When minimum wages are increased, one consequence we might see follow is reduced employment. I say might see, rather than will definitely see, because employers can adjust on multiple margins. Instead of reducing employment, they may reduce hours, benefits, perks, or just put less effort into providing a pleasant working environment. But consumers can adjust to the impact of minimum wages in a variety of ways as well. California’s recent minimum wage increase shows an example of this.
After the minimum wage of fast food workers in California was increased to $20 an hour, fast food establishments increased prices to offset this increase in costs. But this wage increase only applied to fast food workers, not restaurant workers more generally. This means that dine-in establishments do not have to pay their workers this minimum wage – including the workers at various restaurants owned by California Governor Gavin Newsom. Restaurants like Governor Newsom’s that feature “a $37 pasta dish and a $67 steak dinner on the menu” don’t “qualify as fast food, so [are] not required to pay the $20 minimum wage.”
As a result, these dining establishments have not been subject to a large spike in labor costs and have not had to sharply increase their prices. And this has changed the way Californians are eating out, as was described in this story. That article says the minimum wage increase “certainly marked a major win for the roughly 500,000 fast food workers in the state,” but it immediately goes on to note that these restaurants “now seem to be taking a hit when it comes to customer traffic” due to price increases, which makes the “major win” seem a little less than certain. And this decline is a new phenomenon – because “before the new law went into effect, fast food consumer traffic in the state was trending slightly higher than the national average.”
But the decline in fast food traffic isn’t entirely the result of people simply choosing to eat out less. Instead, people are making different choices about where to go out to eat. Now we see that “more expensive casual dining chains like Olive Garden and Chili’s have actually gotten a bump in traffic among California consumers since April. While it’s true that they don’t fall under the fast food category, and so aren’t required to meet the $20 minimum wage for workers across the board, their prices are still considerably higher than those of their quick-service counterparts.” So why would places that serve more expensive food be seeing their traffic increase, while the still-less-expensive fast food establishments see their traffic decline?
The answer is that even though the price of dine-in chains hasn’t fallen in absolute terms, it has still fallen in relative terms compared to fast food. Fast food and dine-in restaurants differ in terms of price, quality, and convenience. But with fast-food establishments being forced to increase their prices in the face of increased labor costs, the gap in price between fast food and dine-in establishments has gotten smaller without any change in the other two dimensions. As a result, people are seeing what it would cost them to get a basic combo at McDonalds and thinking “Well, if I’m going to have to pay this much just to get some McDonalds, I may as well pay just a little bit more and go to Chili’s instead.” As a result of this labor market intervention, Californians face higher food costs, and there has been a shift in favor of restaurants that are both more expensive in absolute terms for the consumer but also pay their employees less than the fast food minimum wage. This seems like very nearly the opposite outcome that the advocates of such a law would have wanted.
As Don Boudreaux likes to say, who’d have thunk it?
READER COMMENTS
Thomas L Hutcheson
Jun 21 2024 at 12:33pm
Financing a transfer to low wage workers with a tax on low wage employment is not pima facie a good idea. It positively anti-Harbergerian.
An EITC is preferable, but somehow Boudreau never makes this point. 🙂
Joe Potts
Jun 27 2024 at 3:31pm
Huh?
It’s Boudreaux, like in the article.
David Seltzer
Jun 21 2024 at 1:17pm
Kevin: “Who’d have thunk it?” People implementing the concept of cross price elasticity in real time. It seems Newsom isn’t completely stupid. His restaurant is offering only $16 an hour for jobs. I suspect those jobs will be filled as fewer $20 an hour jobs will be available.
Craig
Jun 21 2024 at 2:22pm
I suspect you are correct it will be interesting to see what happens to the turnover rate.
Richard W Fulmer
Jun 21 2024 at 2:44pm
Echoing David Seltzer, the fact that Newsom owns restaurants not covered by the law and that stand to benefit from it, brings into serious question the assumption that the outcomes were unintended. This highlights a key problem with laws and regulations that don’t apply equally to everyone. They are an open invitation for other businesses to lobby for rules that give them a similar competitive advantage. As a result, scarce resources are employed in lobbying rather than in improving products and services. Worse, the process leads to the corruption of both businesses and government and feeds people’s cynicism and distrust.
Dylan
Jun 21 2024 at 4:13pm
I didn’t click through on the links, but assuming that the fancier restaurants are still tipped positions and will generally end up making more than $20 an hour?
Nevertheless, the point about relative differences in prices meets my experience. I’m in NYC and not sure if we have the same difference in minimum wage, but I’ve noticed the relative price of all fast food and quick service places has gone up much faster than sit-down restaurants. I got a bahn mi from a small chain a couple weeks ago and it was $18! Airport food felt cheap in comparison!
steve
Jun 21 2024 at 10:35pm
AFAICT minimum wage in NYC is $16/hour for all workers, fast food and sit down restaurants. I would expect real estate prices to be a major factor. Had a banh mi in upstate NY on way toCanada. $12.
Steve
https://dol.ny.gov/minimum-wage-0
Dylan
Jun 22 2024 at 2:53pm
It looks like they can get a tip credit though, but only equal to a few bucks an hour to make up the difference.
https://dol.ny.gov/minimum-wage-tipped-workers
I’ve always suspected that the cost of real estate in NYC drives the high prices, but lately when I’ve traveled to other parts of the country prices feel pretty close to NYC. I was in rural Washington last week and spent $50 on a dozen donuts and $18 for a six pack of beer in the store. If anything, those prices are more expensive than in New York.
john hare
Jun 21 2024 at 5:29pm
My crew eats out for lunch once or twice a week. It’s just not that much more for a sit down lunch rather than fast food. Three of us had lunch with sides and tea for a bit over $40.00 plus tip the other day. Fast food would have been similar except for the tip and level of service and food quality.
