How Will Higher Minimum Wages Impact the Market?

by: Bill Cara

There is a strong likelihood of legislated minimum wage increases in North America this year. How will this change impact equity markets?

Merrill Lynch looked back at the previous four minimum wage hikes, in April 1990, April 1991, October 1996, and September 1997. The following list highlights the industries they identified as outperforming and underperforming the broad market following these wage hikes.

From a broad sector perspective, not surprisingly consumer staples outperformed, while the consumer discretionary group underperformed. And industries facing higher labor costs, restaurants, hotels, casinos, and general and specialty retailers underperformed, while dollar stores, tobacco, and food & beverage outperformed.

Equity sector performance six-months after a hike in the minimum wage
Datastream US Equity Sectors (relative to total U.S. broad market*: average of four cycles: bps)

Total Market Performance = 5.9%

Outperformers

Dollar stores (2,360 bps outperformance)
Household Goods (480 bps)
Tobacco (530 bps)
Food and Beverage (400 bps )
Food Producers (180 bps)
Food & Drug Retailers (90 bps)

outerperformers

Underperformers

Gambling (-2,200 bps underperformance)
Hotels (-1,320 bps)
Media (-350 bps)
Specialty Retailers (-230 bps)
Restaurants (-220 bps)

Source: Datastream. The Datastream total U.S. broad market index is composed of 1500 companies.


underperformers

Note that some of these companies are international in the scope of operations and the minimum wage discussion relates to the U.S. and Canada and a few other countries.