Fiscal Effects of the Fast Food Accountability and Standards Recovery Act, AB 257

Ken Jacobs

Background

The fast-food industry is marked by low-wages, few benefits, and high rates of employment law violations. An estimated 550,000 Californians worked in the industry in 2019. Most earn close to the minimum wage. Eight out of ten fast-food workers in the state are workers of color, and six out of ten are Latinx. Two-thirds are women. While fast-food workers are younger than workers as a whole, the vast majority (77%) are over the age of 18.

The Fast Food Accountability and Standards Recovery Act, AB 257, would create a Fast Food Sector Council charged with establishing industry-wide minimum standards on wages, working conditions, and training in the industry. The council would hold hearings once every six months and review the standards at least once every three years.

Passage of the bill would also make fast-food franchisors jointly liable for violations of state employment laws. The fast-food industry is largely organized through a franchise model. Franchisors hold the economic power in the relationship and exert significant control over franchisees operations—dictating price, suppliers, and customer rules—which incentivize poor labor conditions.

The effect of AB 257 on workers’ wages and benefits, as well as its effectiveness in reducing wage theft, depends on the actions taken by the council. If the council raises the wage floor for fast-food workers and reduces wage theft it would create savings to the state budget through decreased utilization of state safety net programs as well as increased tax revenue.

Lower Enrollment in Safety Net Programs

A recent study I co-authored analyzed fast-food worker family enrollment in Medi-Cal and CalWorks cash assistance. We found that half of fast-food workers in California were themselves or had a family member enrolled in adult Medi-Cal, and 22% had a family member enrolled in children’s Medi-Cal. The total cost to the state and federal governments was $820 million. The state’s share of costs depends on whether the worker qualifies for traditional Medi-Cal (50%), the Medi-Cal Expansion (10%), or state-only Medi-Cal for certain immigrant populations who meet the income requirements but do not otherwise qualify for Medi-Cal (100%). The state’s overall Medi-Cal share is projected to be 23% in 2021-2022. Fast-food workers account for 3% of the overall California workforce, but are 2.5 times more likely than workers as a whole to be enrolled in Medi-Cal. [1]

There is strong evidence that policies increasing workers’ wages in turn reduce public safety net program enrollment.[2] The California Department of Health Care Services estimated $114 million in general fund caseload savings in 2020-21 and a $206 million savings in 2021-22 from a $1 increase in the minimum wage in each of the two years.[3] In addition to savings from Medi-Cal, an increase in the minimum wage is likely to reduce receipt of CalWorks cash assistance and state-funded EITC, among other safety net programs.

For the purposes of this analysis, I assume the council gradually increases wages for fast-food workers to 15% above the state minimum wage ($2.25) over three years. While it is difficult to create a precise estimate, savings to the state from an increase in the minimum wage for fast-food workers of this size is likely to be in the low tens of millions across safety net programs.

Increased Tax Revenues

Higher earnings for fast-food workers would increase their taxable income. Since not all fast-food workers earn exactly the minimum wage, I conservatively assume that a $2.25 increase for fast-food workers would result in an average increase in worker pay of $1.59 an hour, adding up to $1,800 a year. Total wage increases would be approximately $1 billion.[4] Conservatively assuming an average 3% marginal tax rate, a $2.25 higher wage floor would increase state income taxes by $30 million a year. This estimate does not include increased earnings from reductions in wage theft resulting from the legislation, or any multiplier effect. Therefore, the total increase in worker earnings and subsequent tax revenues are likely underestimated.

The fast-food industry has experienced rapid growth in recent years. Raising the wages of fast-food workers but not other food-service workers could result in modestly slower growth in the fast-food industry and greater growth in smaller, independent restaurants and other segments of the restaurant industry not covered by the policy. At the same time, wages will likely increase in competing segments of the industry, though to a lesser extent, as those employers seek to attract and retain workers.

The preponderance of research evidence on the effects of higher mandated wages for fast-food and restaurant workers find little measurable effects on employment. Cost increases may be absorbed through a combination of small increase in price, reduced corporate profits, reduced turnover and improved worker performance.

Downstream Effects on Workers, Families, and the Economy

A growing body of research finds that public policies raising the incomes of low-wage workers have broad, positive, and long-lasting effects on workers and their families.

Increases in parental income lead to higher test scores and better educational outcomes for children, greater likelihood of employment in young adulthood, and improved earnings later in life. A higher minimum wage improves adult mental health, including a significant reduction in suicide rates. Other research shows additional positive effects, such as reducing child poverty and neglect, and improving children’s health. Each of these would, in turn, bring positive effects in the long run to the state’s economy and fiscal outlook.

Improving wages for fast-food workers would also be a step forward in contending with racial inequality in the labor market, which has been exacerbated by the pandemic.

Costs

The main costs for the program would be in staffing, travel, the costs of holding hearings, and additional enforcement of labor and employment law. The analysis for the State Assembly Appropriations Committee estimated potential court costs from additional workload at $382,000.

Conclusion

The ultimate impact AB 257 will have on the state budget will depend on to-be-made decisions by the council. But even with a small increase in fast-food workers’ wages resulting from the bill, the net fiscal effect is likely to be positive for the state.

Acknowledgements

Thanks to Kuochih Huang for research support, and Enrique Lopezlira, Laurel Lucia, and Michael Reich for their helpful comments.

Notes

[1] Sources: Huang et al. (2021) The Fast Food Industry and COVID-19 in Los Angeles. UCLA Labor Center, UC Berkeley Labor Center, UCLA Labor Occupational Safety & Health Program, UC Berkeley Labor Occupational Health Program. https://laborcenter.berkeley.edu/wp-content/uploads/2021/03/The-Fast-Food-Industry-and-COVID-19-in-Los-Angeles.pdf; US Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

[2] Dube, Arindrajit (2019). Minimum Wages and the Distribution of Family Income. American Economic Journal: Applied Economics 11, 4: 268–304. DOI: https://doi.org/10.1257/app.20170085; West, Rachel and Michael Reich 2014. “A Win-Win for Working Families and State Budgets.” Center for American Progress and UC Berkeley Institute for Research on Labor and Employment, https://irle.berkeley.edu/a-win-win-for-working-families-and-state-budgets/

[3] State of California Department of Health Care Services, Medi-Cal November 2020 Local Assistance Estimate for Fiscal Years 2020-21 and 2021-22. Pages 331-332. https://www.dhcs.ca.gov/dataandstats/reports/mcestimates/Documents/2020_November_Estimate/N20-Medi-Cal-Local-Assistance-Estimate.pdf

[4] Between 2017 and 2019, the average annual hours of the states 550,000 fast food workers was 1,143. Source: author’s analysis of the American Community Survey.