Recently, the nation’s second largest city, Los Angeles, voted to increase its minimum wage from $9.00 to $15.00 per hour by 2020. L.A. joins Seattle and San Francisco in enacting a $15 minimum wage with similar levels currently proposed in New York City, Washington D.C., and Kansas City, MO.
Whether this proves to be a good idea remains to be seen. However, investors need to be aware of the potential implications for business and the stock market.
Increasing the cost of labor is likely to increase unemployment.
Higher costs are likely to result in higher prices which may reduce demand.
Higher prices could lead to cost driven increases in inflation.
Higher wages have the potential to increase costs, which may be offset by price increases, reduced head count, greater productivity or a combination of the foregoing. It should be noted that an increase in the minimum wage is highly likely to put upward pressure on wages in general. While we do not expect an immediate increase in wages across the board, over time, wages that have historically exceeded the minimum will continue to do so.
Employers are likely to be generally successful in offsetting wage increases, to maintain profit margins.
More significant to markets is the potential for acceleration in inflation, both actual and expectations.
Inflation can come from many sources. Over the last several years, some economists have expressed concern regarding increases in the money supply. Now, with the apparent move to material increases in the minimum wage, we may start to see more discussions relating to the potential for cost-push increases in inflation rates. Under this theory, rising wages fuel inflation which begets further increases, as workers seek to offset higher prices through additional wage gains.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®