Economist Michael Reich on Why California Fast-Food Wages Can Rise Without Job Losses and Higher Prices

California on April 1 raised the minimum wage to $20 an hour for fast-food workers at chains with at least 60 locations nationwide, among the highest in the country. The wage hike followed years of campaigning by fast-food workers, who also successfully pushed for the establishment of a Fast Food Council, a body made up of fast food employees and employee representatives, franchisees and industry representatives. The council has the power to set standards around wages and working conditions in the industry.

Michael Reich. Photo courtesy UC Berkeley.

Employers warn that the wage hike, which nominally boosts fast-food pay 25% above the state’s hourly minimum wage of $16, will cause layoffs and significant price increases. But many economists believe that the wage boost will have an overall positive effect both for workers and for businesses.

Capital & Main spoke to Michael Reich, an economics professor who has studied the effect of minimum wage increases on employment for decades. He chairs the University of California, Berkeley’s Center on Wage and Employment Dynamics at its Institute for Research on Labor and Employment. His most recent research on previous wage increases for fast-food workers in California and New York found minimal price increases and no negative effects on employment. 

Capital & Main asked Reich to predict how the new minimum wage law might affect fast-food employers, employees and customers. 

This interview has been edited for length and clarity.

Capital & Main: How do you anticipate this wage increase will affect California?

Michael Reich: Most of the conversation centers on possible effects on employment and prices. You have to keep in mind that the statewide [minimum] wage, as of Jan. 1, was $16 per hour. All of the large cities had much higher minimum wages. So in L.A., it’s $17 per hour. In the Bay Area and in San Jose, it’s $18 per hour. About a third of Californians already work in places with minimum wages that are higher than $16 per hour. 

Also, we currently have a very tight labor market with low unemployment. To attract and keep their workers, many fast-food employers have had to pay more than $16 per hour; some already pay more than $20 per hour. As a result, the average increase in fast-food wages will be much less than a $4 increase from $16 to $20 per hour. Based on what we have observed with previous minimum wage increases, the average wage increase may be only 5%, or 80 cents [per hour], not $4 per hour. That’s comparable to past minimum wage increases that did not lead to fewer jobs. In our recent study of the effects of increasing the California minimum wage from $8 in 2013 to $15 in 2022, we did not find any negative employment effects. The evidence so far indicates that minimum wages can go above $16 per hour without causing job losses.

On the other hand, the California minimum wage increases we studied were spread out over seven years. Today we’re discussing a 25% increase in just one day. That could mean the average wage increase this time will be somewhat more than 5%. But I doubt very much that it will be more than 10%.
 

“Consumers aren’t that responsive to small changes in prices of fast food. They’re not going to reduce the number of hamburgers they buy.”

 
There’s a lot of talk from employers about how much prices will have to rise in reaction to the wage increases. What do you predict?

Some people [incorrectly] think that if the minimum wage goes up 25%, prices will have to go up 25%, which will be a lot, particularly because lots of prices have [already] gone up by 20% to 25% since the start of the pandemic, including restaurant prices. 

So how much [of future fast-food price increases] could we expect with the [recent increase in the] minimum wage? Well, if the average wage goes up 5%, not 25%, and if labor costs are one-third of operating costs, which is what they are in restaurants and fast food, then the increase in labor costs is one-third of 5%. That’s under 2%. That means that if wage increases were fully passed through to [prices] as the cost increases, prices would increase by less than 2%. So a $5 burger would go up by 10 cents. It’s less than people think. Also, we know from various studies conducted by the U.S. Department of Agriculture’s Economic Research Service that consumers aren’t that responsive to small changes in prices of fast food. They’re not going to reduce the number of hamburgers they buy.

Contrary to what some critics are predicting, your new paper did not find negative effects from previous fast-food minimum wage hikes. Could you say more about your findings? 

