Fisher Investments Editorial Staff
US Economy

Take a Hike

By, 07/23/2009
 

Story Highlights:

  • The federal minimum wage increases this Friday from $6.55 to $7.25 per hour.
  • The wage hike's impact should be minimal for investors and the broader economy.
  • Markets and businesses have likely already planned for (and priced in) the impact of this increase.

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It's summer and the sun's shining—perfect weather for a hike! Later this week, the feds will go hiking too, Beltway style. The federal minimum wage increases Friday from $6.55 to $7.25 per hour, the third and final in a series of planned hikes mandated by the Fair Minimum Wage Act of 2007. The move will have some impact—currently, 2.8 million workers earn less than the new minimum, and 7 million workers are benchmarked to the minimum wage. Yet despite clamoring critics, supporters, and agnostics, it's likely the wage hike's consequences will prove negligible.

 

Higher wages for the country's lowest wage earners may seem justifiable. But basic economics tells us price distortions—like a mandated hourly wage—often hurt those they're meant to help. While more workers are willing to work for the higher wage, fewer businesses may be willing or able to pay more for something they value less. What makes a job worth $6.55 an hour today worth nearly 11% more tomorrow? If there's nothing different but the government mandate, one rational result of the wage hike is fewer entry-level jobs at the elevated minimum rate. Hard to see how no wage is better than a lower wage.

 

But does that mean unemployment will radically spike? Likely not. States producing 40% of the nation's GDP already set minimum wages at or above the $7.25/hr threshold. And on a state-by-state GDP-weighted basis, the average minimum wage is currently $7.20/hr. After this week's increase, the new weighted average only rises to $7.47/hr—just 3.8% higher and less dramatic than the 10.7% absolute increase.* Further, we've known about the impending hike since the Fair Minimum Wage Act was voted into law in 2007. Most businesses likely have planned for it, and there's been ample time for markets to price in the impact. There's not much market-moving surprise in two-year-old news.

 

Governmental monkeying with prices is always a zoo. We wish they'd leave such matters to the markets (as do the teenagers who will likely find fewer summer jobs to choose from). But for investors, this particular bout of Beltway hiking won't leave much of a trace.

*Fisher Investments Research

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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