|TheStreet.com, Fall, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
Workers in Washington D.C. and New York walked out of some McDonald’s (MCD) restaurants yesterday, and if the one of the driving organizations in the effort — Fast Food Forward — is to believed, food workers in more than 100 cities across the U.S. joined them in protesting the minimum wage. (MCD)
On one hand, the facts are simple: The Federal minimum wage of $7.25 an hour hasn’t changed since 2009. Adjusted for inflation, the minimum wage was actually higher in 1967. Today’s workers are facing increasing prices for basic goods and common living expenses. It’s gotten to the point that over half of the U.S. workers employed by fast-food restaurants rely on government assistance, according to an October report by economists at the University of California Berkley.
There has already been a call by President Obama to raise the Federal minimum wage to $10.10 an hour.
Facts are clear, but, on the other hand, the underlying and intertwining issues are complex. While Obama has smoothly switched gears from promoting the Affordable Care Act to tackling the “defining challenge of our time,” or income equality, in reality the ACA has exacerbated low-paid workers’ situations.
The plan on the table in Congress would raise the federal minimum wage above $10 an hour, which is higher than all existing state rates. ACA’s mandate on employers, however, is already scheduled to raise the hourly cost of hiring a full-time worker past $10 an hour.
Furthermore, there’s a distinction between full-time and part-time workers. Companies with 50 or more employees can avoid ACA’s mandate by cutting workers’ hours below 30 hours per week.
According to a survey by the International Foundation of Employee Benefit Plans, 15% of large employers (50+ employees) had plans to adjust hours so that fewer employees would qualify for full-time medical insurance under the ACA.
Despite the one-year reprieve for that section of the law, the moves appear to be affecting part-time employees, as well. Big-box stores such as Home Depot (HD) have cut the already limited hours for part-time employees from 28 to less than 20 hours per week to handle costs associated with the ACA.
Another simple fact: Fewer hours isn’t a good outcome for workers. Consider this: 35 hours at $7.40/hour = $259/week while 20 hours at $10.10/hour = $202/week. The only way for workers to break even would be if they went from a 40 hour week at the old rate to a 29 hour week at the (proposed) new rate, or $293/week.
Before the ACA, the private economy was run by 114 million workers clocking in an average of 34.4 hours a week. There’s a lot of anecdotal evidence that those workers are being pushed to part time.
Take the instance of Home Depot. In order for the company to handle work left undone by employees whose hours are cut, it must fill 20,000 more job openings, where the employees will average 10-15 hours per week and will not receive paid time off, a 401(k) or benefits of any kind.
The minimum wage issue is one that strongly affects the food, big-box, leisure and hospitality sectors. I believe the wage issues is gaining momentum. If it does gain more steam, I believe companies such as Dunkin Donuts (DNKN), Burger King (BKC), and Yum Brands (YUM), along with McDonald’s, could be painted into a corner as recipients of corporate welfare, with the low wages they pay being subsidized by a variety of social services.
It’s worth noting that the workers themselves are calling for a $15/hour increase in the minimum wage.
Let’s say that happens. Raising the federal minimum wage would further limit the number of jobs available and make entry-level jobs harder to get.
From an economic perspective, rising wages would create a bout of inflation that is unhealthy, in particular since this form of wage inflation (minimum-wage increases) have been shown to do very little to stimulate economic growth. A rising minimum wage would see the prices of goods and services go up across the board and even more employers cutting back on hiring.
From a market perspective, the combination of added health care costs and a potential rise in minimum wage would likely be viewed as damaging as it would suppress corporate earnings. Unless, of course, employers decide to cut back on employees (layoffs) as the CEO of White Castle expressed within the past few days.
The third-quarter gross-domestic-product report, as well as previous manufacturing reports, is encouraging, as the reports demonstrate a strengthening economy, which could help support a rise in minimum wage, naturally and in the future.
Until we get to a point where economic growth is more even and consistent, any cost increase would likely put pressures on equity markets which have rallied on the expectations of continued profit growth.