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Will minimum wage boost kill stocks?

By Sheyna Steiner · Bankrate.com
Thursday, February 14, 2013
Posted: 4 pm ET

In Tuesday night's State of the Union address, President Barack Obama proposed an increase to the minimum wage by 2015, up to $9 from today's $7.25. There would also be a cost of living increase every year in the future.

States actually have their own minimum wage laws. "Minimum wage increases at the federal level only take effect if the federal minimum is above that passed in states," the Washington Post reported Wednesday, in the story "Four things to know about Obama's minimum wage increase."

Nonetheless, the increase would be higher than nearly all of the state minimum wage requirements, except for Washington where it's $9.19, according to the Department of Labor.

What about investors?

On Wednesday following the president's speech, shares of McDonald's Corp. fell 1.2 percent, Bloomberg reported. As McDonald's is one of the largest minimum wage employers in the country in addition to being one of the largest companies in the country, it's a hot spot in discussions over the minimum wage.

The last minimum wage increase was passed in 2007 when it increased from $5.15 to $7.25 over two years. Previously, the minimum wage was increased in 1996 and 1997, according to the Department of Labor.

If you take the potential minimum wage increase alone, it's impact is likely to be a blip, if that, for long-term investors. These two charts look at McDonald's share price in years when minimum wage laws went into effect. One thing that should be noted is that the stock market typically reflects new information right away. By the time a long-expected event occurs, it's already baked in to the share price.

In 1997, the minimum wage increase went into effect September 1.

In 2007, the increase kicked in July 24.

"The minimum wage increase is a problem for the stock market and companies who pay employees minimum wage in the short-term," says Robert Laura, president of Synergos Financial Group in Brighton, Mich.

"From an economic perspective, I see it as another headwind that will send the market backward. We haven't seen the impact the increased payroll tax is having just yet, gas prices are climbing, unemployment is still rampant, and corporate earnings are soft," he says.

Another concern is that an increase in the minimum wage could have a negative effect on unemployment, says Robert Barone, partner and economist at Universal Value Advisors in Reno, Nev.

"The impact of a higher minimum wage won't be obvious, and there is likely no way to directly measure it. We can think of it this way, however: Because the minimum wage has risen, industries relying on such labor are likely not to hire as many as would be the case if the minimum wage didn't rise, or they may even reduce their work forces," he says.

Some research does suggest that minimum wage increases does not have negative implications for jobs. In 1998, Jared Bernstein and John Schmitt wrote a paper for the Economic Policy Institute "Making work pay: The impact of the 1996-1997 minimum wage increase."

Among the findings:

The two-stage increase disproportionately benefited low-income working households. Although households in the bottom 20 percent of the income distribution (whose average income is $15,728) receive only 5 percent of total family income, they received 35 percent of the benefits from the minimum wage increase.

Four different tests of the two increases' employment impact -- applied to a large number of demographic groups whose wages are sensitive to the minimum wage -- fail to find any systematic, significant job loss associated with the 1996-97 increases. Not only are the estimated employment effects generally economically small and statistically insignificant, they are also almost as likely to be positive as negative.

This is a complicated issue. What do you think? Is the minimum wage unnecessary government meddling -- or is it necessary to ensure a decent standard of living?

Follow me on Twitter: @SheynaSteiner.

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1 Comment
Jamie Russell
April 08, 2013 at 9:55 am

If you want to create an incentive to get people working and off welfare, increase wages...Corporate profits will be fine in the long term. Government could create a tax credit to employ chronic unemployed and use the tax increases from wages and welfare savings to fund it.