Minimum Wage: As Pressure Mounts, Who Are Winners? Impacts?

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While the federally mandated minimum wage continues to stand at $7.25 per hour, more than half of the states and the District of Columbia have set a higher minimum wage, most of which have increased this year or will increase in the near future.[1]

This past January, ten states applied a cost-of-living adjustment, which in most cases was less than 2%. In fact, over the past few years, more than 15 states have enacted legislation to “true up” wages with hikes averaging 11% and, in most cases, reflect the first of a series of wage increase installments.

wages mapPerhaps underlying this trend is a belief that we are in the beginning stages of broad societal pressure on employers to increase wages, benefits and rights at-large. The discourse on income inequality is escalating with protests to “true up” wages, so that they catch up to the poverty line and keep up with annual cost of living inflation adjustments. Working full-time shouldn’t necessitate government benefit programs to supplement income just to reach above the poverty line.

CPI vs. minimum wage chart

Increase in Corporate Responsibility

To proactively respond to these societal pressures, a growing number of companies have announced increases to starting wages for their employees — Wal-Mart ($WMT), Target ($TGT) and TJ Maxx ($TJX), among others — effectively increasing the wage floor in excess of the current federal and / or local municipality minimum wage, thereby reducing their own corporate earnings for the wellbeing of their employees.

  • Wal-Mart ($WMT) – Earnings Call Transcript, May 19, 2015
    “We took the initial steps in April towards a stronger investment in our associates by raising the minimum starting wage for all hourly associates to $9.00 per hour. As part of our $1 billion investment in our associates, we also raised the floor and ceiling on pay bands in our stores creating raises for many full- and part-time hourly associates at every level. More than 500,000 associates benefited from this change.”

  • Dunkin’ Brands ($DNKN) – Earnings Call Transcript, July 23, 2015
    “We will work very, very aggressively with our franchisees to mitigate minimum wage, and we will continue to work with them to implement the best programs we can, and I could actually argue, we are in a better situation than most other chains out there … one of the predictions I will make is the increases in minimum wage, if it continues, will actually give us increased market share over the long-term because many of the moms-and-pops that exist in this industry won’t be able to survive.”

  • Chipotle Mexican Grill ($CMG) – Earnings Call Transcript, July 21, 2015
    “In the San Francisco Bay area, for example, the minimum wage was recently increased to over $12 an hour … We recently increased prices by 10% in the 10 restaurants within San Francisco and by 7% for the 74 restaurants outside San Francisco in the Bay Area. These relatively modest increases effectively pass along only some of the higher cost of doing business in that area.”

  • Aetna ($AET) – Press Release, January 12, 2015
    “In April, Aetna will be increasing the minimum base hourly wage for its U.S. employees to $16 per hour. This increase will positively affect approximately 5,700 of our employees across the U.S. On average, this means an 11% increase for employees, and for some it may be as much as 33%.”

Societal Impacts of Increases Wages

It is probably fair to assume that many of the people who are minimum wage earners are among the most disadvantaged. Within the context of any increase to incremental income, the net outcome quickly results in a direct increase in consumer spending, thereby yielding actual trickle-down economics, not to be mistaken with the unproven “political voodoo” of the same named economic theory popularized by some politicians in the past.

Likely winners include consumer staple retailers that are levered to this demographic such as dollar stores — Dollar General ($DG), Dollar Tree ($DLTR) — as well as financial services players where credit charge off levels could very well decline — Capital One ($COF), Synchrony Financial ($SYF).

Industries that are more highly levered towards minimum wage employees with a high percentage of labor costs will experience the greatest volatility. For instance, in restaurants a 1% change in labor costs without any menu price changes can impact a typical store’s earnings by approximately 3 – 4%. Or as one analyst recently estimated, if the average hourly minimum wage increases by 30 cents, it will have a negative impact of 40 – 60 basis points. How will fast-food operators such as McDonald’s ($MCD) or Wendy’s ($WEN) respond to these cost pressures?

Future Unanswered Questions:

One result is certain, wage inflation and increased employee benefits such as the Affordable Care Act will result in greater labor operating costs for corporations. The outcome will almost certainly yield upward pricing pressures and drive inflation and similarly demand increased worker efficiency to limit headcount. Will this also result in a headwind towards low unemployment rates and inhibit increased employment participation levels?

The compression between current minimum wage levels and the wages other employees are earning will yield additional wage inflation as the next tier of workers also seeks a raise. Will this ripple effect increase the standard of living or cause unknown externalities that will cascade through the economy?

Will labor cost pressures be the lever that causes a new recession as inflation returns and real growth grinds to a halt? Rest assured that the current political impasse in Washington and the presidential election cycle in full swing will ensure a bumpy road ahead for the market and economy at-large.

Will unionized labor rise again? Pharmacy workers at a Brooklyn Target ($TGT) just voted to form a microunion, making it the first unionized store in the history of the retailer.  Will more be coming soon?

With the low probability of any change in policy at the federal level, states and local municipalities will continue to be at the forefront of the policy debate. Only recently has corporate America begun to realize the significance of their role on such societal reform. While it is only the beginning, pressure will continue to grow to “true up” wages and bring the income levels of low wage workers above the poverty line.

1. National Employment Law Project (