As California's fast-food minimum wage is hiked to $20 an hour, who is putting up prices?

Prepare to pay more for Big Macs, burritto bowls and lattes in California.

McDonald's, Chipotle and Starbucks have warned they will pass on costs of a new $20 hourly minimum wage for fast food workers that began Monday.

One McDonald's franchisee has already increased prices at his 18 restuarants in northern California - by around 5 to 7 per cent. 

The controversial wage hike - 25 percent or $4 more than for any other job - has been hailed as a big win for fast-food workers trying to make a living in an expensive state.

Critics warned it will lead to higher prices and workers may lose their jobs altogether - with both concerns already becoming a reality. 

Here we summarise all you need to know about it.... 

Why is California raising wages?

Assembly Bill 1228 was signed by Governor Gavin Newsom in September but came into effect this week.

It stipulates that any 'national fast-food chain' with more than 60 restaurants around the country will need to adhere to the new $20 an hour minimum wage.

It is expected to affect 557,000 fast-food workers and 30,000 restaurants.

The bill was a response to worker strikes in 2022, in which they argued the soaring cost of living meant they needed higher wages.

That year, Newsom signed the FAST Act into law which called for a $22 an hour minimum wage for fast-food workers.

But before it took effect a coalition of restaurant industry organizations pushed back and that law was replaced with the current bill, which settled on a minimum wage of $20 an hour. Now, some restaurants say they've been forced to make changes.

Restaurants raising menu prices

McDonald's, Wingstop, Jack in the Box, and Chipotle are among the chains that have said they will pass on the higher labor costs to consumers by increasing prices.

Scott Rodrick, owner of Rodrick Management Group which controls 18 McDonald's restaurants in Northern California, told CNN this week he raised menu prices between 5 and 7 percent in the last three months ahead of the wage hike.

He said the 'extraordinary overnight change' meant he had to explore all possible options to compensate for the extra costs.

'So we have looked at price, although I can't charge $20 for a Happy Meal,' he said.

Meanwhile, Chipotle CFO Jack Hartung told Yahoo Finance the company planned to raise California prices in the mid- to high-single-digits.

An $11 burrito bowl might therefore end up costing closer to $12. 

At the same time, workers are welcoming the change. Jaylene Loubet, 25, a cashier at a McDonald's in Los Angeles, told the LA Times the higher wage would help her family get by.

'When you're in a tough financial situation, even though it's not enough to be comfortable, it does help,' she said.

'Food is going up as well, rent is going up as well, bills are going up as well. Even with the $20, money is still going to be tight.'

Restaurants cutting staff

Other restaurants, especially pizza joints and places with in-house delivery drivers, have said they will mitigate the higher costs by laying off some workers.

Chains like Pizza Hut and Round Table have let go of more than a thousand delivery workers, according to reports made to the state.

In December, two major California Pizza Hut franchises - Southern California Pizza as well as PacPizza - announced they would lay off more than 1,200 drivers.

Instead, they said they would rely solely on third-party apps like DoorDash and Uber Eats. Proponents of the new law say those changes were underway well before it was signed.

Round Table Pizza franchisee Excalibur Pizza has plans to cut 73 driver jobs next month - around 20 percent of its workforce. 

Who will swallow the costs?

The passage of AB1228 has triggered a debate as to who will pay the price.  

Restaurant and franchise owners - and those lobbying for them - say it will fall on consumers and workers.

But others argue fast-food chains are excessively powerful and generating significant surplus value by paying staff less than they would if they were forced to cough up more.

The Service Employees International Union (SEIU), a major advocate for the law, has argued that big fast-food chains have hefty profit margins, and that they will be the ones that suffer.

In an op-ed for CalMatters, economists Michael Reich and Justin Wiltshire argued that when minimum wages have increased in the past restaurants retained their staff and kept price hikes small to maintain their sales volume.

'We compared federal data on fast food jobs in the 36 most populous counties in California and New York - where the minimum wage jumped dramatically - to similar combinations of counties in states that kept the minimum wage at the federal level of $7.25 an hour,' they wrote.

'We found that fast food employment in California and New York did not fall,' they added.

Joseph Bryan, executive vice president of SEIU and member of the California Fast Food Council, said the top nine publicly traded fast-food companies alone took in nearly $25 billion in profits in 2023.

'And, multiple studies have shown that higher wages lead to increased worker retention, recruitment, and job growth,' he said.

'The minimum wage in California has gone up every year since 2015. On the same timeline, fast-food restaurants in California added 142,000 jobs.'

Concerns have also been voiced by some franchise owners that operate a handful of big-chain restaurants. 

They say unlike major corporations which can swallow higher costs, they operate on tight margins.