4 reasons Gavin Newsom's new fast food law is a recipe for disaster

California Governor Gavin Newsom recently signed a bill that raises the minimum wage for fast food workers to $20 an hour and creates a council that can approve further increases. The bill, AB 1228, was hailed by labor activists and fast-food workers as a historic victory for their rights and dignity. 

However, we have serious doubts about the wisdom and effectiveness of this law. We believe it may have unintended and harmful consequences for the fast food industry, its workers, and its consumers.

First, the law will lead to higher prices and lower quality for fast food products. Researchers at the Federal Reserve Bank of Chicago and the Department of Agriculture found that a 10% increase in the minimum wage raises fast-food restaurant prices by approximately 1.5%. This finding would suggest that a $20 minimum wage, which is a 29% increase from the current $15.50, would raise fast-food prices by about 4.4%. This estimate may not seem like a lot, but it could make a difference for low-income consumers who rely on fast food as an affordable and convenient option. Moreover, higher prices will likely reduce the demand for fast food, hurting the sales and profits of fast food chains and franchisees.

Second, the law will reduce the employment and hours of fast-food workers. According to a recent study by the Congressional Budget Office, a $15 federal minimum wage would reduce employment by 1.4 million workers nationwide, or nearly 1%. A $20 minimum wage in California, a much higher and more concentrated increase, could have an even more significant negative impact on fast food employment, with some estimates greater than 10%, or more than 50,000 jobs lost in this sector. Furthermore, fast food employers will likely respond to the higher wage by cutting their workers' hours, benefits, and training or by replacing them with automation and self-service technologies.

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Third, the law may create unfair and inefficient distortions in the labor market. The law applies only to fast food workers who work at chains with at least 60 locations nationwide, excluding workers in other sectors or smaller businesses that may have similar or worse working conditions. The law creates an artificial and arbitrary distinction between fast food workers and other workers, which may generate resentment and confusion among the latter. Moreover, the law gives the power to set fast-food wages to a council that may not reflect the interests and preferences of the fast-food industry, its workers, or its consumers. The council may be influenced by political or ideological agendas rather than economic realities.

CALIFORNIA GOV. NEWSOM SIGNS FAST-FOOD WORKER $20 MINIMUM WAGE BILL INTO LAW

Finally, the proposed increase in minimum wage at fast food restaurants could have unintended consequences for many restaurants that use minimum wage employees, such as fast casual or casual restaurants. These restaurants are already struggling to keep or find employees, and the increase in minimum wage could lead to many of these workers quitting their jobs and moving to fast-food restaurants. This migration could force fast casual and casual restaurants to raise their wages, increasing labor costs. Many of these restaurants are family businesses with an average net profit of about 5%. As a result, they may not be able to absorb this cost increase and stay in business. Approximately 70% of restaurant owners are single-site operators, and a closure could have a severe financial impact on owners and their families.

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In conclusion, we believe that the new California law on fast food wages is a recipe for disaster. It may raise the prices and lower the quality of fast-food products, reduce the employment and hours of fast-food workers, and create unfair and inefficient distortions in the labor market. Instead of imposing a one-size-fits-all mandate, the state should allow the fast-food industry and its workers to negotiate and determine their wages and working conditions based on the supply and demand of labor and the market's competitive forces. In the absence of this, a more deliberate and sequenced approach to increasing wages would give the council the opportunity to evaluate the impact of increases before reaching the point at which the financial and employment consequences are irreversible. This would be a more sensible and sustainable way to improve the welfare of the fast-food industry, its workers, and its consumers.

Dave McMahon and Dave Smith are professors at the Pepperdine Graziadio School of Business.