The White House has been pushing towards raising the federal minimum wage, which has not changed since 2009, from $7.25 to $15 per hour by 2025. Even though this measure was withdrawn from the latest stimulus package, it will probably come back and, as popular as it may be, we are not sure that its effects are correctly assessed by investors.
The official intention behind raising the minimum wage was to lift millions of Americans out of poverty and help them keep pace with the increasing cost of living. Therefore, the measure was viewed as positive for consumer spending… but there is a distinct possibility that it might have had the opposite effect.
The non-partisan Congressional Budget office released a report in February, stating that, while lifting 900,000 people out of poverty, the measure would cost 1.4 million jobs over the next four years.
Recent news, which went largely unnoticed in the European media, actually suggest that a number of US companies are ready to cut their workforce rather than let the minimum wage damage their competitiveness. Kroger, for example, announced it will close two supermarkets in Long Beach, CA (or about 25% of its store base in the region), following the adoption of a municipal law that mandates extra payments to workers amid Covid-19 risks. The law, which was enacted in January, requires grocery retailers to pay an extra $4 per hour to store associates for a period of at least 120 days.
This example is probably a warning for politicians. Companies facing cost pressures systematically reassess what is best for their business. This entails weighing the higher labor costs against a relocation or an investment in technology to cut staffing costs. As Amazon is beginning to license the Just-Walk-Out system behind its fully automated “Amazon Go” stores, retailers (who employ many of the low-qualification workers in the US) will have ways around human staffing if its competitiveness happens to deteriorate.
Even the most popular ideas don’t always produce the expected outcome. If the benefits of higher wages are going to be offset by an accelerated shift to technology-driven substitutes to human workforce, the market’s current scenario about employment and spending might prove too rosy when the bill is passed.
ALF – March 10, 2021