Investment Strategy

Why the $20 California Minimum Wage is a Blessing in Disguise

I remember growing up in a typical suburban neighborhood back in the day where there weren’t a whole lot of options for parents to take their kids out for dinner. In this era moms were mostly stay at home and the vast majority of meals were prepared by her and eaten as a family around a dinner table. Rinse and repeat. Yes, there were a few fast food chains and a local restaurant or two, but far from the myriad of choices today that make driving down a main street in one town indistinguishable from another. You wouldn’t know if you were in Kansas or South Carolina.

Again reminiscing, the minimum wage in the U.S. in 1980 was $3.10. If you fast forward to today, keeping up with inflation, the equivalent minimum was would be $12.40 an hour. California has decided that that isn’t near enough, and has set the state’s minimum wage to $20 an hour, an almost $8.00 an hour premium over the 1980 inflation adjusted number, or roughly double the dollar amount. This is good. Very good. Why do we say that?

Anecdotally to begin, the world needs less fast food and all the deleterious health conditions that result from it. This alone would be reason enough to cheer the demise of the industry. The medical and financial savings from reducing Type 2 Diabetes alone would be worth its weight in McDonald’s french fries. From the business perspective, the wage hike also means higher labor costs for employers. Some businesses, especially small ones, may struggle to absorb these costs, leading to potential layoffs or reduced hiring. The fast food industry, for instance, has already seen job cuts and increased automation in response to the wage increase. This could result in a contraction of employment opportunities, particularly for young and less-skilled workers who typically fill these roles.

According to the Hoover Institution, between last fall and January, California fast food restaurants cut about 9,500 jobs, representing a 1.3 percent change from September 2023. Total private employment in California declined just 0.2 percent during the same period, which makes it tempting to conclude that many of those lost fast food jobs resulted from the higher labor costs employers would need to pay.

And I’m sure you never would have guessed that the increased labor costs would be passed on to you by paying $20 for a Happy Meal at McDonalds. Fast food prices are up since the law took effect on April 1. In less than one month, Wendy’s increased prices by 8 percent, Chipotle’s prices have increased by 7.5 percent, and Starbucks prices are up by 7 percent. McDonald’s has announced it will be raising prices, and many other fast food franchises have announced hiring freezes. This is what happens when you deviate from the free hand of Adam Smith and impose wage and price controls. The chart below shows the draconian price increases in California fast food in just the past two months.

So why did Gavin Newsome and the California legislature enact this law? Well, for one, because they can. If there is a way to give money away and not have to pay for it, they will. The increase in the minimum wage is expected to boost the purchasing power of low income workers. With more disposable income, these workers are likely to spend more on goods and services, potentially stimulating economic activity. This could be particularly beneficial for local businesses, which would see an uptick in sales. However, the extent of this benefit is contingent on the elasticity of demand for the products and services offered by these businesses. While it certainly puts more money in the pockets of workers, it also is ostensibly a tax on the rest of the population that eats out.

Moreover, there is the issue of inflation. As businesses grapple with higher wages, they pass on the costs to consumers through increased prices.  This inflationary pressure could negate some of the benefits of the wage increase for workers, as the cost of living rises correspondingly. Another concern is the competitive disadvantage for California businesses. Higher operating costs could make California less attractive for investment and entrepreneurship compared to states with lower minimum wages. This could potentially slow down economic growth and innovation within the state.

Albeit beyond the scope of this article, unions are at the heart of the demand for pay increases for workers.  For over a decade the Service Employees International Union (SEIU) tried to unionize fast food workers, but failed, despite spending $100 million in the process. The impact of raising the minimum wage to $20 in California is complex and multifaceted. While it has the potential to increase consumer spending and reduce employee turnover, it also poses risks of job losses, inflation, and reduced competitiveness. The long term effects on the overall economy will depend on how businesses, consumers, and the labor market adapt to these changes.

Would anyone really lose sleep if they could no longer get a Big Mac or Fish Filet sandwich? You’d go somewhere else if you had too, just as the displaced workers will find employment elsewhere. Policymakers must carefully monitor these developments and be prepared to make adjustments to ensure that the benefits of the wage increase are maximized while mitigating its potential drawbacks.

Investment Strategy

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