No, California’s wage bump for fast food workers isn’t doomsday for restaurants. Here’s why

Today, the minimum wage for California fast food workers will increase to $20 an hour, or 25% above the state’s $16 level. And a first-of-its-kind fast food council will give workers, employers and state government the opportunity to come together and set standards for the industry.

But rather than celebrating, many headlines are predicting mass layoffs, major burger price increases and even the end of fast food as we know it in California.

These headlines reflect an unsophisticated understanding of an outmoded and simplistic theory: In Econ 101, if you increase the price of labor, employers will use less of it or pass along the higher costs to consumers. 

This explanation ignores that fast food restaurants have and use their power to set wages and employment levels well below the Econ 101 level. The modern theory of labor markets actually recognizes employers’ wage-setting power and that a higher minimum wage can help overcome this power, ultimately raising both pay and employment. 

Outside the theoretical world, economists have conducted hundreds of studies on the actual effects of minimum wage. They repeatedly find that increasing the minimum wage raises the pay of low-wage workers, without leading to even minor job losses. Prices increase by minimal amounts that are too small to deter anyone from buying a burger or taco.

Our latest contribution to this research looked at what happened in fast food restaurants after California and New York nearly doubled their minimum wage to $15 over seven and a half years, from the end of 2013 to the beginning of 2022. We compared federal data on fast food jobs in the 36 most populous counties in California and New York – where the minimum wage jumped dramatically – to similar combinations of counties in states that kept the minimum wage at the federal level of $7.25 an hour. 

We found that fast food employment in California and New York did not fall, compared to employment trends in the lower-wage areas. In fact, in the low-unemployment years after the pandemic, fast food employers in the $15 counties added workers. 

Pizza Hut operators in California recently announced they were laying off delivery drivers and would rely on Uber Eats, DoorDash and other gig delivery services. Analysts blamed the layoffs on the new $20 pay floor. But Pizza Hut began working with those services in 2022 – not to save money but because they couldn’t hire enough drivers. Other national pizza chains have already partnered with delivery companies.

Recognizing all of this, a different question emerges: How do we square the absence of negative employment effects with the theory that higher wages means fewer jobs?

The answer is power.

When employers have too much power in the labor market, they can (and do) pay workers considerably less. Workers take the low-paid jobs, often because they seem to be the best option available at the time. But those artificially low wages lead workers to quit when they find better-paying options – or when they’re just tired of working for such low wages.

As a result, hiring and maintaining staffing levels becomes more difficult for employers, leaving them with unfilled vacancies. 

In recent years, fast food and other low-wage workers have reset the power equation. They have taken to the streets, city halls and state houses to demand better pay, and they have convinced politicians around the country to raise the minimum wage.

By raising pay to meet the higher minimums, fast food restaurants were better able to attract workers to fill the vacant jobs. And those workers stayed longer. 

Lower employee turnover and fewer vacancies demonstrate how higher minimum wages can result in more jobs. Lower turnover also helps restaurant owners because more experienced workers will be more productive, while the owners save on recruitment and retention costs. 

What about prices? Won’t fast-food customers pay a lot more because of the higher wages? 

Pundits claim that a 25% increase in the minimum wage means a 25% increase in prices. Again, the real world provides a different answer.

We examined how minimum wage increases in California and New York changed McDonald’s prices. Every dollar increase in the minimum wage led McDonald’s to raise the price of a $5 Big Mac by just 12 cents. 

Fast food companies are reporting higher sales and bigger profits than before the pandemic. They have absorbed higher wage costs and remained profitable without reducing fast food jobs.

Time and time again, research – and reality – show that raising fast-food workers’ pay in California will only lead to higher living standards for workers and a more equitable economy.