A $20 minimum wage that went into effect this week will squeeze the California fast-food industry, but it won't solve the poverty problem of the country's most populous state.
"A 25% increase in the minimum wage for fast food restaurants in California will ultimately result in higher prices and lower sales, and reduced margins for franchise owners in the state," Ben Johnston, COO at Kapitus, told International Business Times.
"Many large fast-food chains have already announced pricing increases that will be implemented when the law goes into effect. Higher prices will reduce demand for fast food, thereby lowering overall profits and margins, since the business will still need to cover its fixed costs like rent and energy costs on lower revenue."
Scott Greenberg, a franchise expert and author of "The Wealthy Franchisee Game-Changing Steps to Becoming a Thriving Franchise Superstar," raises similar concerns. "Bumping the minimum wage up to $20 an hour is going to stretch labor costs for many businesses, making it tougher for them to stand out as employers by just throwing more money at employees," he said.
Reduced demand for fast food and lower profit margins will eventually push more franchise restaurants off the cliff in a state that leads the country in fast food closures. But Renee Guilbault, CEO of Essayer Food Consulting and Author of 'A Taste of Opportunity: An Insider's Guide to Boosting Your Career, Making Your Mark, & Changing the Food Industry from Within,' thinks that franchise chains will find other ways to survive.
"New, less expensive products, digital innovation, enhanced automation (kiosks and other labor-reducing tools), and loyalty programs will all be utilized to drive continued sales growth and resilience," she said.
"Customers are going to see continued price increases, menu item reshuffling (less profitable recipes will be reengineered or removed from menus to make way for products with better profit margins), reduced staffing, and ongoing operational tweaking to absorb the higher labor costs," she continued.
But he, too, sees limits to these policies as customers could already be getting fed up from relentless price hikes over the past years that "pass it on" higher costs to remain competitive without adding additional value. While the minimum wage hike will squeeze the franchise industry, its impact on minimum wage employment is unclear.
Carl Schramm, an economist from Syracuse University, argues that the minimum wage hike will result in job losses. "Since 1938, when the first federal minimum wage was imposed by statute at 25 cents per hour, economists have demonstrated that minimum wage legislation always results in fewer jobs," he explained. "The market does not set minimum wages where the supply and demand for labor generally meet at a rate that reflects the most efficient level that benefits workers, the owners of businesses subject to such legislation, and consumers."
Ethan Caplan, associate professor of economics at the University of Maryland, provides a different argument. "In general, the academic literature on the impact of minimum wages on employment has tended to find no discernible negative employment impact. Some of the best work compares areas across state borders, which differentially experience minimum wage increases due to differences in state policy. These studies have focused on highly impacted industries such as the fast-food industry."
Meanwhile, Dr. Tenpao Lee, professor emeritus of economics at Niagara University, sess the new minimum wage hike as giving a significant boost to the pay of the state's minimum wage worker. "California is the third highest cost of living state of $53,171 per year and an average wage of $73,220 per year," he explained. "A minimum wage of $20 per hour approximately equals $40,000 annually. About half a million workers are in the minimum wage category, and most must maintain two or three jobs to meet their basic needs. Therefore, a 25% minimum wage jump from $16 per hour to $20 per work would be significant for minimum wage workers."
Nonetheless, he doesn't see the hike as solving California's poverty problem. Fast food workers would still be under the poverty line in California. "On the other hand, employers' labor costs for restaurant and franchise owners would go up inevitably," he said. "Most of them have already envisioned this increase and incorporated it into their strategies to deal with overall inflation caused by the pandemic in the last three years."
