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Minimum Wage, the Economy and the Markets

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So in the same week that the Dow Jones Industrial Average surpasses its record we also have a move in congress to raise the minimum wage. Senator Tom Harkin (D-IA) and Rep. George Miller (D-CA) have introduced a bill to raise the federal minimum wage to $10.10 per hour. It would be the first increase in the minimum wage since 2009.

It's brought about the predictable battle cries, of course. Folks on one side shouting that raising the minimum wage would destroy job creation (and slow the economy) while advocates for the other side trying to shout them down that the lowest earners should be able to participate in rising corporate profits (and thereby grow the economy). It's all one more partisan battle in a year or two filled with them.

Honestly, there's significant evidence that, once you accept the concept of a minimum wage, indexing it to economic growth (inflation, GDP, what-have-you) doesn't hurt economic growth and job creation at all. Still, that's sort of counter intuitive so people can still argue against it. Certainly some of the largest corporations make the argument. Some, but not all. Some, in my opinion, see the long term gain from paying workers more.

"There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wage possible."
- Henry Ford

How Ford's equation gets resolved will go a long way to seeing how this fight ends.

Still, some companies are fretting. Certain industries are more prone to having low-wage workers on their payrolls and some companies will certainly feel the pinch.

There were reports that McDonald's (NYSE: MCD) would really feel the pinch when last month the administration proposed a $9 per hour minimum wage. News reports say the fast food chain's stock was undercut even by the proposal. If so, it's recovered remarkably quickly. Since it's low during that period last month it's up more than $3/share and since November has climbed 15%. Yes, paying its workers more might pinch McDonald's, but a 31% operating margin can absorb the shock.

Burger King (NYSE: BKW) is another one that commentators thought would be harmed by the talk of a minimum wage hike. Not so, apparently, as since February 13, when the administration was kicking it around, the firm's stock hasclimbed 16.9% and since the election it has climbed 27%. It's even raised it's dividend 25% during that time. That's not a sign of the apocalypse for fast food stores. More like steady growth and business development.

What about retail? After all, there are a lot of big box stores out there towards the bottom end of the market that might find themselves paying a lot more in payroll. Would those firms be hurt by a rise in the minimum wage?

Note according to Craig Jelinek, CEO of Costco (NASDAQ: COST). He recently came out in favor of Harkin and Miller's efforts to raise the minimum wage to $10.10 per hour and indexing it to inflation thereafter. There's a joker in Jelinek's deck, though. Costco wouldn't see wages increase if the measure is enacted as it already pays a starting wage of $11.50 per hour. He does say that they keep their overhead and turnover low with that pay scale, though. Still, the firm hasn't suffered. Share growth in the last twelve months is 16.7% with a 1.07% dividend.

However...that might not apply to Costco arch-rival Wal-Mart (NYSE: WMT). While last time there was a minimum wage debate (2005) Wal-Mart executives came out in favor of it, this time there's been little cheering from Bentonville. In fact, there's been very little comment on it from Wal-Mart at all. Could be they're biding their time or don't see either the president's $9 and hour or the more recent $10.10 an hour proposal as serious threats to pass. Or they could just not like it. Regardless, it's not like Wal-Mart shareholders are suffering. The firm has seen some bad press recently, with leaks of board meeting minutes hitting the front page, but shares are up 22% in the last year (though flat recently).

So, in two industries known for being minimum wage intensive, fast food and big retail, both seem to be able to succeed if the rate gets raised, regardless of which spot it lands on. Whether it's $9/hour or more than $10, these employers will survive and even thrive. In fact, of the 50 largest minimum wage employers, more than 90% of them were profitable last year and 75% of them have higher revenues than before the great recession. There's a real argument to be made that Henry Ford's maxim up there applies. At a minimum, indexing it to inflation or GDP growth seems like a good idea.

Good luck!

Follow Nate on Twitter: @natewooley

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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Costco Wholesale, and McDonald's. The Motley Fool owns shares of Costco Wholesale and McDonald's. 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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