On April 1, some California fast-food workers got a raise. Others got, or will soon get, pink slips. This is no April Fool’s Day joke but rather one of the predictable outcomes of the state’s new minimum-wage increase, from $16 to $20, for fast-food workers.
The higher wage floor applies to chains with more than 60 locations nationwide, affecting an estimated 500,000 workers. Fast-food restaurant owners have prepared in predictable ways. They have laid off employees, reduced operational hours, and hiked prices to cope with the increased labor costs to stay in business.
Assembly Bill 1228, signed into law by California governor Gavin Newsom in September, formalizes an agreement between fast-food companies and unions. The law establishes an unelected, governor-appointed Fast Food Council with the authority to adjust the minimum wage annually by the lesser of either 3.5 percent or the annual change in the consumer price index for Urban Wage Earners and Clerical Workers. Additionally, the council is empowered to propose labor, health, or safety standards for consideration by relevant authorities.
The law, signed on Labor Day 2023, marked a significant concession to one of California’s most influential public-sector unions—the Service Employees International Union (SEIU), the primary advocate for the bill. It’s also indicative of how Newsom might try to export the California model to the rest of the nation, if he eventually pursues the presidential ambitions that many believe he harbors.
Originally marketed as “holding billion-dollar corporations accountable,” AB 1228 will likely hit small business owners hardest. That’s because most major fast-food chains, including McDonald’s, Subway, Arby’s, Taco Bell, Papa John’s, and Chick-fil-A operate on a franchise model. Under this system, third-party operators obtain the rights to utilize the business’s name, branding, and model by paying fees or royalties. Corporate franchising, an enduring American business innovation dating back to the 1850s, has traditionally served as a pathway to business ownership, particularly for underrepresented groups like women, minorities, and immigrants. Among California’s nearly 15,000 franchisees, minorities represent 30 percent of franchise owners, a significantly higher proportion than the 20 percent minority ownership seen in non-franchise businesses.
Contrary to the popular perception that these chains are global corporate behemoths, most franchise restaurants are mom-and-pop shops that run on narrow profit margins. In California, more than two-thirds of franchisees own only a single store, categorizing them as small businesses. This fact may have been lost on AB 1228’s backers, such as Assemblyman Chris Holden, the bill’s author, who represents the affluent enclave of Pasadena, California. (Ironically, Pasadena is home to the state’s first fully automated restaurant, where patrons order and pay for their meals via self-serve kiosks, observing as robots grind premium beef for burgers and prepare fries.)
The National Owners Association, an independent advocacy group representing more than 1,000 McDonald’s franchisees in the U.S., estimates that the wage increases will impose an annual cost of about $250,000 on each McDonald’s restaurant in California, as reported by CNBC.
As the cost of hiring and training unskilled workers grows, businesses face inflated expenses, potentially prompting a shift toward automation, reduced hours for workers, and outright closures. Employers face a dilemma: automate or die.
Lawmakers shouldn’t act surprised about these pressures. Since Newsom signed AB 1228, mass industry layoffs have been anticipated. Shortly after Christmas in 2023, Pizza Hut announced the termination of more than 1,200 delivery drivers.
For the state’s workers, the legislation’s timing couldn’t be worse. California’s unemployment rate has surged to 5.3 percent, highest in the nation, according to new data. High unemployment will drive demand for public assistance, while reducing consumer spending and productivity, leading to lower incomes. Paying out unemployment benefits won’t be easy: the latest report from the California Legislative Analyst’s Office projects a $73 billion deficit for the upcoming fiscal year.
AB 1228 also makes a mockery of California’s vaunted equity agenda. The hit to employment from the new minimum wage will disproportionately affect black and Hispanic Californians, who are overrepresented in the state’s low-skilled workforce.
Low-skill, entry-level jobs are the foundation of a thriving and prosperous economy. Positions in retail and fast food often pay minimum wage because no prior work experience is necessary, leaving it up to the employer to train and mentor individuals. When the minimum wage goes up, so, too, do experience requirements for a job, with particularly negative effects for teenagers, young adults, and people with less education.
As a teenager with no prior work experience, I took a part-time position at a hardware store to help fund my college education. I was trained as a cashier. Such jobs are increasingly rare in California, where businesses are investing more and more in computerized self-checkout machines. My humble part-time job gave me invaluable lessons that no undergraduate business course could provide—most importantly, how to hustle. My modest paycheck, taxed heavily, instilled in me the habit of frugality and impressed on me the necessity of budgeting. Early morning shifts at 5 a.m. cultivated self-discipline, particularly when they occurred on weekends. Enduring criticism from irate customers taught me humility, the importance of customer service, and above all, the virtues of patience and kindness.
Minimum wage laws like AB 1228 may be well-intentioned, but their unintended consequences on businesses, employment, and economic equity warrant more careful consideration. In pursuit of a worker’s paradise for some, California legislators may have created an unemployment hell for many more.
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