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How will the new $20 minimum wage for fast-food workers in California affect prices?

The minimum wage increase in April 2024 will likely mean companies take the opportunity to raise prices though this is not inevitable.

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The Department of Finance announced an increase in the minimum wage in California for next yea, increasing to $16 per hour for all employers beginning 1 January, 2024. This increase is more pronounced for fast food workers who will see their wages rise to $20 an hour.

Companies will inevitably use the increase as an opportunity to raise prices.

“We haven’t made a decision on exactly what level of pricing we’re going to take, but to take care of the dollar cost of that and/or the margin part of that, we haven’t decided yet where we will land,” Chipotle CFO Jack Hartungsaid in an earnings call. “It’s going to be a mid to high single digit price increase, but we are definitely going to pass this on. We just haven’t made a final decision as to what level yet.”

Fast food profits have risen enormously since the covid-19 pandemic. Chiptole’s annual gross profit for 2022 was more than 20% larger than the year before, while McDonald’s saw a 5% increase after a 29% the year before. Should the “single digit” wage increase. happen these companies would still be making a profit.

However, McDonald’s CEO Chris Kempczinski said McDonald’s will look for other areas outside of raising prices.

“We believe we’re in a better position than our competitors to weather [wage increases], so let’s use this as an opportunity to actually accelerate our growth in California,” Kempczinski said.

Do increasing wages mean prices have to rise?

While CEOs say the wage increases will mean higher prices, they have not been afraid to consistently increase prices without staff being paid more.

Chipotle has increased its prices four times since June 2021, including as recently as October. As already evidenced, they are returning increasingly large profits. Wage increases wouldn’t stop them growing, but provide a useful excuse to raise prices again. Researchers at UC Berkeley found employment rises at fast food restaurants with higher raises, potentially allowing more sales and an overall stronger economy.

A spokesperson for McDonald’s told ABC News, “The assertion that raising prices is the only way the company is responding to wage increases is inaccurate.”

Whether the companies raise their prices or not is as-yet unknown, but one thing for sure is there is no inevitablity for wage increases to inflate prices. It is a company choice to impact the consumer by paying their staff a fairer wage.