Matthias
Jun 22 2024 at 6:15am
These days minimum wage laws are ostensible on the books to help poor people. (The justifications were a bit different in the past.)
But curiously many places that employ workers on minimum wage also predominantly serve poor people. Or the other way round, rich people tend to frequent places where minimum wage laws don’t have much of an effect.
So, even assuming that minimum wage laws are actually good for workers, the money still comes from other poor people as customers. While rich people aren’t affected at all.
This kind of redistribution seems a bit silly to me. Why not just charge eg a progressive income tax, that naturally falls predominantly on rich people, and hand (some of) the proceeds to poor people? No need to muck around with the labour market.
Phil H
Jun 22 2024 at 9:15pm
This analysis is fine, so far as it goes. But I think it highlights a reality of policymaking, which is that policy is often a fix, not an ideal.
KC here works out all the downstream implications of the minimum wage hike, and comes to a conclusion. But the motivation of the legislators was perhaps more immediate: they saw a problem, and took action to fix it. Perhaps they accept the fact that the fix might have downstream consequences, but thought, we’ll cross that bridge when we come to it.
Of course, one way to think about this ‘problem-solving’ approach to policy is that it’s short-sighted. That’s the theme of all of these Econlib critiques of minimum wages. ‘If you just looked a little further ahead, you’d know you’re storing up trouble for yourself.’ And that’s a fair point.
But another way to think about it is that there’s a lot of uncertainty in an economy. Working out all the downstream implications of anything would be impossible.For example, Kevin suggests that consumer behaviour has changed. Is eating less fast food good? Perhaps the state is setting itself up for a health dividend! But working out all of the possibilities would be an endless task. In order to make a policy decision, you have to decide what impacts you’re going to consider. You could look at just first-order effects, or first-order+second-order, or first+second+third, or… Somewhere, you have to draw a line and say, we’re not going to go any deeper than that. Wherever that line is, someone will disagree with you. But if there is a serious problem, then some action is better than no action.
Anyway, I don’t have much opinion on this particular policy. Frankly, it sounds excessively interventionist to me, too. But I think it’s always worth remembering the perspective of policymaker as troubleshooter, rather than policymaker as perfectionist.
Pete Smoot
Jun 23 2024 at 1:35pm
As the original article points out, $20 an hour is a big win for fast food workers who keep their jobs.
If automation or changing customer preferences lead to less employment by fast food restaurants, that’s a loss for the workers who lose their jobs. They’ll have to slum it and take a job in Newsom’s restaurant at a mere $16/hour. This is not a new observation.
What neither article pointed out is this is a loss for customers no matter how you slice it. I may look at the price of a McBurger and decide to go to Chili’s but what I’d really prefer is the burger at the pre-government-meddling price. April Fools!
Joe Potts
Jun 27 2024 at 3:40pm
It’s no different from your side winning the war.
If you got killed winning that war, you still lost.
Right?
Piper
Jun 24 2024 at 7:39am
I really don’t understand how anyone could believe a corporation that made a $14.7 billion profit in the year ending March 31, 2024 (a 9% increase over 2023, which was a 10.2% increase over 2022, and a 5% increase over 2021 profits), is “forced” to increase consumer prices because they what, can’t afford to give the country’s lowest paid workers a 20% raise? You realize that’s a mere $32 per person per eight hour shift, right? That’s about $160/week, $320 a pay period or $650/month and $7800 annually. If a single franchise had 20 employees, then he’d only need, they could spread the $156k over the months and it’s a mere $13k/month. You think jerks making millions up on millions every year would even notice a paltry $156k missing from their earnings?
It’s so strange how we empathize with the rich men who rationalize their greed with no compunction at all in any form.
If CEOs for a single year we’re willing to pass their earnings on to their struggling and starving employees who have never made a living wage but the shareholders and executives have never taken a loss. Not one like they enjoy forcing on their workers.
Take home $138million this year Bob instead of $160million. Is there even a difference between the values for someone in your eschelon? Execs can go many years without compensation because they’ve already made so much. Workers can’t. They become homeless, lose their kids and pets, and sometimes even themselves on these mean streets out here.
But poor Mr McDonald’s executive wants you to believe that YOU have to foot the bill to make sure he keeps profiting in the eight figure range. He doesn’t care if hundreds or thousands lose EVERYTHING due to their corporate greed.
The oligarchs have won people. Lay down your money and pick up your chains -cuz we’re all straight up owned now and the money they take from us we will never get back.
Not as long as the two dominant political parties force us to choose between Biden and Trump again.
robc
Jun 24 2024 at 3:37pm
You seem to be confusing McDonalds corp with a McDonalds store. According to article from google search from 2023, a typical McD franchise has $2.7 million in annual sales and $150k in profit to the franchise owner.
So, yes, said owner would notice an addition $156k in expenses.
Jon Murphy
Jun 25 2024 at 12:36pm
Piper-
While robc’s point that McDonalds is a franchis model is important, even if we ignore that vital fact, a big issue remains.
Being able to monetarily afford something is irrelevant to whether or not one will pay it. McDonalds’s owners are just like everyone else: they want to earn a profit greater (or equal to) their next best option. If rising labor costs eat into their profits, they will look to offset those costs: cutting back hours, passing on some of the costs to customers, removing employee benefits, etc.
In short: these no reason to suspect the owners of the firm will suddenly stop caring about making profits just because legislation requires them to pay higher wages.
Knut P. Heen
Jun 28 2024 at 7:49am
Piper, why don’t you but all your savings in McDonald stocks if it is such a great deal?
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