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What the Minimum Wage Conflict Means to Investors

A wage increase can be absorbed, but only to a certain extent


NewLettersAnother nationwide strike by fast-food workers at chains such as McDonald’s (MCD) 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) or Wendy’s (WEN), but there are other corporations that might benefit. Ben & Jerry’s always prided itself on this kind of corporate culture. Starbucks (SBUX) has a wider range of starting salaries, 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.

Article printed from InvestorPlace Media,

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