What would the CA living wage act do to restaurant prices?
Policy variation within California suggests minimal effects
Note: This “special topics” article continues my series on California’s Living Wage Act of 2022. The first part of this series examined the characteristics of California’s minimum wage workers. Here I address one of the major arguments against minimum wage increases: the effect they will have on prices.
If you’d like me to examine another aspect of this issue, please feel free to leave a comment. Thank you for sharing!
The California Living Wage Act of 2022, which I wrote about near the end of January, has entered the next major phase. Signatures are being collected to put it on the November ballot.
So far, there has been little pushback against the proposition, suggesting that it will easily coast to victory. Still, it’s useful to consider the opposing views. One of the major arguments is that the higher labor costs will pass on to the consumer in the form of higher prices.
I’ve done research on this question with Eric Nilsson at CSUSB, and we found very small effects on prices. We considered restaurant prices, referred to as “food away from home” prices by the BLS. Since restaurants employ a disproportionate number of minimum wage workers (about 23% of California’s minimum wage workers are in the “restaurants and food services" sector), a higher minimum wage should raise prices in this industry the most.
Is there any evidence from California that a statewide increase will drastically increase prices? It turns out we can answer this question, because starting in mid-2016, Los Angeles County increased its minimum wage above the statewide minimum, and since mid-2017, it has consistently been higher by about $1. (Some cities have different minimum wages for hotel and other workers, but the baseline is consistent across most of L.A. County.) For example in July 2017 most of L.A. County’s minimum wage was raised to $12/hour when it was $10.50 statewide. In July 2018, it was $13.25 while it was $11/hour statewide, and so on.
I compare “food away from home” price inflation in L.A. County to a nearby area that was not in L.A. County - namely, the Riverside-San Bernardino-Ontario metro area - to see if there was any major difference. How did the higher minimum wage in L.A. County impact relative restaurant price growth?
The chart above compares inflation rates in the two areas. Since 2019, the LA metro had a statistically indistinguishable difference in restaurant price inflation from the Inland Empire. Some times, like in early to mid 2019, inflation was higher in L.A. County, but that reversed course in mid-2020. For a while, inflation rates were almost the same - even in spite of the $1/hour higher minimum wage in L.A..
Another way to look at the question is to compare restaurant price growth in L.A. vs. the Inland Empire since 2018. In the chart below, I indexed both CPIs to 100 in 2018 and tracked them through January 2022 - i.e., 4 years later.
After four years, restaurant prices were about 22% higher in L.A. and 18% higher in the Inland Empire - a difference between the two areas of about 1% per year. For most of the time, prices moved together. While L.A. prices began to outpace the IE in mid-2020, there is no reason to think this was specifically about minimum wage differences, since that was a common theme throughout this period.
While this simplistic analysis does not account for the many other differences across these two metro areas, it does suggest that the higher minimum wage in L.A. did not significantly increase restaurant price growth compared to nearby areas. Another limitation of this analysis is that I could have looked at more directly comparable restaurants by looking closer at prices near the L.A. County border (see this paper), but unfortunately I do not have such data readily at hand. Even in that (linked) study, most areas of L.A. did not experience significantly higher prices as part of the minimum wage differential.