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3 Surprising Beneficiaries of a Minimum Wage Boost

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The minimum wage debate has a clear impact on low-income workers, but it could also have three surprising beneficiaries as documented by of our analysts.

Los Angeles Mayor Eric Garcetti signing the city's minimum wage increase into law last month. Source: Flickr via Eric Garcetti

It's been nearly six years since the federal government last raised the federal minimum wage. For low-income workers, that's an exceptionally long period of time to go without a raise relative to the rate of inflation. Even though certain cities and states do have higher minimum wage rates, the debate over raising the minimum wage on a federal level for potentially millions of workers is gaining steam.

A minimum wage boost would most directly impact low-income workers and help move them toward a "living wage." However, there would, according to our analysts, also be three surprising beneficiaries if the federal government decides to raise the minimum wage.

In no particular order, here's what our analysts suggested.

Sean Williams 
Boosting state and federal minimum wage laws is getting a lot of attention at the moment -- especially following Seattle and Los Angeles' laws, which are set to make $15 the baseline wage within each major city. Both wages are being phased in over the course of many years.

But workers aren't the only ones set to benefit from an increase in the minimum wage. One potentially surprising beneficiary that many people forget about are senior citizens.

Source: Flickr user wonderlane

Why senior citizens? Simple: eligible seniors receive income on a monthly basis from the Social Security program. The trust that pays monthly benefits checks (collectively known as the Old-Age, Survivors and Disability Insurance Trust, or OASDI) is funded through payroll tax dollars from workers. It's also set to face challenging times in the years ahead. Due to the retirement of baby boomers in increasing numbers and the longevity of Americans (the average life expectancy is up nearly nine years over the past five decades), the OASDI is set to burn through its remaining cash reserves by 2033. If this happens and Congress passes no solutions, benefits checks will be cut by 23% across the board in order to keep the program functional for an estimated 54 more years.

However, if minimum wages rise, then the amount workers are paying into the Social Security program rises as well. More payroll tax revenue being collected could push out the cash reserve depletion date well past 2033, giving current seniors and preretirees a little breathing room for when they do collect a benefits check. It also gives Congress even more time to hash out a solution.

A word to this wise, though: It'll take more than a minimum wage increase in two cities to make a dent in the OASDI's long-term revenue shortfall. But from the point of view of senior citizens, it's a start.

John Maxfield
It's safe to say that most companies dread the idea of an increase in the federal minimum wage. But the nation's biggest banks aren't likely among them.

Source: via Flickr

Sure, banks will have to pay out more in labor expenses. However, a nationwide increase in pay for people at the bottom of our socioeconomic ladder could tip the scale on inflation by jolting consumer prices out of their nearly decade-long malaise.

This matters because the Federal Reserve ties monetary policy, in large part, to inflation. If inflation approaches or exceeds the central bank's 2% benchmark, then the central bank is likely to increase short-term interest rates.

At first glance, this may not seem like it'd provide a boost to banks. After all, most people still tend to think that banks make money by arbitraging between long- and short-term rates. That is, by borrowing money from depositors at low short-term rates and then investing the proceeds in higher long-term rates.

However, this is an outdated model of banking. Since the early 1980s, banks have chosen instead to tie the interest rates on their portfolio investments (i.e., loans that they originate and then keep on their books instead of selling to institutional investors on the secondary market) to short-term interest rate benchmarks like LIBOR or the Fed funds rate. The net result is that any increase in short-term rates will translate directly into high-margin revenue for the nation's biggest banks.

Jordan Wathen
Like John, I believe lenders are very likely to benefit from an increase in the minimum wage. Conn's (CONN 7.82%) comes to mind as the type of company that would benefit the most.

Analyst & investor day presentation slide. Source: Conn's

Conn's is a retail chain that specializes in financing small-dollar consumer purchases from electronics to furniture. It describes its core customer as having annual income between $25,000 and $60,000 per year, and an average FICO score of less than 620. Its borrowers at the lower end of the income spectrum would be likely beneficiaries of rising wages, which would improve the results of Conn's subprime loan book.

The company isn't without its sore spots. Last year, aggressive promotion attracted higher-risk borrowers and resulted in poor loan performance. But the trend is in its favor; the company slashed low-margin products and sought out more creditworthy borrowers. If the minimum wage jumps, I would expect it to benefit tremendously from increased demand from new customers, and decreased delinquencies among its existing customers.

John Maxfield, Jordan Wathen, and Sean Williams have no position in any stocks mentioned in this article.

The Motley Fool has no position in any of the stocks mentioned. 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.

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