Why California Raising the Minimum Wage to $20 Actually Hurts Workers
California will raise the minimum wage for fast food workers in the state to $20 per hour effective April 1, 2024. California already has the one of the highest minimum wages for all other workers at $15.50 per hour. A recent Associated Press article noted “Democratic Gov. Gavin Newsome signed the law amid a throng of cheering workers and labor leaders.”
My perspective? This decision and new law will, eventually, be one of the worst things that ever happens to California’s fast food workers. Here are four reasons why!
1. Legislators ignore, minimize or don’t want to understand that the world is dynamic not static. In their static view, if we raise wages, then presto, workers make more money and salaries go up. Of course, the world is dynamic meaning there will be numerous immediate and long- term reactions or impacts due to this forced wage increase. So, the first problem is the fundamental thinking that led to law is wrong. When wages go up employers will figure out how to maintain the same level of profitability and they’ll have to make one of three decisions:
a. Offset the wage increases by eliminating some of their full-time workers or reducing total hours.
b. Offset the higher input costs (wages) by raising the prices of their outputs (food, meals, drinks) .
c. Substitute capital for wages. In this case, trade service workers for more automation.
2. California legislators can “wish” whatever they want but they can’t change the basic tenets of economics. Specifically, as noted above labor and capital are substitutes for each other at some level. So, because labor costs (wages) go up, employers now have more incentive to substitute in capital (or in this case automated solutions). For simplicity, say a fast food restaurant has 30 workers and each one works 2000 hours a year and each one makes the current minimum wage of $15.50. With the new law, the employer’s labors costs will go up $270,000 annually. This will supercharge efforts to automate jobs/tasks and reduce total labor hours. Look for more self-pay kiosks, order automation and service robots. For example, it wouldn’t be that hard for Starbuck’s to make existing microwaves customer facing and have them heat up their own food items while waiting for their drinks. How different is that from ringing up and bagging your own groceries? There will be many new, creative ways to “transfer” costs from the employer directly to the customer and eliminate employees. Remember, there used to be such a thing as full -service gas stations and being a service attendant was a pretty decent job.
3. Prices will go up at virtually all fast food restaurants since employers will pass through some of these increased costs. Most of this will be price action, but you may see portion sizes / quality decrease as well.
4. This new legislation is also a “back door” minimum wage increase for the state since rational employees will say why should I work at Target or a gas station for $15.50 when I can work for a fast food unit for $20. Other employers with minimum wage jobs will likely have to pay more for their workers. And guess what, they’ll also pass their increased costs along to consumers. Oh, and these consumers include all of the fast food workers who were “temporarily” making more money. Until, that is, their increased take home pay was reduced by more inflation from the other across the board price increases. Bottom line, very little of the new minimum wage will result in an increase in “real wages” where the fast food worker sees a sustained increase in their purchasing power.
What California’s fast food and minimum wage workers really need is lower gas prices and more affordable housing! The same decision makers forcing through an increase in minimum wage have supported a myriad of laws and policies making California the most unaffordable state to live, drive or build new housing units. According to AAA data , California drivers on average pay $2 more per gallon for gas which costs each driver extra $1200 annually versus other states.. According to earnest.com, the average rental price in the US is $1,249 monthly and it is $1,901 in California. Using this example, the average person/family renting in California is paying about $650 more monthly or $7,800 annually to keep a roof over their heads. The lack of affordable housing in California is a known problem exacerbated by too many existing laws and regulations from the same legislative decision makers.
If the California legislature really wanted to improve the lives of its minimum wage workers, they’d be focusing on reducing gas and housing costs (among other things) and not forcing large and small business owners to pay higher wages that will ultimately serve to reduce the number of minimum wage positions in the fast food industry. This is a great example of not understanding how markets and basic economics really work…
