California’s $20/hr minimum wage stirs controversy in fast food industry
Last September, California Governor Gavin Newsom signed into law Assembly Bill (AB) No. 1228 which raised the minimum wage for certain fast-food workers within the state to $20 per hour. The state’s current rate is $16 per hour. This new law, which went into effect on Apr. 1, targets the national fast-food chains and covers fast-food workers employed by restaurants that have 60 or more locations nationally.
AB 1228 effectively creates a two-tiered minimum wage structure in California. First, it imposes a $20 per hour minimum wage for much of the fast-food industry. Then there is the existing $16 per hour rate for all other employees in the state. For perspective, California’s $16 per hour minimum wage is the second highest in the nation, behind only Washington’s rate of $16.28.
By comparison, Iowa’s minimum wage is $7.25 per hour, which matches the federal minimum rate. Illinois, however, also has one of the highest minimum wages in the nation at $14 per hour. This is set to rise to $15 per hour on Jan.1, 2025. In Chicago, the current minimum wage is $15 per hour for businesses with four to 20 employees and $15.80 per hour for those with 21 or more employees.
Supporters of AB 1228 argue that it provides many fast-food workers a higher standard of living, especially in the uber-expensive state of California. Based on data from the U.S. Department of Commerce, California ranks No. 50 among all states in terms of affordability and cost of living, according to a 2024 analysis by U.S. News & World Report. California even beats out perennial high-cost state Hawaii, which ranks No. 49. Locally, Iowa is ranked No. 5 while Illinois ranks No. 35.
But AB 1228 is not without its share of criticisms. The new law exclusively targets the national fast-food chains such as McDonald’s, Chipotle, KFC and Dunkin’ Donuts, among numerous others. But even if a franchisee-owner operates just a single store, they must now pay their employees a minimum of $20 per hour. However, most of the high-end, fine dining restaurants in the state are exempt from this new wage law. In fact, California Governor Newsom still has ownership in several such high-end restaurants that are excluded from the new $20 per hour minimum wage.
Rising labor costs are also forcing many fast-food restaurants in California to raise their prices even higher. The fast-food industry was once a staple where budget-conscious families could receive good value-for-money while eating out. However, there are a growing number of reports in California that the cost of a single meal at many fast-food restaurants is reaching $20-$25. Thus, a family dinner at a local fast-food restaurant is quickly approaching $100. McDonald’s CEO Chris Kempczinski recently acknowledged that rising costs are pricing out many American families, especially low-income households, who simply can’t afford these rising prices.
Finally, and perhaps most importantly, there’s ample evidence throughout California of restaurants being forced to close or to move to a more business-friendly state. Even before the Apr. 1 implementation of AB 1228, California was already reeling from a mass exodus of businesses. In a joint survey by PublicSquare and RedBalloon, just 13% of California small businesses say they are happy operating in the state and don’t plan on moving. However, a whopping 67% say they are either planning on leaving, considering leaving or want to leave the state.
The flight of businesses out of California carries over to its residents as well. According to data from the U.S. Census Bureau, between July 2022 and July 2023, California lost 0.9% of its residents via migration to another state. This is the second largest percentage of residents who moved to another state in the nation. New York holds the title for losing the greatest share of its residents at 1.1%.
Over the past few years, we’ve seen various forms of technology, such as AI and robotics, increasingly being used by various industries to reduce the impact of rising labor costs. Consider Amazon. They currently use 750,000 robots within their network of warehouses and they’re looking to ramp up the extent of automation even more.
For fast-food restaurants, wage pressures have quickened the pace of automation within the industry. We’re already seeing more and more self-ordering kiosks being used. But experts say this automation will soon extend to food preparation, packaging and even delivery. So, from the moment you place your order until the moment the food is delivered to you, one day that entire process may be 100% robotics and automation.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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