The Impact of California’s Fast Food Minimum Wage Hike
On April 1, the long-awaited and contentious minimum wage law for California fast food workers finally took effect, raising their hourly pay to $20. This represents a 25% increase and is $4 per hour higher than the state-wide minimum—a massive shift in an industry where margins are notoriously razor-thin. To boot, based on recent Black Box Intelligence (BBI) data, approximately 90% of limited-service employees in the state were projected to benefit from the raise, with an average hourly increase of nearly $3.
To put it briefly, the new law mandates that chain restaurants with “limited or no table service” and over 60 franchises nationwide must adhere to the new wage requirement. This means that restaurants with specific exemptions, like bakeries selling bread as a standalone item, are not covered by the law. (The Department of Industrial Relations explains the law in more detail here.)
Of course, as with any legal changes of this scale, the downstream impact and nuances are significant. Despite the 60-unit “rule,” many impacted are franchisees with only a few restaurants because they operate within the framework of huge national chains. This, in particular, seems grossly unfair to small business owners trying to make ends meet.
Most industry-focused headlines are understandably sounding the alarm, foreseeing large-scale layoffs, substantial price hikes, customer attrition, excessive automation, and even business closures. The apprehension is sparking restaurants to act quickly to reduce financial hardship, with some already laying off staff and cutting hours for workers.
And needless to say, many are bracing for further impact nationwide. As the adage goes, “Where California leads, others follow.”
But what is the historical precedent set by similar changes? We give our view below based on our extensive long-term study and analysis of the restaurant industry.
Job Shedding
- California last raised wages by this much in 1988 (26.87%) and 1975 (25%), but it wasn’t exclusively aimed at fast food workers.
- A study on the effects of California and New York fast food establishments increasing their minimum wage to $15 over several years shows no decrease in employment.
- Phased-in minimum wage increases have a lesser impact on prices compared to sudden, large increases.
The truth is that the recent minimum wage increase exclusively for fast food workers in California breaks from historical precedent. While the state has seen similar minimum wage increases in the past, such as the 26.87% increase in 1988 and the 25% increase in 1975, these changes were not targeted solely at the fast food industry. So applying the research that does exist to this scenario is not exactly like comparing apples to apples.
Nonetheless, a 2024 research paper, co-authored by economist Michael Reich from The Institute of Research on Labor and Employment (IRLE), challenges the prevailing narrative surrounding minimum wage increases. Contrary to expectations, significant hikes in the minimum wage have been found to have minimal impact on employers’ hiring decisions.
The paper also reveals the effects of California and New York fast food establishments increasing their minimum wage to $15 over seven-and-a-half years (from 2013 to 2022).
It concludes there was no decrease in employment in California and New York compared to employment trends in the lower-wage areas.
Note that the study refers to gradual wage increases over an extended period, unlike the recent abrupt increase in California.
Gradually increasing worker pay helps align it with what the state considers fair without causing a significant spike in consumer prices. According to an Upjohn Institute working paper, phased-in minimum wage increases, often tied to inflation, have a lesser impact on prices compared to sudden, large increases. Small, scheduled increases might even result in lower prices and potentially stimulate employment in low-wage labor markets.
Circling back to California’s 1988 wage increase, in a 1992 study, economist David Card highlights a minor decrease in employment within the eating and drinking industry between 1987 and 1989 compared to control areas. However, he suggests the decline is likely due to long-term trends rather than just the minimum wage increase.
A different study co-authored by Card in 1993 focuses on New Jersey’s decision to raise the minimum wage by nearly 20% in 1992. It reveals that fast-food restaurants, which typically had high turnover rates and vacancies, experienced stable or even increased employment levels.
Despite some researchers questioning the reliability of the survey data and arguing that the post-treatment observations were too close to the minimum wage change, the 1993 study offers a glimmer of hope to an anxious industry.
Employee Turnover
- Implementing sudden changes in staff roles or eliminating positions can lead to a 35% increase in employee turnover.
- Replacing an hourly non-management restaurant employee costs $2,442.
