Saturday, November 11, 2006
Minimum Wage hike- Effects on lower income population
Minimum Wage hike- Effects on lower income population
After the recent elections and a shift of power from right to the left, a new bill is set to be created to hike the federal minimum wage from $5.15 to $7.25 per hour.
I think this is something awesome for the American economy. This will also help companies like Wal-Mart, even though they are ridiculed for their payroll practices.
Most minimum wage workers are high school kids. Very few people over the age of 18 work for minimum wage simply because they have experience in whatever field they are currently employed. Refer back to your teenage days, we weren’t very savvy savers. Every dollar that enters the hands of a teenager will eventually be spent again and reentered back into the economy.
Many people think this will hurt companies like Wal-Mart because of how many people employed at these discount businesses currently earn minimum wage.
I think this minimum wage hike will help discounters like Dollar General, Wal-Mart even Kmart. The clientele at the above operations consists of lower income America. With a 41% pay raise almost overnight, the shoppers who frequent the stores will have much more money to spend on goods.
While I am in favor of no set minimum wage, because I believe it restricts a free market economy, I do have no doubts this will spur much more activity in the economy. Political and economic theory will show that prices should be set by supply and demand and be allowed to float freely; wages are no exception to this rule.
A 40% increase does seem a bit sharp however.
I do not think that the minimum wage will be increased by $2.10. I think this is just a number set to look better by comparison. If the bill is shot down, democrats can try again with JUST a $1.50 raise. $1.50 is a huge increase but compared to $2.10 it doesn’t seem nearly as high.
Deep discounters will see the biggest gains from this. I would not recommend buying Wal-Mart on news like this because of the current market cap of the company. Dollar General would make a perfect investment for this kind of news release because of a market capitalization of only $4.3 billion. There is plenty of room for growth in the value of Dollar General as a whole. I think the increase in minimum wage will come to be entirely positive for Dollar General.
Dollar General Chart:
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Dollar General is also an outstanding technical play. I was lucky to enter the stock at $12.50 a share and have been holding since. DG is teetering on the most crucial support line to its share price.
I think DG is a great long term play because of its steady growth, small market cap and an awesome looking chart. I did not include the moving averages in the chart but DG has made it through both the 50 and 100 day simple moving average. I expect that it will make a move for the 200 day moving average sitting at $15 a share. The prospect of a high flyer will depend on its performance against the 200 day MA.
If it gets through, DG could make another run for $20. If it doesn’t make it, the price will retreat back to the ancient trend line and prepare for another upward move. To be quite honest, I don’t think that trend line will be broken for years to come.