On January 1st California’s AB 257 will go into effect. This law, enacted in September, creates a 10-member council empowered with broad authority to set wage and working standards at the state’s fast-food restaurants. It also authorizes localities with 200,000 or more residents to establish their own councils. This law may be well-meaning, but it will stifle opportunity—especially for younger, entry-level workers—decrease options for consumers, and slow economic growth.
Employment in food services and drinking places in California is still 41,000 jobs below its pre-pandemic level, as shown below.
AB 257 will only make it harder for restaurant employment to recover. The new council is authorized to increase the minimum wage up to $22 per hour in the fast-food industry, a 42% increase from the scheduled state minimum wage of $15.50. Research shows that higher minimum wages reduce employment for teens, young adults, and those with less education.
Fast-food is often a first job for many teenagers (my first job was at a Burger King), but it will be difficult if not impossible for a manager to justify paying an inexperienced worker $22 per hour, or $44,000 per year for a full-time worker. Wages are based on worker productivity, and teenagers typically cannot produce $22 worth of value per hour.
In fact, a study finds that increases in the minimum wage are the leading cause of the decline in teenage employment since 2000. Worse, the study also finds that teens from areas with higher minimum wages also had lower wages as adults, likely because the higher minimum wage prevented them from gaining important experience and skills—work ethic, collegiality, punctuality—when they were younger. A $22 wage will benefit the older, more experienced workers who keep their jobs, but this benefit comes at the expense of younger workers who are prevented from getting on the first rung of the economic ladder.
In the long run, even experienced workers are likely to suffer. This is because a higher wage for workers encourages employers to use more machines and less labor. As UCLA economist Lee Ohanian points out, there are robots capable of doing many restaurant jobs. One, The Wingman, can bread chicken, toss fries, and add dry rub to wings, among other things. It can be rented for $2,999 per month, or the equivalent of about $10 per hour for a restaurant open 10 hours per day for 30 days a month. Another robot, Flippy, can make burgers and chicken nuggets for $2,000 per month, or less than $7 per hour. And we have all used or at least seen the kiosks in restaurants that reduce demand for cashiers.
Of course, using more machines is not necessarily a bad thing. Many fast-food jobs are tedious and freeing up people to do higher-value customer-facing work could lead to more worker satisfaction. But the competitive market already provides a strong incentive for entrepreneurs to create cost-effective robots and for managers to use them. The government should not be putting its foot on the gas to speed up this process, especially since those most likely to suffer during the transition are often those most in need of a steady job.
At a broader scale, the new fast-food council is likely to slow California’s economic growth and reduce its dynamism. In his article Competition as a Discovery Procedure, Nobel-prize winning economist F.A. Hayek discusses the downsides of rigid wage structures. As he explains, wages need to be free to quickly adjust to changes in economic conditions. In a dynamic economy, new technologies and business models are constantly changing the cost structures of industries and thus their profitability. Meanwhile, demographic changes alter the demand for various goods and services, e.g., older populations demand more healthcare and less education than younger populations.
These frequent changes mean workers must be regularly reallocated among industries and firms to meet the needs of managers and ultimately consumers. Rigid wages, due to minimum wage laws or council decrees, make it harder for the market to send signals about where the most valuable work is located. If on average there is a shift in demand for fine dining relative to fast-food, wages in the former sector should rise to attract more workers while wages in the latter fall. Laws that prevent such relative wage changes also prevent workers from being put to their highest valued use. This is bad for workers and means economic output is lower compared to what it otherwise would be.
California’s new council only has jurisdiction over the fast-food industry, but it is not hard to imagine California or other states expanding the idea of wage-and-standards councils to other industries in a misguided attempt to help favored groups or steer the economy in a preferred direction. If this occurs, the adjustments in relative wages that are crucial for a dynamic, growing economy will be impeded, which reduces opportunities for everyone.
As an economist, it will be interesting to watch California’s experiment with wage councils unfold. But as a person, it is frustrating to see lawmakers implement imprudent policies that help better-off workers at the expense of those who are worse off. I only hope that California changes course once the evidence shows how harmful its attempt to control the fast-food industry really is.