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California minimum wage hike prompts fast food price increases: Are they justified?

Fast Food Real Food
Posted at 6:20 PM, Apr 15, 2024

It's been a couple of weeks since the minimum wage for fast food workers in California rose to $20 per hour. As businesses warned they would, some raised their prices.

"Some businesses started increasing their prices in late March in anticipation of the minimum wage increasing," said Alan Gin, an economist at the University of San Diego. "So some businesses started raising their prices before the minimum wage actually took effect."

Gin has been following the fast food worker minimum wage closely. Workers making minimum wage used to earn $16 per hour. The law change brings a 25% increase.

"Minimum wage work is only a fraction of the cost that fast food restaurants have to incur," Gin said.

Gin points out work from Michael Reich, an economics professor at UC Berkeley, which he shared with CalMatters. Reich told CalMattershe estimates a 10% increase in wages leads to a 2-3% increase in prices.

Therefore, Gin estimated the 25% increase in wages could lead to a 5-7.5% increase in prices.

"Estimates that I've seen show that the price increase should be about 5%," Gin said. "Anything above 5%, then maybe just the business is exploiting this increase to increase their profit margins."

Fast food companies that ABC 10News contacted did not share what formulas they use for the adjustments.

Tracking the extent of price increases can be complex, partly because many restaurants are franchises which allow franchisees to set their own prices.

Shane Paul, owner of seven Jack in the Box locations in San Diego, told Business Insider he raised prices by roughly 10-11% over the past six to 12 months, knowing the wage change was coming.

Similarly, McDonald's, which operates through franchises, said it suggests prices but allows franchisees to set their own menu prices. A California-based franchise owner with 18 stores told CNN he raised prices by 5-7% before the law look effect.

In-N-Out Burger, a California staple, told ABC 10 News it increased prices on items by $0.10 to $0.25, amounting to a 1.5%-4.5% increase.

While the companies told ABC 10News it was raising prices in response to the law change, McDonald's alone made a gross profit of $14.5 billion in 2023.

"This should help people at the lower end of the income distribution," Gin said.