Consumer Adjustments to Minimum Wage
When minimum wages are increased, one consequence we might see follow is reduced employment. I say might see, rather than will definitely see, because employers can adjust on multiple margins. Instead of reducing employment, they may reduce hours, benefits, perks, or just put less effort into providing a pleasant working environment. But consumers can adjust to the impact of minimum wages in a variety of ways as well. California’s recent minimum wage increase shows an example of this.
After the minimum wage of fast food workers in California was increased to $20 an hour, fast food establishments increased prices to offset this increase in costs. But this wage increase only applied to fast food workers, not restaurant workers more generally. This means that dine-in establishments do not have to pay their workers this minimum wage – including the workers at various restaurants owned by California Governor Gavin Newsom. Restaurants like Governor Newsom’s that feature “a $37 pasta dish and a $67 steak dinner on the menu” don’t “qualify as fast food, so [are] not required to pay the $20 minimum wage.”
As a result, these dining establishments have not been subject to a large spike in labor costs and have not had to sharply increase their prices. And this has changed the way Californians are eating out, as was described in this story. That article says the minimum wage increase “certainly marked a major win for the roughly 500,000 fast food workers in the state,” but it immediately goes on to note that these restaurants “now seem to be taking a hit when it comes to customer traffic” due to price increases, which makes the “major win” seem a little less than certain. And this decline is a new phenomenon – because “before the new law went into effect, fast food consumer traffic in the state was trending slightly higher than the national average.”
But the decline in fast food traffic isn’t entirely the result of people simply choosing to eat out less. Instead, people are making different choices about where to go out to eat. Now we see that “more expensive casual dining chains like Olive Garden and Chili’s have actually gotten a bump in traffic among California consumers since April. While it’s true that they don’t fall under the fast food category, and so aren’t required to meet the $20 minimum wage for workers across the board, their prices are still considerably higher than those of their quick-service counterparts.” So why would places that serve more expensive food be seeing their traffic increase, while the still-less-expensive fast food establishments see their traffic decline?
The answer is that even though the price of dine-in chains hasn’t fallen in absolute terms, it has still fallen in relative terms compared to fast food. Fast food and dine-in restaurants differ in terms of price, quality, and convenience. But with fast-food establishments being forced to increase their prices in the fact of increased labor costs, the gap in price between fast food and dine-in establishments has gotten smaller without any change in the other two dimensions. As a result, people are seeing what it would cost them to get a basic combo at McDonalds and thinking “Well, if I’m going to have to pay this much just to get some McDonalds, I may as well pay just a little bit more and go to Chili’s instead.” As a result of this labor market intervention, Californians face higher food costs, and there has been a shift in favor of restaurants that are both more expensive in absolute terms for the consumer but also pay their employees less than the fast food minimum wage. This seems like very nearly the opposite outcome that the advocates of such a law would have wanted.
As Don Boudreaux likes to say, who’d have thunk it?
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