New Deal?

“Say yes. Give America a raise.” stated President Barack Obama in his traditional State of the Union address to Congress on 28 January. A catchy slogan for a spectacular proposal to increase the minimum wage by 40%, but a proposal which left the Republican Chairman of the Chamber of Representatives, John Boehner, who is clearly opposed to the idea, unmoved.

However, a closer look at this fierce opponent of any form of interference by the administration in American economic life suggested he was worried, surely reflecting a feeling of political discomfort given that 78% of US citizens (1) agree on the need to increase the minimum hourly wage ($7.25), which looks pretty low, and even ridiculously low, to French workers used to a minimum hourly wage of almost $13 (€9.53). President Obama’s reasoning is based on indisputable figures that illustrate that while US growth is picking up (more than 4% on an annual basis and unemployment at less than 7%), the fate of US wages has still not improved. Quite to the contrary, since low-end wages are stagnating (standing 20% below the level in 1982) and inequalities are widening.

At the same time, margin levels at US companies are breaking all records, driven especially by this low cost of labour, with results that have never been seen before, much to the delight of our community of equity investors. As such, we are not really the best placed to assess the relevance of an increase in hourly rates imposed on companies. And yet, is there a strict contradiction between a company’s profitability and an increase in the minimum wage?

Most certainly yes, if we confine ourselves to the immediate calculation: the average wage at WAL-MART is currently $8.5 (1), and if the minimum wage were to be increased to $10.10 as President Obama would like, WAL-MART would feel a sharp pinch on its margins. However, we cannot stop at the arithmetic of net margins. The famous and polemical inversion “all wages merit jobs” (2) has its limits. Even the most ardent defenders of a sketchy framework to labour costs are now reviewing their positions. In Germany, one worker in six still earns less than $8.5 an hour and the government is considering creating a minimum wage ($8.5 in 2017), whereas in the UK, backed by the Prime Minister, calls are for a significant increase (11% over two years) in the already-existing minimum wage, at a level way beyond inflation!

Note that all of these countries, and the US above all, have emerged from the crisis more quickly than the rest of the world. While they are now in a healthy and promising situation, they also know that an economy without a recovery in consumer spending for the majority is a limping economy.

After 2008, banks and the system as a whole needed saving. The challenge is currently being won and today it is Private Ryan that needs saving: after the system, the time has come to look after the individuals.

Keynes, who we cannot qualify as a Marxist thinker, stated in his general theory “the political problem of humanity consists of combining three things: economic efficiency, social justice and political freedom”. Every day, the US gives us lessons in economic efficiency and if it is now turning a corner in terms of social justice, we consider this good news for American citizens and not necessarily bad news for the markets”.

Didier Le Menestrel

(1) Source: Kepler Cheuvreux
(3) Words pronounced by Yvon Gattaz