On Monday, California's governor Jerry Brown unveiled a deal which would raise the minimum wage of the state to $15 per hour by 2023. This agreement, concluded with leaders from labor groups and the state's legislature, would mean that the state would have the highest minimum wage in the world.
At present, the fallout from such a proposal is not easy to determine. However, it will have a significant impact on several sectors, primarily retail and restaurants. Determining the fallout on these industries will provide a valuable perspective on the effects of a higher minimum wage on costs, prices and ultimately employment in these sectors and even the wider economy.
Landmark Deal
Per the deal, the state's minimum wage will be increased from $10 to $15 per hour in a phased manner. This level will increase by 50 cents over two years and then by a dollar a year over four years, ultimately touching the $15 mark in 2022. Smaller businesses, namely those with 25 or less employees will be required to reach this target by 2023.
From 2024, the level will be inflation indexed. Other conditions of the proposal include paid sick leaves for home care workers. Additionally, the governor may extend the timeline for the higher minimum wage if a recession takes place or in case of a budget deficit. Governor Brown asserted that the implementation of this deal in the most populous state in the U.S. would lead to higher pay levels for those who have jobs but are still poor.
Menu Prices, Technology Usage Likely to Rise
The announcement by California's governor comes at a time when New York is adopting the same level of minimum wage for large QSR chains. Meanwhile, a report released on Tuesday by brokerage and investment banking company Maxim Group says that the impact of these changes will be an increase in menu prices and higher technology usage.
According to current estimates, these developments will result in a rise in menu prices ranging from 0.6% to 1.4% per year for the next five to six years. These estimates assume that there will be an average wage increase of a dollar per hour in New York and California. Additionally, there is an additional assumption that wages will increase by 25 cents per hour over the rest of the country.
This may have a detrimental impact on chains which have a substantial number of outlets in California, such as El Pollo Loco Holdings, Inc. LOCO and The Habit Restaurants, Inc. HABT . At the same time, it is important to note that these increases may not have a substantial impact until next year or 2018. This is because restaurants have gained from stable or lower commodity costs.
Mixed Impact on Retail
Retail chains will be impacted in different ways depending on their existing pay structure, the benefits from higher wages and the increase in costs. For instance, Costco Wholesale Corporation COST is likely to be largely unaffected. A spokesperson from the company has said that its average hourly wage is already at $22.50. The lion's share of the retailer's sales, around 31%, is generated from its 105 stores in California.
Meanwhile, an increase in the minimum wage will benefit the likes of Ross Stores Inc. ROST , Target Corp. TGT and Wal-Mart Stores Inc. WMT , per financial services company Cowen and Co. This is because these chains have high levels of exposure to customers with low household incomes or those dependent on subsidies. According to the company, Ross Stores is likely to gain heavily over the current year since 25% of its stores are located within California.
However, the outcome may also have a negative impact on Wal-Mart. Last year, the company said that profits had fallen because of wage increases. The retailing giant said in January that it was closing 269 stores, which would affect 16,000 employees, in an attempt at rightsizing. The impact of higher wages has not been directly attributed as a reason for this decision, but this is not unlikely.
As wages continue to rise, larger chains will have to restructure their workforce in order to clamp down on costs. This is because investors closely watch the increase in costs of companies they have bet on.
In Conclusion
The deal is yet to receive legislative approval and may face opposition in the state assembly. In case it does receive assent, there will be a differential impact on companies across sectors. This will depend on how they are uniquely placed to deal with the fallout of such a decision.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