- In Q3 of 2023, companies that were fully staffed had YoY growth in comparable stores that was 2.8 percentage points higher based on sales.
Typically, wage increases contribute to lower turnover rates and higher employee engagement.
Harvard Business Review states that wage increases bolster employee productivity for two reasons: a fear of job loss and a sense of reciprocity. And when employees work harder, they make more sales—about 4.5% more across all workers.
Based on a Harri survey, implementing sudden changes in staff roles or eliminating positions can lead to a 35% increase in employee turnover, implying that restaurants may want to think twice before making such drastic changes in response to the wage increase. The cost of turnover remains high: As per BBI research, replacing an hourly non-management restaurant employee costs $2,442. This includes all expenses for separating the previous employee and hiring and training a new one. Of those costs, training makes up about 47% for hourly employees and 65% for all levels of managers.
Beyond the cost savings associated with reducing turnover, the effect of increased employee retention on a business is very significant.
Our data shows that both limited-service and full-service restaurants see improvements in their sales and traffic growth if they are in the top quartile of hourly worker tenure compared to those that aren’t. Additionally, in Q3 of 2023, companies that were fully staffed had YoY growth in comparable stores that was 2.8 percentage points higher based on sales and 2.7 percentage points better when it came to traffic growth compared to those with understaffing issues.
In layman’s terms, wage increases generally lead to higher job satisfaction, increased productivity, lower turnover—which means employers spend less on advertising, recruitment, and retention costs—and increased sales and traffic.
As true as this may be, some California restaurateurs may have little choice but to make staffing cuts in response to the wage increase. This will likely lead to harder working conditions and lower job satisfaction and could—with the promise of comparable compensation elsewhere—actually lead to the increased turnover levels many fear.
Price Hikes
- A 10% wage increase typically results in a 2% to 3% rise in costs to the consumer.
- California quick-service restaurants saw a 3% to 3.5% rise in spending per transaction from the last week of March to the first week of April.
Given the substantial increase in the fast food minimum wage, popular brands including Jack in the Box, Starbucks, McDonald’s, and Chipotle are already warning consumers of upcoming price hikes.
How significant these may ultimately be is open to question.
For example, the IRLE research paper examines how minimum wage increases in California and New York affected McDonald’s prices (from 2013 to 2022). For every dollar increase in the minimum wage, McDonald’s raised the price of a $5 Big Mac by just 12 cents.
Of note, these increases were phased in at a much slower pace than the recent California wage hike.
Reich suggests that wage hikes have a modest effect on product prices, especially in labor-intensive industries such as dining and fast food. He notes that a 10% wage increase in the restaurant industry typically results in only a 2% to 3% rise in costs to the consumer, usually as a one-time adjustment.
Whether the consumer is prepared to swallow this amid a cost-of-living crisis remains to be seen.
Further, according to Victor Fernandez, VP of Insights and Knowledge at BBI, early data shows a sharp increase in average spending per transaction in California due to the minimum wage hike. Quick-service restaurants saw a 3% to 3.5% rise in spending per transaction from the last week of March to the first week of April. This is how much guests actually paid and does not necessarily align with the underlying price increases.
While restaurants are raising their prices by a larger margin, guests might be offsetting this increase by choosing cheaper items or skipping add-ons, meaning restaurants may not see all of the expected revenue.
Typically, the long-term impact of price increases balances out. Although they may initially prove very challenging for lower-earning consumers, the fact is an increased minimum wage would elevate the income of certain households beyond the poverty threshold, triggering a chain reaction that would gradually allow those with low incomes to reach economic stability.
And while this offers long-term help, it also proves that a phased rollout may have been the smarter move.
Customer Experience
- Higher wages and improved customer sentiment go hand in hand.
- Less turnover and longer employee tenure lead to a better customer experience.
- The study shows that brands in the quartile with the lowest non-management turnover had nearly 10 percentage points higher service net sentiment.
- 65% of customers are willing to pay more when they know there will be exceptional service.
