How California's Generous Minimum Wage Backfired in the Fast-Food Industry
California’s recent implementation of a $20 minimum wage for fast-food workers has stirred up quite a stir in the restaurant industry. The move, signed into law by California Governor Gavin Newsom at SEIU Local 721 in Los Angeles, has already set off a series of reactions since it came into effect on April 1. Recent data analysis paints a vivid picture of the consequences that have followed this bold step.
Initially, things seemed to be looking up for major chain restaurants in California. Foot traffic during February and March this year was on the rise compared to the previous year and even surpassed the national average. However, this upward trend took a drastic turn once the $20 minimum wage law kicked in. From April through May, foot traffic to fast-food establishments in California consistently dipped below the national average for seven out of eight weeks.
McDonald’s, a fast-food giant, saw a similar year-over-year foot traffic trend at its California locations as the rest of its outlets across the country during the initial period. But post the implementation of the minimum wage law, the California locations, comprising approximately 9% of the company’s U.S. restaurants, started to underperform by nearly 250 basis points. Other major chains like Burger King, Wendy’s, Jack in the Box, In-N-Out Burger, and even Chipotle, which had raised its prices by 6%-7% in response to the wage hike, also experienced a decline in foot traffic in California.
The repercussions of the minimum wage increase are not limited to fast-food chains alone. The broader restaurant industry in the state is beginning to feel the effects as well. According to R.J. Hottovy of Placer, “It’s early, but we’re starting to see the ripple effect of the minimum wage increase across the broader restaurant industry.” The impact is not just limited to foot traffic but has also forced some restaurant chains to shut down locations in California.
Interestingly, casual dining chains, which typically paid their workers more than the mandated $20 minimum wage, have been able to leverage menu price hikes at fast-food joints to their advantage. Olive Garden and Chili’s in California, for instance, outperformed their respective national averages in foot traffic year-over-year in April. This shift in dynamics within the restaurant industry in California underscores the multifaceted consequences of such a significant wage increase.
As the effects of the $20 minimum wage continue to play out in California’s restaurant scene, it poses a challenge for businesses to navigate the delicate balance between meeting wage requirements and maintaining operational efficiency. The ongoing developments serve as a case study for the broader implications of policy decisions on the intricate dynamics of the restaurant industry.
