The minimum wage trade

The government’s decision to begin raising the minimum wage is both a political move and one that will have consequences for a number of companies listed on the FTSE. It will result in higher wages and a hit to margins that could cause a reduction in profits. 

Aerial view of London
Source: Bloomberg

Osborne supplants the invisible hand
The Conservative government’s decision to become an advocate of higher wages for the low paid surprised many, not least the Labour party, on whose lawn the tanks have now been parked. The minimum wage is to slowly morph into a ‘living wage’ reaching £9 an hour by 2020.

Having secured its position until the next election, the government is moving to appeal to Labour voters by siding with those at the lower end of the income scale. This will win the party votes, but what will be the stock market impact?

Slimmer margins all round
We can expect a number of sectors to suffer from rising wages at the bottom end of the scale. Retailers, outsourcing firms, and pub companies are all at the forefront of these changes, employing staff that require little training. Also on the list will be supermarkets, restaurant firms and hoteliers. All these firms use a high degree of transient staff, such as students, looking to earn extra cash, and who may not stay with the company for more than a medium-term period.

Crucially, some firms have already broken cover to either inform the market of wage increases ahead of time, or complain about the impact of the changes and defend their existing pay schemes. A classic of the latter is pub group JD Wetherspoon, which took the opportunity in its latest results to discuss at length the opportunities available to its staff.

We can expect further announcements from these sectors as the year goes on. Like a rising home currency, which often takes the blame for poor performance, this hit to margins will be deployed as a convenient excuse for poorer performance. Shares in firms like JD Wetherspoon and Capita have already suffered, and may continue to do so, underperforming the broader market on a sustained basis as wages continue to rise and margins shrink.

Nonetheless, it is still something that investors should keep an eye on. With rising wages putting a drag on performance, investors may well wish to shift some allocations away from sectors such as supermarkets, retailers and pubs, and look towards the higher end of retailing where lower wages are not such an issue and margins tend to be wider. 

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