Nearly Half of Limited-Service Restaurants in California Are Subject to the New $20 Minimum Wage
Introduction
On April 1 the minimum wage in California increased by 25% to $20 per hour for limited-service restaurants with at least 60 locations in the U.S. While there has been considerable discussion of the possible impact of the $20 minimum wage on restaurant prices and employment, an accurate projection of the effects of the law requires information about the number of businesses and employees directly impacted by the law. Unfortunately, accurate estimates of the number of businesses subject to the $20 minimum wage have not been presented by either the state of California, or outside researchers.
In this article, I show that just under half of limited-service restaurants in California are subject to the $20 minimum wage. I estimate that 69% of non-exempt (hourly) employees in restaurants covered by the law were earning less than $20 per hour when the minimum wage was enacted, so that just over one-third of all limited-service restaurant employees are directly affected by the $20 minimum wage. Based on these figures I estimate that the initial impact of the minimum wage law on limited-service restaurants in California subject to the law will be a $1.03 billion increase in annual labor costs.
The law disproportionately increases labor costs for the largest chain restaurants that account for almost half of limited-service restaurants. However, even limited-service restaurants that are exempt from the law are indirectly affected by the $20 minimum wage because they must compete for workers with larger chain restaurants that pay at least $20 per hour. As explained below, the effects of the $20 minimum wage on restaurant prices and employment depend on consumers’ substitutability of meals across different restaurant brands and the competition for workers among different restaurants.
Limited-Service Restaurants Directly Impacted by the $20 Minimum Wage
The state of California has not indicated how many businesses are directly impacted by the $20 minimum wage, but I have estimated the number of directly impacted restaurants from other data sources. A recent article by Xiaofan Liang and Clio Andris of Georgia Tech University identified “chain” restaurants in the U.S. that operate in multiple locations.[1] These researchers provided a list of restaurant chains with at least 60 locations in the U.S.[2] Reviews of the websites for these businesses and other online sources indicate that 228 different businesses, with 60 or more national locations, operate about 24,120 California limited-service restaurants. Limited-service restaurants covered by the law account for 49.5% of the state’s restaurants in this sector.[3] According to recent trends in County Business Patterns data there are about 48,710 limited-service restaurant establishments in the state. This leaves about 24,590 limited-service restaurants in California that are exempt from the $20 minimum wage because they have fewer than 60 locations.
I consider limited-service restaurants to include quick-service and fast casual restaurants, coffee and juice bars, and cafeterias (but not full-service restaurants), consistent with general language in the $20 minimum wage law.[4] There is, however, some ambiguity in how this definition has been applied by the state of California to certain chain restaurants.[5] Chain restaurants that sell “fresh bread” as a standalone item are also exempt.[6] While the law allows other exemptions for some limited-service restaurants in certain locations, my calculations assume that all limited-service restaurants, in businesses with 60 or more locations, are covered by the law.[7]
Limited-Service Restaurant Employees Directly Impacted by the $20 Minimum Wage
According to Bureau of Labor Statistics (BLS) data, an average of 738,740 people were employed in limited-service restaurants in California over the most recent 12-month period, or about 15 employees per restaurant. If average employment per limited-service restaurant is unrelated to the number of locations nationwide, 49.5% of limited-service restaurant employees in California work in businesses subject to the $20 minimum wage.
Not all employees in restaurants subject to the law will be directly impacted by the $20 minimum wage because:
- One out of eight California restaurant employees are paid a salary and are presumably exempt from the minimum wage law.
- 21% of hourly (non-exempt) restaurant employees in California already earned at least $20 per hour at the time the new minimum wage was enacted.
- About 79% of hourly (non-exempt) restaurant employees were earning less than $20 per hour when the minimum wage law was enacted.
These data suggest that about 34% of non-exempt limited-service restaurant employees, or 252,770 workers: (1) are employed by restaurants covered by the $20 minimum wage and (2) earned less than $20 per hour at the time the law was enacted.[8] I estimate that the law increased wages of workers directly impacted by the minimum wage by 17%, on average, because some earned exactly the $16 minimum wage and others earned between $16 and $20 per hour.[9] In addition, hourly restaurant employees work in California work an average of 27 hours per week. Together, these data indicate that the initial annual increase in labor costs, for only the hourly workers directly impacted by the minimum wage, will be about $1.03 billion, or $42,848 per limited-service restaurant.
Limited-service restaurants may raise prices in response to higher labor costs but can avoid some of the $1.03 billion in additional costs by reducing employment. If the elasticity of demand for hourly employees is -0.5 to -1.0, a 17% minimum wage increase would result in an 8.5% to 17% decline in employment in businesses covered by the law. Employment reductions could occur through a loss of 21,485 to 42,790 jobs with no change in hours per week or fewer job losses and shorter work weeks.
