How McDonald’s and Walmart Wage Hikes Can Boost the Economy

How McDonald’s and Walmart Wage Hikes Can Boost the Economy


Much has been made of recent news that McDonald's (MCD), Walmart (WMT), and other entry-level employers are looking to boost pay and benefits (such as vacation time) for their workers. Seven years into this economic expansion and the dividends are finally starting to trickle down to those on the bottom rungs.

It's about time.

Related: The Middle Class Is Struggling in All 50 States​

Many of the recent job gains have been in the leisure and hospitality areas (specifically, bar and restaurant jobs) and, as analysts at Bank of America Merrill Lynch note, these jobs and ones in retail are showing some of the best wage growth over the past year. You can see this in the chart below comparing wage gains in these areas to overall private sector wages.

This provides anecdotal evidence that the recent decline in the unemployment rate to 5.5 percent in February is giving workers — even unskilled ones — bargaining power of a type that they haven't enjoyed in a very long time. Friday’s disappointing jobs report showed more evidence of that, too, even as the leisure and hospitality sectors experienced a sharp drop in jobs growth: Average hourly earnings overall ticked up 0.3 percent month over month, an encouraging sign despite the fact that the annual growth rate is still just 2.1 percent.

The wage hikes from McDonald’s, Walmart and other large employers could fuel further increases in the months ahead.

Related: Disappointing U.S. Job Growth Clouds Fed Rate Hike Timing

Deutsche Bank noted this week that the unemployment rate for people out of work for six months or less — considered relatively high-quality and easily employed workers — is only 3.8 percent. That's a level that hasn't been seen since the peak of the last economic cycle in 2006 and 2007. Moreover, there is only been one other instance since the late 1960s when this measure was at this level or below: The 1999-2000 dotcom boom.

For this reason, the Deutsche Bank economists suggested that the job market is tighter than is commonly believed.  

Related: The Job Market May Be Tighter Than It Looks

This, in turn, should translate into further wage gains and higher consumer spending later this year. The folks at Cornerstone Macro have already dubbed 2015 the "Year of the U.S. Consumer" amid a broad-based improvement in consumer confidence. This confidence is happening across a wide range of income categories.

Of course, another lift is being provided by the drop in gas prices, which remain historically low for this time of year. The chart above from Ed Yardeni of Yardeni Research shows the rollover in personal consumption expenditures spent on gasoline has fallen to levels not seen since 2009. That frees up cash to be spent elsewhere.

Related: Will Consumers Finally Start Spending Their Gas Savings?

Overall, the three-month average of real personal income rose at a 6.7 percent on a seasonally adjusted annual rate according to Yardeni — the best performance since January 2013. Wages and salaries were up 7.3 percent. At the same time, real consumer spending rose just 2.6 percent.

The savings rate crept up to start the year, but that should clear the way for a new surge in spending as the spring shopping season begins.

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