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Why Minimum Wage Increase May Be GOOD for Walmart and McDonald’s

A plan to increase minimum wage to $9 an hour by 2015 has been a big subject of debate since Obama proposed the move in his State of the Union address.

Talking heads will undoubtedly attack this issue from any angle they can to “prove” that their argument is the right one. However, if this does come to pass, there’s one area of potential that investors probably are overlooking.

Namely, the opportunity a minimum wage increase might bring to certain stocks with a large number of lower-income customers. Such companies include Walmart (NYSE:WMT), McDonald’s (NYSE:MCD), CarMax (NYSE:KMX) and PepsiCo (NYSE:PEP), among others.

You probably think I’m nuts to say that McDonald’s would benefit from a minimum wage increase, since the company’s labor costs could skyrocket as a result. I don’t deny this.

But for starters, consider that McDonald’s has ways to mitigate those costs that include cutting back on other employee benefits and compensation, as well as passing the expense on to consumers.

And more importantly, consider that a large share of McDonald’s domestic customers are low-income folks who make the minimum wage themselves. These people pretty much spend whatever they earn — so in a way, MCD customers in particular are getting a “stimulus” through the minimum wage increase.

This is not just an assumption based on a gut check. Consider a 2011 study from the Federal Reserve Bank of Chicago indicating that “a $1 minimum wage hike increases household income by roughly $250 and spending by approximately $700 per quarter in the year following a minimum wage hike.”

Not enough to buy a new house, sure, but an extra $700 per quarter means a few more trips to the store.

The Fed also found that money going to durable goods cars represented “the majority of this additional spending.” That means a new television or dishwasher or even a car. Not always new ones, mind you, but perhaps used cars like ones from CarMax or local vehicle lots.

Furthermore, a 2012 article in The New York Times cited research at the liberal Economic Policy Institute that found a minimum wage bump to $9.80 an hour would lift GDP by $25 billion. That’s 0.2% growth right there.

I’m not saying you should run out tomorrow and buy McDonald’s or Pepsi stock because a minimum wage increase automatically will result in an increase in junk food spending as low-income Americans find more money in their pockets. There clearly are more factors at play with an individual company and its unique product line — particularly global corporations like these.

But don’t forget that by and large, the economy is a closed system. More money spent by a consumer or business means more income for someone else. If millions of low-income Americans suddenly get a bump in pay, somebody is going to benefit from that.

We learned this the hard way with government spending cutbacks in America. Sure, we need to be fiscally responsible — but big drawdowns in federal and local spending over the last few years have resulted in a big drag on employment or GDP.

When someone spends money, there is a counterparty that winds up with more money in their pocket. So sometimes it’s actually a good idea to encourage spending.

Of course, there are risks. Businesses that have been hit hard by the last few years might not have that much more to give and could see profits pinched — even if it is for the “good” of the overall economy.

Furthermore, consumers themselves may lose out in some ways. The aforementioned Fed study from 2011 admits “[i]t is possible that a minimum wage increase reduces the odds that those without a job will be able to find one” — a risk that cannot be overlooked in an already difficult job market. And if costs are just increased in kind across the board, then it really is just a zero-sum game.

It’s a complicated issue with many moving parts. But one thing investors might want to consider is how minimum wage affects lower-class spending habits — and which companies could benefit if and when an increase takes place.

Related Reading

  • If you didn’t know, some waiters and waitresses make far less than even the current minimum wage. The base rate is just $2.13 an hour, and when you add in tips, some folks still make well below what retail counterparts do. (The New York Times)
  • How U.S. minimum wage ranks globally. (Washington Post)
  • The risk that minimum wage reform will drive up unemployment. (Fox Business)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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