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Minimum Wage Set To Increase

July 13, 2009 By Leave a Comment

On July 24th the federal minimum wage is set to increase from $6.55 to $7.25 per hour. 29 states will be directly affected by the hike as their current minimum wage is lower the the new federal guidelines. The other 21 states already have a minimum wage that equals or exceeds $7.25 per hour. Minimum wage rates had been unchanged from 1997-2007 at $5.15 per hour. Rates have risen from $5.15 per hour in 2007 to their current level over the past 3 years.

Minimum wage rate increases are going to hit certain sectors particularly hard. According to the Wall Street Journal, ”The industries that rely most on minimum-wage workers include fast food restaurants, small-scale independent retail stores, day care establishments and hotels.” In the UK,”The sectors offering the highest number of minimum wage jobs were cleaning (26%), hairdressing (24%), hospitality (21%), textiles (9%), social care (8%) and retail (8%).” Those most affected by the increase are teens, young adults and less skilled employees.

I have spent the last few weeks trying to nail down my position on raising the minimum wage.

On the one hand raising the minimum wage level will give employees more money in their pockets. Employees can use the 10% hike to purchase needed goods, services and pay bills. The wage increase may also give a boost to the sluggish economy. Employees with more money have more money to spend. This can benefit businesses at a time when businesses are struggling to remain profitable. Another benefit is higher worker productivity. Higher wages are directly proportional to higher productivity, A happy employee is a more productive employee. The biggest beneficiaries of wage increases are existing employees. 

Conversely the minimum wage increase will hurt individuals seeking employment in lower level jobs the most. Companies are cutting costs wherever possible to remain afloat during these difficult economic times. Companies will not look to hire new employees since they have to pay higher wages to existing employees. Businesses that have pricing power will seek to pass rising wage costs along to the already cash strapped consumer. Consumers will have to pay more for goods and services at a time when money is already tight. Industries that will be affected the most are customer service oriented industries like fast food restauramts, movie theaters and retail sales. This means paying more for a movie ticket, cheeseburger or groceries.

I think that raising the minimum wage is a great idea but that this is the wrong economic environment to do so. At a time when unemployment is headed over 10%  and payrolls are being cut; this is not a good idea. This will only further weaken the job market and prolong any chance of an economic recovery. Congress should freeze the increased minimum wage until the economy stabilizes. When the minimum wage increase was passed in 2007, the American economy was booming and all was well. But in these perilous economic times an increase in the minimum wage may hinder a recovery in the job market  and hurt job seekers searching for gainful employment.

Filed Under: Finance Tagged With: ,

Saving the US Auto Industry

December 5, 2008 By Leave a Comment

Congress is meeting with all three US auto makers to try and help them avoid bankruptcy. This is a necessary step because the economy cannot handle the bankruptcy of all 3 domestic auto companies at this point in time. While there are some issues that affect all three companies such as unfavorable trade agreements and high labor costs that make it difficult to be competitive with foreign competitors. I think Congress is making a mistake though by treating all three as a collective group. These are individual corporations that each face their own unique set of problems. Below is my take on the problems for each company and how we start to fix them.

General Motors

GM just makes too many brands that are not popular. GM needs to drop unprofitable brands such as Pontiac, Buick, Saab and Saturn. Too many GM brands are seen as being an old person’s car. Honda, Toyota and Nissan build sleeker better looking cars. The stronger selling brand names like Cadillac, Chevrolet and GMC should be their core focus. Chevrolet and GMC also need differentation in design. Is there that big a difference between a GMC Yukon and a Chevy Tahoe?  The Hummer brand does have value and should be sold off if possible.

Ford

Ford is in the best position of the 3 auto makers. Ford has already redesigned it plants and started producing better looking more fuel efficient cars. They have reduced their number of brand names by selling Jaguar and Land Rover this year. Ford should retain its interest in Lincoln, Volvo and Mazda while selling off its Mercury brand. Mercury sells less than 200,000 models per year and is similar to other Ford products.

