California fast-food workers’ minimum wage win stirs up old economic debate

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Business groups claim hard-fought $20 hourly wage victory will cause reduced hours, layoffs and price hikes – critics say otherwise

As fast-food workers celebrated a pivotal wage increase to $20 an hour in California last week, an old economic debate was awakened by business groups and others claiming the increase will wind up hurting workers through reduced hours and layoffs, hurt customers with price hikes, and harm the franchise owners of fast-food restaurants.

Their critics are not so sure.

The hard-fought wage increase to $20 an hour from California’s current minimum wage, $16 an hour, was a compromise to initial demands of $22 an hour with annual wage increases. Representatives of fast-food workers and the fast-food industry came to a deal to avoid what would have been a costly ballot initiative over the passage and signing of the California fast-food sector bill last year.

“Frontline workers like me organized, went on strike, and fought to pass a historic law that raises our wages and gives us a seat at table with some of the biggest fast-food corporations in the world,” said Anjelica Hernandez, a McDonald’s worker in Los Angeles for nearly 20 years. “Even though we are the engine of a billion-dollar industry, too many of us struggle to keep up with rent, our bills and the rising cost of living.”

The minimum wage for fast-food workers at larger chains was agreed last September and increased to $20 an hour on 1 April, but numerous reports have already been made that the wage hike is resulting in job losses and price increases for customers.

The decision by two Pizza Hut franchises in California to lay off more than 1,000 delivery driver employees and rely on gig delivery drivers instead has been cited in claims that the minimum wage rise will result in layoffs and job losses.

“The reality is that delivery drivers have become more numerous in the last couple years because of Covid,” said Michael Reich, UC Berkeley chair of the Center on Wage and Employment Dynamics. “The pizza companies have been moving to make their delivery drivers not employees but instead rely on these delivery services for quite some time. And I think Pizza Hut is going to make this change anyway.”

Reich also argued that previous research had found employment increases as a result of higher minimum wage, lowers turnover rates for businesses, and makes it easier to recruit and retain employees.

The research is unlikely to deter attacks.

A group representing fast-food franchise owners poured more than half a million dollars into political donations for ads opposing elected officials who helped craft and pass the legislation. A Wall Street Journal op-ed referred to the California wage increase as “crazy” for paying “burger flippers” $20 an hour. The New York Post claimed Los Angeles fast-food chains increased prices on 1 April in response to the law, including citing price increases at the actor Kevin Hart’s chain Hart House, which doesn’t have enough locations to be subjected to the new law, which stipulates the chains must have at least 60 restaurants nationwide.

A McDonald’s franchise owner of 21 locations complained to a local Los Angeles news outlet that they could not “raise prices enough”. McDonald’s and Chipotle blamed the wage increase for anticipated price hikes in California ahead of the wage increase taking effect. El Pollo Loco claimed it would be looking into automation to cut labor costs due to the law.

The Center for Union Facts, a non-profit founded by a Washington lobbyist, Rick Berman, who 60 Minutes referred to as “Dr Evil” for his tactics in advocating for business interests, is running television advertisements in California claiming the wage increase is a “wrecking ball” for the fast-food industry.

But researchers have long criticized these claims of causation which have frequently been made in response to minimum wage increases around the US, all of which have come at the state level because Washington has failed to act on raising the federal minimum wage from the $7.25 an hour minimum last passed in 2009.

“Overall, study after study shows that increases to the minimum wage actually have a net gain. They produce a stimulus effect. If you give poor people more money, they’re going to spend it locally, including on rent, utilities and housing. It doesn’t get much more local than that, and that increased spending actually produces jobs,” said Tia Koonse, legal and policy research manager at the UCLA Labor Center.

An analysis of financial data over the past decade by researchers at the Roosevelt Institute found the fast-food industry has more than enough profits to raise wages without affecting prices and employment and have been hiking prices far beyond their operating costs for years.

“In 2023 alone, the 10 largest publicly traded fast-food companies spent $6.1bn on share repurchases,” noted the report. “As with most industries, the fast-food industry has historically charged higher prices than their marginal costs. However, between 2014 and 2023, markups increased at an annual rate of 2.2%, faster than at any period since 1978.”

Ali Bustamante, author of the report and deputy director of worker power and economic security at the Roosevelt Institute, added: “There’s really an opportunity here to revert profits back into workers back into the source of productivity for these businesses in a way that is going to be beneficial, not just for the overall economy, but certainly for these businesses in the long term.”

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