Question

Wage Gains Threaten to Squeeze Retail, Industrial Profits - Higher labor costs pose risk to some U.S. companies already facing trade-related tensions, limited pricing power

Summary: The U.S. job market and its low unemployment rate are forcing companies to rise the wages of its employees and potential employees. According to the U.S. department of labor, wages are up about 2.7% from a year ago. The growth in hourly wages holds both good news (for workers) and bad news (for shareholders). The increase in wages may result in increased consumer spending, while the higher labor costs are pressuring operating profit margins that will likely impact the price of stocks and dividends. Companies have been fearing wage increases as the U.S. economy grows and the availability of workers become more scare. The number of firms that are claiming increased wages are a factor in their quarterly financials are slowing rising, from 8% to 10%. In addition to the increase in wages, some firms are seeing cost increases associated with the tariff and trade policy of the current administration. While some firms may and will be able to raise prices to offset the increased labor costs, a number of companies are reluctant to raise prices to the competitive pressure from online retailers like Amazon. Retailers such as Dollar General are employing another strategy to stay competitive. They are simply not raising wages.

Assessment: This article is relevant to virtually everyone. Whether one is a worker, a shareholder, a senior finance executive or a potential investor. Rising wages have a direct impact on the overall U.S. economy. Increasing wages tend cause inflationary pressure which will likely result in the Federal Reserve board taking some action to cool the economy down. The article is mostly fact based, relying on key wage data from past years to show the significance of the current trend. The article does quote some sources that make predictions about the impact of increased labor costs on earnings. And while there may be some historical evidence to support these assertions; their statements are still speculative in nature. But it is clear that there are inferences being made that we will see a increase in the rate of inflation. The bottom line here is, earnings per share continue to rise over the long term. The article calls out an important trend while keeping the number of assumptions to a minimum.

Questions:

1. As a potential investor, how would you react to this information? Would this article cause you to revist your investment strategy? Which types of firms would you look to invest in? Which type of firms would you look to divest of?

2. As a finance manager in a company that 1) must compete with online retailers and 2) Are seeing increases in costs due to the tariff and trade related policies of the U.S. administration; what strategies would you consider to keep growing operating profits and earnings?

3. Is the apparent lack of available workers an opportunity to propose and enact new immigration legislature? Which special interests would benefit? Which would be hurt?

Answer 1

1)As a potential investor , we should change our strategy. We have to invest in only those firms

that are able to increase prices when costs of labour and tariffs increase. These firms will survive

We need to divest from other firms as their existence is threatened.

2)As a finance manager, that has to compete with online retailers, and is facing increases in costs

due to tariff and trade policies , we need to do follow this strategy.

We cannot increase prices but we can increase our volume of sales by expanding. This will

Increase total profits. We can also improve the quality of our products by investing in R &D.

3)Yes ,the apparent lack of workers is an opportunity to liberalize immigration laws.

Share holders will benefit as the cost of labour will decrease due to influx of immigrants.

Existing workers will be hurt as their wages will be reduced.