retailers han- e-mail at [email protected]. $937.0 million in 2009 before recover- dling nursery and floral products has ing to $1.015 billion in 2010. The large implications for both producers and For additional information, the consumers. Some producers undoubt- decrease in sales by florists with only a author recommends: small change in farm level sales is due edly lost their major retail customers to a significant change in retail market while many lost important retail outlets. Carman, H., and A. M. Rodriguez. 2004. Economic Contributions of shares for floral products. Specifically, The impact of the loss of outlets was The California Nursery Industry. other outlets such as supermarkets not uniform but it was widespread. Berkeley: University of California gained market share for floral products This consolidation of outlets may Agricultural Experiment Station, at the expense of individual florists. offer some economies in distribution Giannini Foundation Information The situation for lawn and garden but the short-run impact on floral and Series No. 04-1. http://giannini.ucop. equipment and supplies stores is much nursery product sales will be negative. edu/InfoSeries/041-Nursery.pdf. different than florists or other retail- Products are not as available at the Carman, H. 2011. Economic Aspects ers of nursery products. While total consumer level as previously, which of the California Nursery and Floral sales decreased after the peak occur- tends to reduce consumer choice and Industry, 2001–2009. Berkeley: ring in 2007, the number of retail negatively impact impulse buying. University of California Agricultural licenses continued to increase. A change from specialized to Experiment Station, Giannini Foundation Information Series This is not the case for other retail- multiproduct retailers tends to No. 11-1. http://giannini.ucop. ers handling nursery products. As reduce customer service and may edu/InfoSeries/111-Nursery.pdf. shown in Table 2, there are fewer pro- reduce product assortments. And, ducers (including some with direct finally, the changes noted may be

Giannini Foundation of Agricultural Economics • University of California 11 Department of Agricultural and Resource Economics UC Davis One Shields Avenue Davis, CA 95616 GPBS

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