Companies may be poised for a minimum wage windfall

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Published: Tuesday, 14 Jan 2014 | 3:50 PM ET
By: | Correspondent, CNBC
Stock boost from higher minimum wage
Tuesday, 14 Jan 2014 | 1:09 PM ET
CNBC's Sara Eisen reports which states are raising their minimum wage, and the impact to business; and Dominic Chu forecasts which stocks could get a boost, too.


While President Barack Obama has been pushing to increase the $7.25 federal minimum wage to $9 per hour, and even supported a plan for as high as $10.10, there's been no traction on the issue in Washington.

Instead, states have been tackling it on their own. As of Jan. 1, 13 individual states raised the minimum wage, and in July, California will become the 14th.

The biggest boost comes for New Jersey, where wages just jumped 14 percent to $8.25 per hour.

Since many of the most populous states, including New York, Florida and California are seeing wages rise—an area covering states that make up 42 percent of the population—the economic impact could be meaningful.


Nik Modi, consumer staples analyst at RBC, said that added income "is particularly positive for tobacco as well as energy drinks and beer."

His top pick: Lorillard, which "generates a meaningful portion of sales and profit from New York as well as California where overall tobacco consumption is highest."

To be sure, the stimulative spending impact of higher minimum wages across the nation could be partly offset by a number of other headwinds facing the consumer this year, including the Dec. 28, 2013, expiration of long-term unemployment benefits and the reduction of food stamps benefits last fall.

Overall, though, many economists say rising incomes should translate into greater spending.

Emile Wamsteker | Bloomberg | Getty Images

A widely cited piece by the Chicago Federal Reserve in Feb. 2011 found that minimum wage increases not only lead to a boost in household income and spending, but also to a boost in household debt. A $1 wage increase boosted spending by $700 per quarter, more than the $250 the household gained in extra income during the period, according to the Chicago Fed.

There are no shortage of naysayers. Minimum wage increases could potentially have harmful impacts on business and the economy as well, including raising costs for small businesses already struggling with new policies on health care and taxes, and ultimately hurting job-seekers and the labor market.

Fast food chains like McDonald's that pay workers minimum wage would be hit with higher labor costs.


Morgan Stanley analysts point to BJ's Restaurants and Cheesecake Factory as potential losers from the policy because of their large sales exposure to California, which will see wages rise by $1 to $9 an hour.

Clearly, there are costs and benefits of higher minimum wages. Economists and politicians are split over the ultimate impact on the economy, and that's one reason there's been no progress or change in the federal minimum wage since 2009.

Martin Feldstein, a Harvard professor and former economist under President Ronald Reagan, is in the camp that says it would harm the dynamics of the labor market.

"When low-skill labor becomes more expensive, employers have a greater incentive to mechanize or outsource their work," he argued in an op-ed in The Wall Street Journal last December.

Other economists counter, saying it will help spending and actually improve prospects for hiring, motivating people to go out and look for work.

(Read more: Jack Ablin: Why we should raise the minimum wage)

Recently, a group of economists on that side of the argument, including Nobel Laureates Joseph Stiglitz and Peter Diamond, signed a letter calling for the hourly minimum wage to reach $10.10 by 2016.

"A minimum wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earning," they said.

Expect to hear a lot more about raising the federal minimum wage heading into this year's election season, with the issue of income inequality taking center stage. But now those states where wage increases were made will offer evidence of the true costs and benefits on the economy and business.


—By CNBC's Sara Eisen; Follow her on Twitter @SaraEisen.

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