Chrysler

Most of the offerings from Chrysler do very little to inspire excitement. There is not much value in the Chrysler, Jeep or Dodge names. Chrysler needs to merge with another auto company. The government should not extend any financial help to Chrysler. Chrysler is 80% percent owned by Cerebus and 20% by Daimler. Cerebus Capital Management is a private equity firm owned by some of the wealthiest men in the world. They seem to just be seeking financing to keep them afloat long enough to sell Chrysler and redeem their investment. Daimler has already valued its almost 2 billion dollar investment in Chrysler as worthless.

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Bright Spots in Retail this Holiday Season

November 28, 2008 By 2 Comments

I know we are in the midst of an economic recession and analysts are expecting a terrible holiday season for retailers. But I think that some retailers actually do okay. Will people shop as much as in years past? Obviously not. But I think the drop off will not be as bad as expected. The industries hardest hit by the downturn will be luxury items and electronics. Retailers such as Saks 5th Avenue and Nordstrom will find this holiday season particularly rough. Electronics retailers like Best Buy and Circuit City have so much inventory on hand that they are being forced to slash prices as never before. Even with the price cuts, big ticket items such as flat screen televisions, laptops and appliances will probably have the greatest drop off in purchases.

But I think there could be some bright spots in retail. My opinion is that lower prices and new programs will encourage some consumers to shop places they have shunned in the past. I think that retailers like Sears and Kmart may actually benefit this holiday season due to bold programs.  Struggling retailers Sears and Kmart have brought back layaway programs, extended business hours and are offering major price discounts. I think this a smart move. Any increase in sales no matter how small could be the difference between surviving this Christmas season and going out of business. Layaway programs may entice credit weary borrowers to purchase items that they otherwise would not have purchased this year.

Walmart, the nation’s number one retailer, will continue to thrive. Discount retailers like Family Dollar, 99 cents store and Dollar tree will continue to profit as consumers downsize. Clothing retailers like TJ Maxx and Burlington Coat Factory have also implemented layaway programs that should help sales. I also expect that niche items will perform well. Small ticket electronic items such cell phones, video games and mp3 players(ipods) will continue to sell. I think that video game demand will remain high as parents shop for children this holiday season. I expect Apple and Gamestop to do well despite low expectations.

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The Economic Crisis

November 16, 2008 By Leave a Comment

What caused the economic crisis?

A number of contributing factors have led to the current economic crisis that we face. I will list three of the major factors.

1) U.S. Housing Bubble – From 1999 – 2006, home prices in the US rose at a rate that was not sustainable and property valuations appreciated much greater than income levels. During this time period of “easy money”, lenders were giving loans to unqualified borrowers. These borrowers had below average credit scores and low income levels. Also, predatory lenders were taking advantage of these sub-prime borrowers by giving them high fee adjustable rate mortgages that would reset to double digit interest rates. These bad loans were then packaged together and sold to banks, businesses and investors as mortgage backed securities.

2) Credit Crunch – American consumers relied heavily on debt as a way of financing their purchases. Too many people treated their homes like an ATM and would refinance it whenever they needed money. As home prices declined, borrowers were unable to take money out of their homes. This led to a rise in the number of homes that went into foreclosure.

3) Liquidity Crisis- Wall Street investment banks and U.S. banks relied too much on leverage. For every dollar of cash that an institution had, they would borrow 40 times that. As more and more homes were foreclosed, the value of the existing mortgage backed securities owned by financial institutions declined. This caused a liquidity crunch for these institutions where they needed cash but had no means of obtaining it.  The availability of credit shrank and the cost of obtaining credit skyrocketed. Banks were scared to lend to banks. Businesses that rely heavily on loans to fund operating activities were unable to obtain financing.

Other factors such as credit default swaps, derivatives, easy money policy from the Fed and high commodity prices also placed a part. All of these issues led to business bankruptcies, rising unemployment, major stock market decline and the delevering of financial institutions.

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