Would a Higher Minimum Wage Hurt Wal-Mart and McDonald's?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following four consecutive days of losses, stocks opened roughly unchanged this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.07% and 0.04%, respectively, at 10:15 a.m. EST.

Although the stock market doesn't appear to be biting, there are a couple of positive data points out this morning. Initial jobless claims for the week ended Nov. 30 fell to 298,000, their lowest level since the first week of September (although one ought to note that making seasonal adjustments to these data becomes trickier during the holiday period). In addition, third-quarter GDP growth was revised higher, from 3% to 3.6%, reflecting the highest inventory buildup in 15 years, which contributed nearly half of the growth.

Yesterday, calling rising inequality "the defining issue of our time," President Barack Obama renewed his call for an increase in the minimum wage. Last month, the White House backed a bill that would raise the federal minimum wage from $7.25 to $10 an hour. Today, a movement demanding $15 per hour for fast-food workers is sponsoring a one-day strike across 100 cities in the U.S., expanding a 50-city strike that occurred on Aug. 29. Are these a threat to Dow components McDonald's (NYSE: MCD  ) and Wal-Mart Stores (NYSE: WMT  ) ?

That's a difficult question to answer, but it's not as straightforward as simply calculating the increase in payroll that would result from a higher minimum wage. Contrary to standard economic theory, the U.K. proved to be a real-world example of a higher minimum wage not leading to lower employment. Similarly, there are tangible economic benefits to the employer of a higher minimum wage, which makes it more costly for an employee to leave a job to seek another one.

That's a meaningful benefit at a company like Wal-Mart, where the employee turnover rate was 37% in 2011 (down from 44% a year in 2006). Wal-Mart is the largest private employer in the U.S., with a roster of 1.3 million workers. At the end of October, the company announced that it would promote 25,000 employees – most of whom are currently hourly workers -- in the fourth quarter. That's a logical extension of the company's September announcement that it would move 35,000 workers from temporary to part-time status and another 35,000 from part-time to full-time status.

A higher minimum wage would likely result in higher prices for the customer. While such a move is not imminent, Wal-Mart could look to Costco, which pays it employees more and enjoys significantly lower turnover, for evidence that higher wages need not destroy its business.

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  • Report this Comment On December 05, 2013, at 11:45 AM, TXObjectivist75 wrote:

    Please explain how it would be more costly for an employee to change jobs if the minimum wage was $15? Wouldn't the risk be the same if the minimum wage stays where it is (since there's no risk of earning less than the MW)?

  • Report this Comment On December 05, 2013, at 3:15 PM, Mathman6577 wrote:

    So you are saying that you know more than Wal-Mart or McDonalds regarding how a higher min. wage affects their business? I'm sure the companies know much more than you. And it sounds a lot like the government saying that it knows more than the people do regarding their healthcare needs.

  • Report this Comment On December 05, 2013, at 11:47 PM, Corsair3117 wrote:

    Both previous comments were on the money. So I will just briefly point out an additional fact. There is no fairer and more accurate determinant of wages and prices than the marketplace. The finger on this pulse is the employer with his profit (and in the case of the small businessman his survival) on the line daily. Pay too low for a job's contribution to productivity and you'll be understaffed. Pay too much and you can only cut workstaff. Be FORCED to pay too much by pols showing their compassion with YOUR money and you will either make that staff cut draconian or close your doors. Has any of these MF writers and "champions of fairness" ever explained how a job that contributes $8/hr to productivity should be rewarded by jack-booted gov't fiat at $10, $11, or on Big Rock Candy Mountain even $15? without distorting costs, viability,and subsequently prices and unemployment . Economics 101, you shoulda taken it in school

  • Report this Comment On December 06, 2013, at 7:53 AM, NOV95EG wrote:

    What the Marxist MF writers are refusing to recognize is that this nation (and world) is mired in a recession that prefers to become a depression. Furthermore, according to the National Chamber of Commerce, 1 out of 5 small businesses in America are currently operating at no income to their owners. Those businesses are not coasting, rather they are trying to survive these hard times. Meanwhile, the Obama administration, through its "damn the torpedoes" policies of higher taxes, unaffordable health care, higher minimum wages, increased welfare, burdensome regulations, etc. has miserably and totally failed to improve the business climate. Indeed, BHO hasn't ever reflected on the needs of business.

    Low wages will certainly go up when businesses are forced to compete for available workers. Let's not legislate further business contraction and failure by imposing higher labor costs on ALL businesses.

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