There's been a lot of talk lately about raising the minimum
wage, both on the federal and local level.
In his State of the Union address earlier this year, for
instance, President Obama
announced an executive order raising the minimum
for federal contract workers to $10.10 per hour from $7.25, and
he called for a similar increase for all minimum wage workers
Meanwhile, Port Authority of New York and New Jersey
commissioners are pushing for a similar wage increase, just one
example of similar efforts happening nationwide.
These moves come amid still sluggish growth in average hourly
earnings, broad dissatisfaction across the political spectrum
distribution of wealth and income in the United
, and growing concerns about how technology and globalization are
altering the labor market.
Yet whether raising the minimum wage is good for the economy
or not spurs heated debate. Some argue that
it's a no-brainer that a higher minimum wage will
be good for the economy
as it will lead to higher incomes, more consumer spending and
economic growth. At the other end of the spectrum, others argue
a higher minimum wage will lead employers to use
, thereby hurting the jobs market.
So it's no surprise, then, that many investors are wondering
whether raising the minimum wage would be a cure or a curse for
today's sluggish recovery. The truth is that it's likely to be
Public policy involves tradeoffs, especially when it comes to
income redistribution. The debate about increasing the minimum
wage is no different.
Congressional Budget Office report published in
concluded that raising the federal minimum wage to $10.10 an
hour, and thereafter adjusting it for inflation, would boost
incomes of most low-wage earners, lifting many families above the
poverty line. But at the same time, according to the report, it
could also involve the displacement of as many as 1 million
workers and a reduction in incomes of business owners of
approximately $17 billion.
Why job losses? Higher wages make automation more attractive
to employers and could make certain lower-skilled minimum-wage
employees uncompetitive. Meanwhile,
another report from the National Bureau of Economic Research
published in January
reached similar conclusions about the tradeoffs between
employment and incomes when raising the minimum wage.
So what does this mean for investors? In our opinion, like
most economic phenomenon income inequality is a complex topic not
lending itself to any single solution. So even if we see
widespread adoption of higher minimum wages, they're likely to be
a wash for the broad economy and the impact on income
distribution is likely to be modest.
In the absence of a quick fix, modest income growth-especially
among lower and middle income Americans-suggests that consumer
spending is likely to be constrained, and may even shrink
relative to other sectors of the economy, such as such as
manufacturing. As such, we remain cautious toward consumer
sectors, particularly given their relatively high valuations.
It's also worth noting that the consumer discretionary sector
would be particularly vulnerable to a rising minimum wage due to
the large number of leisure and hospitality workers who earn at
or below the minimum wage and as these industries aren't yet
You can read more about
Russ' outlook for wages in his Market
Perspectives paper on the subject
Sources: Linked to throughout Post, BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
Kurt Reiman is a Global Investment Strategist at BlackRock
who works directly with Russ Koesterich. He contributed to this
post by providing research and investment insights.