Higher prices, lower turnover, more workers: The reality of California's $20 fast-food minimum wage

When California governor Gavin Newsom signed AB 1228 — legislation which raised the state hourly minimum wage for fast-food employees from $15.50 to $20 — into law last September, members of the fast-food industry were left with a lot of questions before the bill officially went into effect on April 1.

To address some of these, the State of California’s Department of Industrial Relations set up an FAQ board. Their material ranged from broad topics, like what constitutes a “fast-food” restaurant under the new law (the state defines it as a “limited-service restaurant” that sells food or drink for immediate consumption, and has more than 60 locations nationwide ), to the more obscure, like whether employers could simply increase the amount of meal or lodging credits administered to employees to count against the minimum wage (no).

However, it didn’t address one of fast-food employers’ biggest questions: How would they actually pay for their workforce under the new law?

While the decision was lauded by many labor activists as part of broader efforts to improve working conditions and address wage disparities, some California franchise owners began preemptively cutting employees’ hours in advance of the minimum wage hike.

For instance, two days after the bill went into effect, Business Insider reported that two Pizza Hut franchisees in the state said they “planned to scrap in-house delivery” and instead rely on third-party services, resulting in around 1,200 workers being laid off. A few days before that, in March, Alex Johnson, who owned 10 Auntie Anne’s Pretzels and Cinnabon restaurants in the San Francisco Bay area, laid off his office staff and told the Associated Press he would now rely on his parents to help with payroll and human services.

“I try to do right by my employees,” Johnson told the publication at the time. “I pay them as much as I can, but this law is really hitting our operations hard.”

Many economists and franchisees predicted AB 1228 would cause the fast-food industry in California to unequivocally crash, however, according to new state and federal employment data, California’s fast-food industry has actually added jobs every month this year — including 11,000 new jobs since the wage increase officially went into effect in April. In a release, Newsom’s office reported that since raising worker wages, every month this year has seen consistent fast-food job gains, and nearly each month has seen more jobs than the same month last year.

“What’s good for workers is good for business, and as California’s fast food industry continues booming every single month our workers are finally getting the pay they deserve,” Newsom said in a written statement. “Despite those who pedaled lies about how this would doom the industry, California’s economy and workers are again proving them wrong.”

This isn’t exactly unexpected. Michael Reich, professor of economics at the University of California-Berkeley, said history didn’t support a lot of doomsday predictions about the future of fast-food in California.

"The knock is that a minimum wage increase would lead to businesses closing, workers getting laid off, and much higher prices," Reich told Public News Service. "That's been the knock on every minimum wage increase since 1938. Indeed, a large number of studies have found that minimum wages do not reduce employment in fast food."

Yet despite the positive job growth, the implications of AB 1228 have also proven to be complicated. As expected, higher wages have contributed to an increase in menu prices across fast-food chains, with many companies passing on the cost to consumers.

This summer, the nonprofit Employment Policies Institute surveyed the owners or managers of 182 limited-service restaurants in California and 98% reported they had already raised menu prices, with 93% anticipating they will have to raise menu costs again next year to accommodate rising costs. Relatedly 92% of owners think that “raising menu prices will adversely affect customer foot traffic.”

It’s important to note that this phenomenon isn’t entirely unique to California—fast-food giants nationwide have been adjusting their pricing strategies to cope with rising labor costs, sparking what some have dubbed the “value meal wars.” Companies are fiercely competing to offer the most affordable meal deals, balancing the need to maintain profitability while attracting cost-conscious customers.

On the flip side, the higher wages have had an unexpected benefit: lower employee turnover. With a $20 per hour wage, fast-food jobs in California have become more attractive to higher-quality applicants, reportedly leading to a more stable and skilled workforce.

Joseph Bryant, the executive vice president of the Service Employees International Union — which was a major proponent of AB 1228 — recently told NBC Bay Area that the industry has not only added jobs, but “multiple franchisees have also noted that the higher wage is already attracting better job candidates, thus reducing turnover

This stability could allow some franchises to streamline operations and improve service quality, potentially offsetting some of the increased costs. However, the pressure on franchise owners remains intense, as they navigate the fine line between staying competitive and managing new operational expenses.