On a more general basis, there is a clear link between higher wages and improved customer sentiment. And ultimately consumers are prepared to pay for a better experience.
To illustrate, analysts from the Cornell SC Johnson College of Business conducted a study comparing restaurant reviews before and after minimum wage increases. They discovered an increase in perceived service quality alongside higher wages. Additionally, they observed a decrease in negative reviews regarding workers’ friendliness and courtesy.
Again, higher wages generally lead to lower turnover rates. And BBI research proves that less turnover and longer employee tenure lead to a better customer experience (CX): According to a recent study, brands in the quartile with the lowest non-management turnover had nearly 10 percentage points higher service net sentiment, an impressive 2.2 percentage points higher YoY traffic growth, and nearly 3 percentage points higher sales growth. Brands in the quartile with the lowest general manager turnover had 7 percentage points higher service guest sentiment and traffic growth nearly 2 percentage points better than the rest.
As to customers’ willingness to pay more, a survey conducted in 2023 by Lisa W. Miller & Associates shows that although 59% of restaurant-goers believe prices have increased too much, 65% of customers are willing to pay higher restaurant prices when they know there will be exceptional service.
Similarly, a study by American Express states that US consumers are willing to spend 17% more to do business with companies that deliver excellent service.
Still, if restaurateurs are required to reduce their workforces as a result of the California wage hike, this may go straight out the window. The reality is fewer workers will likely result in worse service and CX.
The Domino Effect
- A Study shows increases in the minimum wage have minimal impact on small businesses overall.
- However, there may be an unintended consequence: Smaller restaurants may shut down as higher minimum wages lead to improved worker retention rates and increased profits for larger brands.
Although the new law technically exempts some small chains like mom-and-pop restaurants, many argue that the minimum wage increase will trickle through to other sectors within the industry, potentially forcing them to raise wages and even cut jobs to stay afloat.
Research from the University of Michigan reveals that increases in the minimum wage have minimal impact on small businesses overall. Analysts looked at data from six states over a decade and concluded that most independent businesses managed to accommodate higher wages through increased revenue, with some even seeing higher profits.
The data, however, suggests there may be an unintended consequence behind the wage increases, which may negatively impact smaller operators: Smaller, less efficient restaurants may shut down as higher minimum wages lead to improved worker retention rates and increased profits for larger, more productive establishments that continue operating.
On a positive note, one BBI customer is taking a proactive approach. Kura Sushi in California, exempt from the ruling but conscious of downstream impact, consistently strives to stay ahead of industry changes. Retaining current employees remains a top priority for the brand, which places a strong emphasis on thoughtful scheduling practices that consider employee preferences, ensure fair workload distribution, and optimize shifts.
In a recent interview with BBI, Arlene Petokas, Chief People Officer at Kura Sushi USA, stressed the importance of clear and heightened communication with employees to ensure they feel reassured and valued.
Now, of course, every business is different. However, solid communication and valuing employees is rarely a failing strategy.
Our Take
Only time will reveal the true impact California’s fast food minimum wage increase will have on businesses, customers, and the economy as a whole. Based on the historical precedent that does exist, conditions will settle in the long term.
But how the adaptation period plays out is uncertain. And this disruption may have been avoided had California opted for a slower rollout to the $20 mark. This would’ve been a more sensible approach to ensuring greater stability for employees and consumers.
But now the cat is out of the bag—it’s not going back in.
So the critical question remains: How can restaurants make the best of the situation? While layoffs or price hikes may seem necessary, operators should aim to adopt strategies that enable them to take a holistic view over time.
Take a step back and understand how this change affects your business in real terms, viewing it through the lens of overall market trends. The data doesn’t lie.
At times like this, be guided by insight—as hard as that may be. Make price adjustments, staffing decisions, financial reallocations, and strategic operational decisions based on a deep analysis of all the information available to you. This will ensure you are taking a big-picture approach that will best set your business up for success.
As a long-term partner to and knowledge source for the industry, we are here to help you manage through—like we always are.