On Monday, April 1st, California implemented a statewide $ 20-an-hour minimum wage for fast food workers, making it one of the highest minimum wages in the nation.

Cue the price hikes. And be on the lookout for layoffs.

What happened

Last year, the Democratic-led legislature and governor passed a new high minimum wage for the fast food industry after a battle between labor unions and businesses.

The new $20 minimum wage, which applies to restaurants with at least 60 locations nationwide, is just the beginning. The law also creates a fast food wage board to hike the minimum wage by 3.5%, or inflation, through 2029.

The backroom dealing so well known in California was evident in this deal, as not every fast food chain will have to raise their base pay. An exception was carved out for restaurants that make and sell their own bread, like Panera Bread. How strange is that? This bread carve out makes sense when you learn that a billionaire businessman, who owns two dozen Panera locations along with many other franchises, is good friends with Governor Newsom and donated six figures to his campaigns. 

What’s the impact?

Fast food workers are understandably happy about the pay raise from the previous level of $16.60 an hour. However, their celebration may be short-lived when they start to directly feel the consequences of hiking labor costs this much.

The impact of this minimum wage hike will ripple across the food industry, the state, and nationwide.

First, unions will not stop with the fast food industry but will push to drag the minimum wage to $20 an hour statewide.

Second, other industries will now have to hike their base pay to compete for workers who will be drawn to fast food for the higher pay. 

In addition, other states may find themselves competing with California or pushing for their own $20 minimum wage.

While low-wage workers will benefit in the short term, in the long run, they will lose out much more in lost jobs, replacement by automation, and high prices.

The economy, businesses, workers, and consumers stand to lose.

Businesses will be hit hard. As Alex Johnson, the owner of nearly a dozen Auntie Annie’s Pretzels and Cinnabon franchises, notes, this minimum wage increase will cost $470,000 each year and threaten his ability to stay in business. He plans to raise prices by 5%–15% at his stores and won’t be hiring anyone else or opening new locations in the state. 

I try to do right by my employees. I pay them as much as I can. But this law is really hitting our operations hard. I have to consider selling and even closing my business. The profit margin has become too slim when you factor in all the other expenses that are also going up.

Meanwhile, as Fox Business News reported, multiple California food chains, including Pizza Hut, Southern California Pizza, Round Table Pizza, and Vitality Bowls, announced layoffs following the law’s passage.

In January, two California Pizza Hut franchisees laid off all 1,200 delivery workers ahead of the new wage floor being implemented. Now, they are relying on third-party delivery services.

Michael Ojedo, a Pizza Hut delivery worker who was laid off, told The Wall Street Journal.  “Pizza Hut was my career for nearly a decade, and with little to no notice it was taken away.”

A franchise owner in Northern California said customers keep asking about what happened to the “$5 footlong,” but wages have increased fivefold, and there’s no way to keep offering prices that low.

You keep kind of wondering when you’re going to break the camel’s back? And I think that’s our fear now…

To cut costs, businesses will undoubtedly raise prices, cut offerings, cut back hours for workers, downsize staffing, cut back operating hours, and replace workers with automation. If these changes aren’t enough, they may have to shut their doors. 

Bottom Line

Will a $20 Happy Meal become the norm in California? That may be a stretch, but prices will certainly rise. Restaurants may start closing during non-peak business hours (as they did during the pandemic). As inflation remains high, hiking the minimum wage only makes the dining-out experience more expensive and will drive away customers. Workers will lose jobs, and eventually, favorite businesses may go out of business. These outcomes are hard to swallow, but they are the consequences of bad policies.