California: Is This the April Fool’s Poster Child?

Starting today, most fast food workers in California will be paid at least $20 an hour beginning when a new law is scheduled to kick in giving more financial security to a historically low-paying profession while threatening to raise prices in a state already known for its high cost of living.  In theory, democrats in the state legislature passed the “FAST Recovery Act” in 2022 as an acknowledgement that many of the more than 500,000 people who work in fast food restaurants are really not teenagers.  They are, in fact, adults working to support families and they require a higher income to survve. The new $20 wage (a 25% increase) affects restaurant chains and franchises with 60 or more restaurant locations nationwide.

But at What Cost?

The new law affects some of the biggest restaurant chains in the state such as McDonald’s, Pizza Hut, KFC, Subway, and Starbucks but some  local franchisees have raised alarms about the increase in labor costs.  Many California restaurant chain owners and franchisees say that higher labor costs will force them to raise prices, add automation, and cut workers’ hours.  Those already operating on the thinnest of margins say it will even require them to close shop.  In December alone, Pizza Hut franchisees laid off hundreds of delivery drivers ahead of the upcoming wage hike and switched to apps like Uber Eats and Door Dash, which pushes more delivery fees onto customers.

Consider the view of Alex Johnson, who owns 10 Auntie Anne’s Pretzels and Cinnabon restaurants in the San Francisco Bay Area.  Johnson says sales have already slowed in 2024, prompting him to lay off his entire office staff.  In fact, to meet his current payroll, he is now relying loans from his parents to help him meet cash needs for paychecks.

Johnson says that increasing his employees’ wages will cost about an additional $470,000 each year.  To make it up, he will now have to raise prices anywhere from 5% to 15% at each of his stores.  He says he is no longer hiring or seeking to open new locations in California,  “I have always tried to do right by my employees. I pay them as much as I can. But this law is really hitting our operations hard,” Johnson says.  I now have to consider selling and even just closing my business. The profit margin has become simply too slim to operate when you factor in all the other expenses that are also going up.”

The $18 Big Mac

Everyone is going to have to pay more,” said Jack Hartung, chief financial officer of California-based Chipotle Mexican Grill. Chipotle has raised its menu prices four times in the past two years and expects to increase them a further 5% to 9% in its California restaurants to cover the latest higher pay required for workers.  The price of a meal at the classic burger chain has even hit $18 at one location — that’s what a Big Mac combo meal will run you at a rest stop in the wealthy town of Darien, Conn.

According to MarketWatch, the same combo of a Big Mac, medium fries and medium soda costs a whopping $13.89 on DoorDash in New York City (before any fees or delivery charges)… or $17.79 if you swap the soda for a shake.

Newsome…The California Politician

Gavin Newsom claims to be a savvy politician. But unfortunately, he has a problem dealing with economic realities. Unlike his predecessor, Gov. Jerry Brown, who demonstrated how to prevent a budget from getting out of hand, Newsom has gone on a spending spree turning a $97 billion state surplus into $38 billion deficit. And with the new increase in the minimum wage, he can only anticipate higher unemployment.  In fact,  according to the U.S. Bureau of Labor Statistics, California’s unemployment already has risen from 5.0 percent posted last September to 5.3 percent in this February, the highest in the nation.  In comparison, arch rival Texas is just 3.9 percent and Florida is a paltry 3.1 percent.

Nearly Half of California Residents Now Consider Leaving the State

While a new statewide poll found 70% of respondents expressed high levels of happiness with living in California and applaud the state for its diversity, some 4 out of 10 Californians are considering moving out of state, with the majority saying it’s simply too expensive to live there anymore.  In fact, California has had three consecutive years of population declines, according to U.S. Census data.  And when business owners responded to a recent poll by recruiter Red Ballon, it gets worse.  While nationwide, half of Red Balloon’s poll respondents say they are happy with their current location and don’t plan on moving. those responding from California say only 13% say they are happy in their location.  Sixty seven percent (67%) are either planning a move (10%), considering a move (30%) or they are feeling trapped, wanting to move but can’t afford it (27%).

For California, the Wage Increase Could Not Come at a Worse Time

Higher minimum wages such as those in California usually kill jobs unless it is genuinely in line with an area’s comparative economy.  The current statewide $16 minimum wage in California is already the second-highest of any state in the nation, after Washington state’s $16.28.  Additionally, Washington, D.C., not a state, is the highest at $17.00.  While it is too early to gauge the total fallout of this legislation, rest assured it will be just another stake in the heart of what was once the most attractive state in the union to call home.

The End Result…More Job Loss

Layoffs, which have been enormous in California’s tech sector, will accelerate now due to this latest legislation.  Strides in technology will cause the industry to normalize and the high wages that are now crushing profit margins are making the upcoming decision making easy for business owners.  Some large franchises and chains have reported that they will be forced to cut operating crews in half, which of course means those still having jobs and working will be paid $4 an hour more, but they’ll have to work twice as hard per shift.  The most likely end result will be that within the next few years, the majority of chain restaurants will be operating with a small fraction of a crew of humans working alongside increasing automation.