Fast-Food Price Hikes and the 50% Cost Pass-Through: Who Pays for the $20 Wage?

Fast-Food Price Hikes and the 50% Cost Pass-Through: Who Pays for the $20 Wage?

A critical piece of the minimum wage puzzle is how businesses absorb the increased cost of labor. While opponents of minimum-wage hikes often argue that labor costs are fully passed through to consumers in the form of higher prices, recent empirical evidence from California's $20 fast-food minimum wage shows a more nuanced reality: a partial pass-through that compresses profit margins, suggesting that employers wield monopsonistic power in low-wage labor markets.

According to a comprehensive price-scraping study of over 2,000 restaurants conducted by Denis Sosinskiy and Michael Reich at UC Berkeley (published April 1, 2026), fast-food prices in California did increase, but a significant portion of that increase was driven by broader, industry-wide inflation rather than the wage mandate itself:

"Prices in the fast food industry increased by approximately 3.3 percent in California compared to control states in the three quarters following the policy. However, part of the increase can be attributed to broader trends in the restaurant industry. We detect a 1.8 percent increase in full-service restaurants that did not experience wage increases after the policy. Using triple difference estimate, we find that the policy led to short-run price increases in fast-food restaurants of about 2.9 percent. Prices decreased subsequently, relative to prices in our control groups, resulting in an average increase of 1.5 percent three quarters after the policy." (From Sosinskiy & Reich (2026))

The 50% Pass-Through and Margin Compression

A 1.5% net price increase on a 10% to 11% average wage increase reveals that fast-food chains did not pass the full burden onto consumers¹. Since labor costs typically represent about 30% of a fast-food restaurant's operating expenses, a full pass-through of a 10% wage increase would require a 3% price hike.

The actual net price increase of 1.5% indicates a 50% cost pass-through. The remaining 50% of the cost was absorbed by the employers through compressed profit margins. Economists interpret this as evidence of monopsony power, where employers have some wage-setting flexibility and can afford to absorb wage increases without reducing staffing levels.

The Franchisee-Franchisor Conflict

This margin compression has created a unique tension between local franchise operators and national parent brands. Because demand for fast food is highly price-inelastic, the price increases actually raised total store revenues, even as profit margins shrank. This disproportionately benefits the parent companies (franchisors) over the local operators (franchisees):

"The price increases probably translated into higher restaurant revenues, given the highly inelastic demand for fast food (Okrent and Alston, 2012). Such higher revenues hold implications for franchisee payments to franchisors. Franchise licenses granted by a chain’s parent company to individual restaurant owners call for a royalty fee to be paid to the parent company. The fee is usually a fixed percentage of the restaurant’s revenue. Restaurant owners may thus have paid greater fees to their parent companies, even as their own profits were reduced." (From Sosinskiy & Reich (2026))

This structural dynamic is visible in the public financial performance of major fast-food brands. For example:

• McDonald's Corporation (MCD) maintains a massive operating margin of 44.3% on TTM revenue of $27.45B (as of June 2026), heavily insulated by its royalty-and-real-estate model (MCD Market View).
• Chipotle Mexican Grill (CMG), which operates company-owned stores rather than franchising, has a lower operating margin of 13.3% on TTM revenue of $12.14B (CMG Market View), making it more directly exposed to store-level labor margin compression.

Welfare and Distributional Impact

While the 50% pass-through spared consumers from the worst-case price predictions, the policy's welfare effects may still be regressive. Because lower-income households spend a larger share of their budgets on fast food, a general increase in fast-food prices effectively taxes low-income consumers to fund wage increases for a specific subset of low-income workers.