How the Minimum Wage Can Cost More Than Money

A $16 meal now costs $20 at a Hollywood Chick-fil-A. The reason is California’s minimum wage hike.

Starting April 1st, 2024, California’s fast-food workers were paid a new $20 minimum wage. According to the California FAQ page, their fast-food worker wage hike applies to restaurants with limited service that are a part of a chain with at least 60 establishments.

Traditional economic theory suggests that employers respond to an increase in wages with fewer jobs and work hours. Instead, California’s fast-food establishments increased prices. Looking at 70 large chains, one study estimated the overall increase was 10 percent:

They did have other alternatives.

The Cost of Raising the Minimum Wage

Debating the impact of a minimum wage hike, economists have done countless studies. Many conclude with higher prices. For example, when two economists gathered gargantuan information from thousands of U.S. McDonald’s for five years, their focus was the group that earned a minimum wage. With data from approximately 10,000 outlets that were in malls, Walmarts, and freestanding, they considered 300 minimum wage changes that included 42 cities. In this study, like California, there was a pass-through of the wage increase to the customer.

Others, though, identified “Channels of Adjustment.”

Because of a 25 cents minimum wage hike, delivery people at a NYC pizza establishment no longer hang out until they get a call. Instead, they had new responsibilities that cut their “down time.” Observing a minimum wage hike in Georgia and Alabama, another group of researchers looked at prices, training, and firm-wide wage boosts. Yes, prices did go up on meals like the combo meal (sandwich, small fries, small soda). But also the firm’s wage structure “compressed” because higher paid workers received lower raises. As for hiring and firing, there was less of both because training cost $300 to $400 a person. Other results included less overtime, better inventory control and more for each worker to do.

So, when we hear that the minimum wage increase boosted prices, we can guess that there might have been other less obvious “Channels of Adjustment.”

Our Bottom Line: The Minimum Wage Debate

We can also assume that there was no free lunch. If firms do not eliminate jobs, then we have to look elsewhere to discover how they are absorbing the extra cost of a higher minimum wage. And then, as economists, we can assess the tradeoff. We can decide if the cost was worth the benefit.

Below, on our traditional price floor graph, supply is labor while demand is the business side of the market:

Now though, we should add the “channels of adjustment” to “unemployment” on the (above) horizonal price floor line.

My sources and more: Thanks to WSJ for the California minimum wage update. Meanwhile, this paper provided more insight. I hope also you will return to econlife posts, here and here, with much more of the debate.

Please note that several of today’s sentences were in a past econlife post.