When California lawmakers approved a $20 minimum wage for fast food workers in September 2023, the debate that followed was less about whether the policy would affect prices than by how much. Restaurant owners warned of sticker shock at the drive-thru. Supporters argued that chains could absorb the costs. With the wage floor rising from $16 to $20 on April 1, 2024, economists finally had a natural experiment large enough to study in detail.
A new NBER working paper takes up that question using the most comprehensive public data on restaurant prices available. The analysis finds that prices for food purchased away from home rose about 3.3 to 3.6 percent in California’s major metro areas compared with cities elsewhere in the country, with the gap widening in the months after the law was enacted and stabilizing roughly a year later.
The policy and the puzzle
Assembly Bill 1228 applied only to limited-service restaurant chains with more than 60 locations nationwide. Full-service restaurants, smaller chains, and independents were exempt. The $4-per-hour increase, from California’s existing $16 statewide minimum, ranks among the largest single-step minimum wage hikes in U.S. history.
Jeffrey Clemens of the University of California, San Diego, along with Olivia Edwards, Jonathan Meer, and Joshua D. Nguyen of Texas A&M University, set out to measure how much of that labor cost increase showed up in what consumers actually paid at the register. Earlier research has reached mixed conclusions about how fully minimum wage hikes get passed to customers, and most prior studies focused on smaller increases. Large increases, the authors note, may behave differently because they can reshape competition and the mix of firms operating in a market.
How the analysis was built
The team used monthly Consumer Price Index data from the Bureau of Labor Statistics covering 21 large metropolitan areas from September 2022 through December 2024. Four of those metros are in California: Los Angeles, San Francisco, San Diego, and Riverside–San Bernardino. The other 17 served as a comparison group.
The main outcome was the “food away from home” index, which tracks prices paid at restaurants and other commercial food service establishments, including taxes and tips. Limited-service and full-service restaurants together make up more than 93 percent of that index, with fast food alone accounting for roughly half.
To isolate the effect of AB 1228, the researchers compared price changes in California’s metros to those in the control cities before and after the law’s enactment. They ran the comparison in several ways: with and without adjustments for pre-existing price trends in each metro, and with and without controls for local economic conditions such as average weekly wages, unemployment rates, and employment outside of minimum-wage-intensive industries.
Because only four metros were treated by the policy, standard statistical tests for significance could be misleading. The authors instead used placebo tests, randomly reassigning “treatment” status to different combinations of cities 500 times and comparing California’s actual results to that distribution of fake treatments.
What the prices did
Before the law was enacted, restaurant prices in California’s metros tracked closely with those elsewhere. After September 2023, the lines diverged. Prices began rising faster in California in the months between enactment and the April 2024 implementation date, consistent with firms adjusting in anticipation of the coming cost increase. The gap then widened and settled at roughly 3 to 4 percent by late 2024.
Across specifications, the estimated price gap ranged from 3.29 to 3.60 percent. Placebo tests on unrelated price categories, namely groceries and the broader “all items less food and energy” index, showed no comparable differential increases in California. That pattern is consistent with the restaurant price effect being tied to the minimum wage policy rather than to broader California-specific shocks.
There was some variation across metros. San Diego and Riverside–San Bernardino saw larger increases than San Francisco or Los Angeles, which already had local minimum wages above the state floor and so experienced a smaller effective jump.
Separating fast food from full-service
Because the food-away-from-home index blends fast food and sit-down restaurants, the 3.4 percent figure understates the effect on fast food alone. AB 1228 didn’t apply to full-service restaurants directly, but those establishments may still have raised prices in response to rising labor costs across the sector.
Drawing on a separate analysis by Michael Reich and Denis Sosinskiy of UC Berkeley, which used web-scraped menu prices to estimate that full-service prices rose about 43 percent as much as limited-service prices, the authors decomposed their overall estimate. The implied increases come out to roughly 4.9 to 5.1 percent at fast food restaurants and 2.1 to 2.2 percent at full-service restaurants.
That fast food figure is larger than what a straightforward cost pass-through calculation would predict. If labor accounts for about 30 percent of revenue and wages rose roughly 8 percent in California’s fast food sector, simple arithmetic suggests prices should have risen about 2.4 percent. The observed 4.9 to 5.1 percent implies a pass-through rate around 2.1, meaning prices rose about twice as much as direct labor cost accounting alone would predict.
Why prices may have risen more than expected
The authors discuss several factors that could explain why prices rose by more than a direct cost pass-through would imply. One is composition: if the lowest-priced restaurants are more likely to exit the market after a large wage hike, the average price can rise even without any surviving establishment changing its menu. Using the pre-policy distribution of hamburger prices reported by Reich and Sosinskiy, the authors calculate that removing the bottom 3.2 percent of establishments, matching the employment decline documented in earlier work, would mechanically raise the average price by about 2.5 percent.
Another factor is changes in product quality or the skill mix of workers. A third, drawn from recent work by Kunal Sangani, involves how firms set markups: when wage increases push up prices across many industries, consumers may become less sensitive to any individual restaurant’s prices, giving firms room to increase margins. Reduced competition from firm exits could compound that effect.
Implications for jobs and consumers
Applying a standard estimate of how much restaurant demand falls when prices rise, the authors calculate that the price increases they measured would translate into roughly a 3.9 to 4.1 percent drop in quantity demanded at fast food restaurants and a 1.7 to 1.8 percent drop at full-service restaurants. Those figures line up closely with employment declines that Clemens and coauthors documented in a separate paper using government payroll data.
The authors interpret the combination of higher prices, lower demand, and lower employment as consistent with a competitive model of the low-wage labor market rather than one in which fast food employers hold substantial wage-setting power over workers. Under the latter view, a minimum wage hike could in theory expand employment and reduce prices. The California data show the opposite pattern.
The price increases also carry distributional weight. Lower-income households spend a larger share of their budgets at limited-service restaurants, so higher fast food prices function somewhat like a regressive consumption tax. That tradeoff, the authors note, sits alongside the wage gains for workers who kept their jobs.
