The minimum wage has long been a contentious political topic, with quick service restaurants a frequent target given wages in the industry have historically been at the low end of the spectrum. Opponents of higher minimum wages argue that higher minimums will reduce employment and increase prices for consumers. Proponents believe higher minimum wages will boost living standards for workers. A recently implemented law in California, AB 1228, provides an opportunity to observe some early effects of a meaningful increase in the minimum wage for quick service restaurants on prices and traffic by using the nationwide averages as a control.

After passing AB 1228 in September 2023, on April 1, 2024, California raised the minimum wage for employees at fast food restaurants by 25%, from $16 to $20 per hour. This provides economists and investors with a good test case of a basic economic idea: labor supply and demand curves. Within the framework of Exhibit 1 below, when a price floor (minimum wage) is implemented, supply of labor will be greater than demand, which represents unemployment. The idea is that a higher minimum wage should cause an increase in unemployment.

Exhibit 1: Supply and Demand of Labor

Source: Steven Clarke's Blog

In California, many restaurants have moved to increase their prices to offset the higher costs that the minimum wage change has induced, as labor costs can typically represent 25-35% of sales. For restaurant investors, an assessment of how higher prices are impacting sales is important especially for concepts with a heavy concentration in California. Early looks at credit card data comparing sales growth in California to the nation suggest that since the beginning of April, sales for California quick service restaurants have actually outpaced national trends.

Exhibit 2: Quick Service Industry Sales Growth

Source: Earnest Analytics' anonymous credit card spending data from millions of US accounts.

This outperformance is occurring despite a lag in transactions, which have trailed the national trend since January as restaurants began raising prices in preparation for AB 1228’s implementation. Average ticket prices have increased faster than the national trend, seemingly more than making up for the loss in consumer traffic caused by higher prices. It should be noted that it is still early however, and further loss of traffic is a possibility as consumers adjust their behavior.

Exhibit 3: Quick Service Industry Transaction Growth

Source: Earnest Analytics' anonymous credit card spending data from millions of US accounts.

Exhibit 4: Quick Service Industry Avg. Ticket Growth

Source: Earnest Analytics' anonymous credit card spending data from millions of US accounts.

While it is too early to definitively assess the impact on industry employment, since the signing of AB 1228, year over year employment levels in food services and drinking places in California have consistently lagged the nation with the gap widening year-to-date.

Exhibit 5: Food Service Employment

Source: FactSet Research Systems

Additionally, the 3-month trailing average of growth in average weekly earnings in leisure and hospitality in California has begun to meaningfully separate below the national trend. This highlights that companies in the industry have not only slowed hiring in California but have also likely been cutting working hours to offset higher wage costs, making it unclear whether the new minimum wage was actually a net positive for workers. This suggests that the basic idea of supply and demand at least somewhat explains what happens when a minimum wage is put in place, although this topic is much too complicated to be fully explained by the simple model.

This piece was co-written by the US Equities Analyst Intern, Evan Toth. Please find his bio here.