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 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 and Wal-Mart Stores ?
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.
2 "cash kings" that are beating Wal-Mart and changing retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.
The article Would a Higher Minimum Wage Hurt Wal-Mart and McDonald's? originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.