What the Minimum Wage Conflict Means to Investors

by Lawrence Meyers | August 29, 2013 3:21 pm

NewLetters What the Minimum Wage Conflict Means to Investors[1]Another nationwide strike by fast-food workers[2] at chains such as McDonald’s (MCD[3]) raises a number of important questions, though the one on most InvestorPlace readers’ minds is probably “How does this issue affect investors?”

It’s difficult to answer this question without examining the minimum wage issue itself, as the investment angle is wrapped up in the very DNA of labor issues.

Both Sides of Minimum Wage

First, let’s examine the employer’s view of this issue.

Labor is a commodity, subject to supply and demand. Unskilled workers are in large supply, and have no pricing leverage. They aren’t considered valuable enough for an employer to pay more than the minimum wage. Should that floor be lifted by the 100%-plus that unskilled workers are asking for, skilled workers would follow up by demanding their own increases, driving up labor costs and devastating the bottom lines of many companies … which ironically would result in layoffs.

What minimum-wage employees don’t realize is that the economics simply don’t work for a large wage increase.

I happen to have family members who own McDonald’s franchises. A successful store has 60 employees working 125,000 man-hours annually, and nets some $350,000 in a great year. Even a $3 increase in minimum wage means:

  1. The entire profit vanishes, along with the store;
  2. Some employees lose their jobs; and/or …
  3. Prices rise across the board, potentially reducing the number of consumers who buy the product, and decreasing revenue, leading us back to items 1 and 2.

Now, let’s examine the employee’s side of this issue.

It’s practically impossible to live on $14,000 a year. It results in dependence on government benefits to supplement that income.

Higher wages may result in higher productivity. The most interesting argument is that while paying higher wages might not be the best thing for the bottom line, there are intangible benefits to the employer that result from having a happier work force. There’s a certain brand and corporate culture value here. This won’t necessarily apply to McDonald’s, Burger King (BKW[4]) or Wendy’s (WEN[5]), but there are other corporations that might benefit. Ben & Jerry’s always prided itself on this kind of corporate culture. Starbucks (SBUX[6]) has a wider range of starting salaries[7], but also offers benefits.

The issue gets muddy when employees start screaming about “greedy corporations,” because as shareholders, we know that management has a sacred fiduciary duty to maximize shareholder return. As shareholders, we prefer tangible returns, not intangible benefits to a corporate culture. Telling a franchise owner — who has likely risked all of his money and taken down a sizable loan to buy a franchise (they cost around $2 million each at McDonald’s) — that he should give up some of his hard-earned profit to his unskilled employees is an emotional argument that doesn’t work for shareholders.

It’s these moral arguments that underlie the debate, even more than the practical arguments — and that’s exactly why they are doomed to fail, along with the push for higher minimum wages.

Business is amoral — not immoral, but amoral.

And Investors?

That being said, what do we do as investors if wages do rise? That depends on the company.

At fast food chains like McDonald’s, those labor costs will be absorbed at the franchise level, so we won’t see much impact on the corporate P&L. Franchise owners will lobby for higher food prices to offset those costs, and that’s where the pinch comes — because while all restaurants will see increased labor costs, nobody wants to raise prices on their customers.

There’s a breaking point where that price increase drives customers to buy pasta and sauce at Dollar Tree (DLTR[8]) instead of a burger. Then revenue declines, which means reduced franchise fees on the P&L.

So a minimum wage increase would hit restaurants and any other stock that relies heavily on unskilled labor. I think some of it would be offset by higher prices, and likely not impact P&Ls too much — provided the wage increase isn’t too bad. Any other business that doesn’t rely as much on unskilled labor is unlikely to be affected — unless minimum wage skyrocketed and forced other skilled labor to demand increases.

Bottom Line

Frankly, while I don’t see a federal increase on the way, certain states might make changes. So the bottom line for now is don’t sell any stocks just yet.

The one thing that often gets overlooked in this debate, though, is a solution that doesn’t affect businesses at all. It results in higher pay for anyone who wants it, and places the responsibility for a higher wage where it belongs: on the worker, not the employer.

Unskilled workers who want higher pay can do so by improving their skill sets. After all, if the market sees them as more valuable, they’ll be paid more. There’s a reason that plumbers, electricians and even janitors are paid more than minimum wage — they have specialized skills. Yet there’s this perception that somehow that’s not possible, which begs the question: Where did all these plumbers, electricians and janitors come from?

There are enormous resources for people to learn these new skill sets, from free local workshops to job fair referrals to government programs. Opportunity is out there. It just takes motivation.

As of this writing, Lawrence Meyers was long DLTR, and has worked his share of minimum wage jobs in his life.

The opinions contained in this column are solely those of the writer.

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Endnotes:
  1. [Image]: mailto:letters@investorplace.com
  2. nationwide strike by fast-food workers: http://www.nydailynews.com/new-york/fast-food-walkout-workers-u-s-protest-wages-article-1.1440232
  3. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  4. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  5. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  6. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  7. wider range of starting salaries: http://www.glassdoor.com/Hourly-Pay/Starbucks-Hourly-Pay-E2202.htm
  8. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR

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