Minimum Thinking: A Hike for Wages?

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During the State of the Union address President Obama proposed raising the federal minimum wage to $9 per hour. The next day some Democrats in Congress went further by stating the rate should be even higher --- over $10 per hour.

Although the main goal is to benefit full-time workers, these types of efforts usually go beyond the original intent. It's possible that the rate for all workers will go up. An increase would most likely affect not only the minimum wage earner -- who is typically a student or part-time worker -- but a lot of companies, some of which will also be impacted by the Affordable Care Act (Obamacare) and the rescinding of the Bush-era payroll tax cut. The triple whammy is bound to cause the most harm to the restaurant and hospitality industries and the discount retailers. 

If a business is forced to pay a higher rate, and if it doesn't reduce the number of hours worked for existing employees or postpone hiring, then it would have to raise the prices they charge their customers. None of the options help growth over the long term. 

Companies such as fast food giant McDonald's (NYSE: MCD) would be impacted. A significant portion of its workforce consists of minimum wage earners. Margins are already being squeezed and revenue growth is slowing because of continuing weakness in economies around the world. Any uptick in prices for Happy Meals and milkshakes could make the current situation even worse. Don't bet against McDonald's though. Based upon its history it will find ways to adapt.

Wal-Mart (NYSE: WMT) will also be affected. The company, the world's largest nonunion private sector employer, has a lot of minimum wage workers in the U.S. Wal-Mart is already being impacted by the expiration of the payroll tax, which took effect earlier this year. The stock dropped 2% on a report circulating that company sales are slowing because consumers now have less disposable income. An increase in prices would further complicate the problem. A decrease in hours worked or reduced hiring could slow growth. However, the company has weathered past storms and likely should be able to get though relatively unscathed over the long term. 

Even the slightly more upscale retailers could be hurt. Minneapolis-based Target (NYSE: TGT), although it doesn't employ as many minimum wage workers as Wal-Mart and pays a bit more on average, could be affected. Upward pressure on labor costs would ripple though the company and would reduce margins. The company will also be impacted, although to a lesser extent, by the payroll tax increase. Shares dropped 1.6% based on the Wal-Mart news.

The pizza chain Papa John's International (NASDAQ: PZZA) previously announced prices would most likely be raised (for example, a large pizza might cost up to 14 cents more) due to Obamacare alone. If the minimum wage is increased it is probable that prices would go up even more unless other measures are taken such as reducing hiring or hours worked. In any event growth will be impacted. 

Although it isn't the end of the world my thought is that it would be best if the minimum wage is not increased. Business outlooks and the bottom line in some cases are already being affected by Obamacare and the payroll tax increase. Adding a third headwind at this point is not a very good idea. 


Mathman6577 owns shares of McDonald's and Wal-Mart Stores. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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