First came the farfetched “Fight for $15.” Now, California has made a $20 minimum wage a reality, at least for workers at large fast-food chains. The pay hike took effect in April 2024, joining the state’s broader minimum wage of $16 (now $16.50) for other workers.
A new academic working paper finds that the hike boosted wages for fast-food workers by about 8 percent—but it also reduced fast-food employment in California by roughly 3 percent, or 18,000 jobs.
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The NBER study adds to a controversial and complex body of minimum-wage research, which includes studies from some economists—perhaps surprisingly—defending the policy. It also arrives amid a populist political moment, in which the federal minimum wage remains just $7.25, Republicans are adjusting to their increasingly blue-collar base, and new polling from Echelon Insights shows remarkable public support for even the largest minimum-wage hikes. Echelon’s respondents favored a $20 federal minimum wage by a 20-point margin—even though about 40 percent of U.S. jobs pay less than that.
The new paper’s methods are elaborate but essentially treat California’s abrupt $4 hike as a natural experiment. The authors compare fast-food employment in the state with various control groups—such as fast-food jobs in other states and other types of jobs within California. The roughly 3 percent employment decline is fairly consistent across these different approaches. Students of basic economics will not be surprised. When employers are forced to pay more for labor, they tend to buy less of it.
Nevertheless, the new paper makes a useful contribution. To see why, it helps to understand how arguments in favor of the minimum wage have evolved in recent years.
Some supporters now contend that, even if a wage hike leads to some job loss, the benefits of higher pay may outweigh the cost. For example, a 2024 review found that, on average, only 13 percent of minimum-wage gains are offset by job losses. However, that tradeoff may worsen as minimum wages rise. The new study estimates that, in California’s case, 29 percent to 49 percent of wage gains were offset by job losses.
Also worth noting: unemployment carries social and psychological costs that can’t easily be weighed, dollar for dollar, against pay increases for those who remain employed.
More strikingly, some studies have failed to find any dis-employment effects from minimum-wage hikes, especially smaller ones. How is this possible?
For one thing, there’s a difference between “too small to measure with statistical confidence” and “nonexistent.” Another possibility is that employers are adjusting in ways other than layoffs—for example, by reducing scheduling flexibility to get more out of their workers. In that case, workers are indeed worse off in some respects to compensate for their raises, just not in a way that shows up in employment numbers.
Among strong supporters of minimum-wage hikes, the most seductive theory has been that low-wage employers possess “monopsony power.” In such cases, raising the minimum wage doesn’t reduce employment: it’s a free lunch.
The concept is a bit tricky, so it helps to begin with the more familiar idea of a monopoly. Imagine a company that, after consolidating control of a market, raises prices by 25 percent and loses 10 percent of its customers. (There are no competitors, but some buyers simply go without.) The intriguing implication is that if the government forced the monopolist to lower prices again, sales might actually increase—because those missing customers would return.
“Monopsony” describes the same process, except the buyer, instead of the seller, has market power and pushes the price (in this case, wages) artificially lower absent government regulation. Restore the price through regulation, and employment would remain unchanged, or even rise.
There are certainly places where a major employer exerts some sway over the low-wage labor market. But we shouldn’t let this grain of truth snowball into wishful thinking. The bulk of the evidence, including the new study, suggests that there’s at least some job loss from minimum-wage hikes, alongside other tradeoffs.
Where should policymakers go from here, given the public’s undeniable support for boosting the minimum wage? There’s much to recommend for a federalist approach, with the national government leaving the matter to states and localities. We’re already living with this approach, more or less. Federally, the minimum wage has remained unchanged for a decade and a half, but hardly anyone earns $7.25 anymore. Most states have enacted higher wage floors than that, though some have not, while a handful of states and cities have experimented with much higher minimum wages.
Federalism offers a pragmatic path through the minimum-wage debate. High-cost urban areas can raise wage floors without destabilizing rural economies. Progressive jurisdictions can try bold experiments—like California’s $20 minimum for fast-food chains—while business-friendly states let markets set wages with minimal interference. We may never settle the question of the minimum wage nationally, but we don’t have to. America’s diverse political communities can chart their own course—and in doing so, teach one another what works.
Photo by Alejandro Tamayo/The San Diego Union-Tribune via Getty Images