California’s New Fast-Food Minimum Wage Law Destroys Another 1,250 Jobs

By Lee E. Ohanian. 

"I remember my first fish taco from Rubio’s Baja Grill. It was a game changer. Crispy fish, combined with a creamy sauce, cabbage, cilantro, onion, and lime in a fresh corn tortilla. It was as close to a revelatory food experience as you could imagine having at a fast-food restaurant. But last week, Rubio’s announced it was closing 48 of its 115 California restaurants because of California’s high operating costs. I estimate that these closures destroyed about 1,250 jobs, since the average Rubio’s restaurant employs about 26 workers.

What happened? California fast-food restaurant operating costs rose substantially on April 1, when the state’s new fast-food law took effect. The law (Assembly Bill 1288) increased the minimum wage for fast-food workers in the state to $20 per hour. This is 25% higher than the $16-per-hour minimum wage that applies to all other California workers. Rubio’s job losses followed as many as 10,000 others in the industry that occurred even before the law took effect.

California’s new law puts fast-food restaurants at a severe disadvantage compared with businesses in every other industry in the state. There is no rationale for levying a more severe regulation on a single industry. And state lawmakers couldn’t have picked a worse industry to single out. Around 60% of fast-food workers are 24 years old or younger, compared to only about 13% in other industries. Younger workers, particularly teens, are on average much less productive than older workers, because they have not acquired the experience, skills, and education of those who are older. Median full-time earnings for workers 25 years and older is nearly twice as high as that of teens, and 57% higher than 20- to 24-year-olds.

This means that requiring fast-food restaurants to pay a $20-per-hour minimum wage creates a substantial gap between the value produced by their young workers and how much these workers cost their employers. And these costs are not just wages and benefits but also the substantial training and recruiting costs incurred by employers. Young workers require significant training, since they often have very little, if any, work experience. And turnover of fast-food industry workers is exceptionally high—as high as 150% per year—which means businesses are constantly recruiting, hiring, and training new workers.

California’s $20 minimum wage is predictably leading to job losses, fewer hours for those workers who retain their jobs, restaurant closings, and higher fast-food prices. This was entirely predictable, because fast-food industry profit margins are low, typically in the 5–8% range. And if a business is not covering its costs, including paying a competitive return to investors, then the business closes. This is of course bad news for everyone but particularly for young workers, who chronically have a much harder time finding a job than older workers. In April, the unemployment rate for teens was 11.7%, compared to 3.9% for all workers.

Some, particularly those who are unfamiliar with the economics of running a business, do not understand this reality, and this includes many California legislators. In 2020, only one out of four Democratic state legislators had any private-sector experience. Legislators take credit for raising wages within the industry and speak of “holding billion-dollar corporations accountable” but never cite the job losses, reduced hours, fewer opportunities, or the higher prices that negatively affect consumers that result from the new law. Nor do they acknowledge that roughly two-thirds of fast-food restaurants are owned and operated as small businesses run by a single franchisee.

Fast-food prices rose 10% in the first month after the law took effect, but there is of course a limit to how much prices can rise before they significantly affect consumer demand. As one McDonald’s franchisee noted in response to the $20 minimum wage, “I can’t charge $20 for a Happy Meal.” Since 2019, fast-food prices nationwide have increased 41%, which is leading many consumers to now view fast food as a luxury rather than—in its traditional role in household budgets—an affordable and quick meal.

Ralph Rubio started Rubio’s Baja Grill with a single restaurant in his hometown of San Diego after eating fish tacos in Mexico during a college trip in the 1970s. He then expanded his restaurants throughout California and in other states. Rubio not only created thousands of jobs, but he also gave back to his community, including opening a restaurant on the campus of Monarch High School in San Diego, which enrolls homeless and at-risk youths. The “Cabo Café” gives students valuable work and entrepreneurial experience, and all profits are rebated back to the school to support various programs.

Ralph Rubio risked his family’s capital to bring his culinary dream to life and has contributed much more to California than he ever took. Now, California is penalizing his success and destroying nearly half of Rubio’s restaurants in the state. As economists like to say, there is no such thing as a free lunch. And the cost of California’s new fast-food minimum wage law is raising breakfast, lunch, and dinner prices substantially, is reducing opportunities, and will create additional damage over time. It is perhaps the worst California law of 2023."