So what does this mean for investors? In our opinion, like most economic phenomenon income inequality is a complex topic not lending itself to any single solution. So even if we see widespread adoption of higher minimum wages, they’re likely to be a wash for the broad economy and the impact on income distribution is likely to be modest.
In the absence of a quick fix, modest income growth—especially among lower and middle income Americans—suggests that consumer spending is likely to be constrained, and may even shrink relative to other sectors of the economy, such as such as manufacturing. As such, we remain cautious toward consumer sectors, particularly given their relatively high valuations.
It’s also worth noting that the consumer discretionary sector would be particularly vulnerable to a rising minimum wage due to the large number of leisure and hospitality workers who earn at or below the minimum wage and as these industries aren’t yet automated.
You can read more about Russ’ outlook for wages in his Market Perspectives paper on the subject.
Sources: Linked to throughout Post, BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Kurt Reiman is a Global Investment Strategist at BlackRock who works directly with Russ Koesterich. He contributed to this post by providing research and investment insights.