Our new paper looks at the effects of the near-doubling of the minimum wage in California, from $8 in 2013 to $15 in 2022. We also looked at the effects of minimum wage increases of about the same amount in New York state over the same period. To isolate the effects of the minimum wage from other economic changes, we compared fast-food employment growth in California and New York to employment growth in states that have not raised their minimum wage since 2009. 

We did not find any evidence of negative employment effects and some evidence that the minimum wage increases led to faster employment growth. [That is] because the wage increases made it easier for fast-food employers to attract workers. Fast-food employers had kept wages low for decades. Since these jobs were not very attractive, employers could not fill all their job vacancies. And their employees kept quitting at high rates. But once minimum wage [rates dictated by law] forced employers to increase wages, they ironically found it easier and cheaper to recruit and retain workers. They could hire more workers than before.  

We also found that prices at places like McDonald’s increased by small amounts when the minimum wage went up. The price increases were much smaller than the increases in operating costs. That’s evidence that reductions in what had been very high profits absorbed a good part of the companies’ cost increases.
 

“We did not find any evidence of negative employment effects and some evidence that the minimum wage increases led to faster employment growth.”

 
Fast-food employers have been warning that restaurant owners would cut hours. Is this likely?

The average weekly hours [at fast-food restaurants are] about 25 hours. That also includes a lot of people who work part time. There’s not a lot of room to cut hours even more without cutting the number of hamburgers you can sell. So I think it’s like a threat rather than something that is going to happen.

But [companies] could intensify the work and make employees work faster, which has implications for health and safety. It’s very hard to get data on how hard people are forced to work. There’s a lot of anecdotal stories about that, but I like to deal with data.

Pizza Hut franchises recently laid off more than 1,000 workers in California, and it’s been reported that the layoffs were in anticipation of this new $20 minimum wage. Is that really why they were laid off?  

I haven’t done specific research on that question. But I think it’s pretty obvious that the number of food delivery drivers — DoorDash drivers, Uber Eats, Grubhub and so on — has been skyrocketing. And they’re paid very little. About half of their income is from tips. So it’s very, very cheap for the restaurants to employ the services, which then hire the drivers as independent contractors. That’s a change in the delivery model.

Pre-COVID, most deliveries were made by employees, as in the case of Pizza Hut and a lot of other pizza chains, too. And so I think Pizza Hut’s transition from [using employee drivers] to using delivery services that rely on independent contractors was going to happen anyway. I don’t see why Pizza Hut would not make that change when everybody else has. So I don’t attribute the layoffs to the minimum wage increase.
 

“It’s an experiment. If it goes well, I think you’ll see it copied in other sectors and in other states.”

 
Many fast food restaurants operate as franchises, where individual entrepreneurs pay for the rights to use the parent company’s branding and products. Do you anticipate the wage increase affecting corporate-owned and franchised restaurants differently?”

Excellent question, but I can’t answer it. It depends on whether the corporate-owned stores have a greater ability to absorb cost increases from corporate profits [than stores operated by franchisees]. I haven’t not found data on whether that’s the case. McDonald’s makes the most profits [of the major brands], yet 95% of its stores are franchised.

Is there anything unique about California that makes the passage of a minimum wage law for fast-food workers easier to accomplish than in other states?

There is this innovation of having a wage-setting Fast Food Council and having the employers and the workers meet together for what’s called “sectoral wage bargaining.” There are other examples in Minnesota, where nursing home workers have a council for wage bargaining. 

California is not unique. But this [wage increase in California] is the biggest example [of such an increase] by far. It’s because we’re a blue state. We have a Democratic governor, and we have unions that are very active in organizing — much more so than in most other states. It’s an experiment. If it goes well, I think you’ll see it copied in other sectors and in other states.

By going well, you’re referring to there being no negative effects, such as layoffs?

Yes, if there aren’t big layoffs, and if there aren’t gigantic price increases, but also if Fast Food Council meetings resolve other issues, such as scheduling and worker health and safety. If they come to agreement on some of those issues and improve the workings of the industry, that will also be a marker of success.

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