The magnitude of price increases and employment declines in covered businesses depends on the substitutability between meals served by larger chain restaurants subject to the $20 minimum wage and meals served by exempt restaurants. The greater the substitutability of meals across restaurant brands, the more difficult it will be for targeted restaurants to raise prices, because more demand will shift away from these restaurants after prices increase. Greater substitutability of meals across restaurant brands will also lead to greater employment declines in the restaurants targeted by the $20 minimum wage.
Spillover Effects: Other Employees Indirectly Impacted by the $20 Minimum Wage
As noted earlier, 21% of hourly employees in businesses subject to the $20 minimum wage were earning $20 or more at the time the minimum wage law was enacted. These higher wage workers not directly impacted by the new minimum wage include more experienced workers and/or workers with some supervisory or managerial responsibilities. Restaurants that are required to pay entry-level employees $20 per hour may face pressure to increase the compensation of more experienced workers and supervisors which would further increase labor costs above the initial annual increase of $1.03 billion. The $20 minimum wage also increases the salary threshold by 25% for managers in covered businesses to be exempt from California’s wage and hour laws. I will discuss the implications of this higher salary threshold in another article.
Slightly more than half of limited-service restaurants are exempt from the $20 minimum wage (because they have fewer than 60 locations). These restaurants could experience an increase in demand because of the expected price increases at the larger chain restaurants. While exempt restaurants will initially have a labor cost advantage over larger chain restaurants, they may also face pressure to increase their wage rates as they compete for workers with restaurants that pay at least $20 per hour. A substantial majority of hourly workers in exempt restaurants earn less than the $20 per hour they could earn at competing restaurants.
Exempt limited-service restaurants may experience an increase in demand and somewhat higher labor costs but are expected to either increase employment or reduce employment by less than restaurants targeted by the $20 minimum wage. The overall impact of the law on exempt restaurants is unclear because although these restaurants may attract some customers from the larger chain restaurants, other customers may simply choose to not purchase as many limited-service restaurant meals.
Conclusion
This article has not only provided the first estimates of the number of restaurants covered by California’s $20 minimum wage and the associated increase in annual labor costs in these restaurants, and explained why this is likely a lower bound on the wider number of restaurants affected by the law. California’s $20 minimum wage directly impacts just under one-half of limited-service restaurants and just over one-third of employees in these businesses. The higher minimum wage will increase wage rates by about 17%, on average, for workers in these businesses who previously earned less than $20 per hour. I estimate that the initial increase in labor costs at these restaurants will be over $1 billion annually. Higher labor costs for larger chain restaurants will increase prices and substantially decrease the number of jobs and hours worked in these businesses. Furthermore, while the magnitude of spillover effects on exempt restaurants (those with fewer than 60 locations) is difficult to estimate, the need to compete for workers with restaurants paying $20 or more per hour will put upward pressure on their labor costs and prices, which may not be fully offset by customers switching from larger chain restaurants.
CITATIONS
[1] Xiaofan Liang and Clio Andris, “Measuring McCities: Landscapes of Chain and Independent Restaurants in the United States,” Environment and Planning B: Urban Analytics and City Science, Volume 49, Issue 2, February 2022, Pp. 585-602.
[2] Chain restaurant data are displayed on a US map at https://friendlycities.gatech.edu/data-interactive/.
[3] The Service Employees International Union estimated that about 3,000 separate employers are covered by the $20 minimum wage. Because many of these employers own and operate multiple franchise establishments, the number of establishments impacted by the law is substantially more than 3,000.
[4] The text of AB-1228 specifies that their definition of limited-service restaurant “includes but is not limited to” NAICS sector 722513 “Limited Service Restaurants”. Applying their definition of establishments that “primarily engaged in providing food and beverages for immediate consumption on or off premises where patrons generally order or select items and pay before consuming, with limited or no table service”, I take this to also include NAICS 722514 & 722515.
[5] Pizza restaurants, for example, often offer full service options as well as takeout service. Guidance from the California Department of Industrial Relations states this depends on the proportion of sales from each on a chain-wide basis making it hard to assess which chains will be subject to the rules. I include pizza restaurants with 60 or more locations in my calculations. https://www.dir.ca.gov/dlse/Fast-Food-Minimum-Wage-FAQ.htm
[6] This exemption makes it unclear whether pretzel-makers are subject to the $20 minimum wage. I include pretzel-makers with 60 or more locations in my calculations. rules.https://calmatters.org/politics/capitol/2024/03/california-minimum-wage-fast-food-workers/
[7] Limited-service restaurants in grocery stores, hotels, airports, theme parks, museums, gambling establishments and event centers are exempt from the law. See https://www.dir.ca.gov/dlse/Fast-Food-Minimum-Wage-FAQ.htm
[8] 34% is obtained by multiplying the 49.5% of restaurants covered by the law by the 7/8 of employees who are paid hourly, times the 79% of hourly employees who earned less than $20 per hour when the law being enacted.
[9] The average hourly earnings of hourly restaurant employees paid between $16 and $20 per hour, and the share of hourly employees in this pay range were estimated from Current Population Survey Merged Outgoing Groups microdata for 2022 and 2023.
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