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    Higher Minimum Wage Could Benefit Retailers

    Analysts say higher paychecks mean more spending, but legislation is still being debated.

    NEW YORK -- Last week the Senate passed a minimum wage bill that would increase the federal minimum wage from $5.15 to $7.25 per hour over two years. While the bill faces some challenges before it is signed into law, some analysts believe a higher minimum wage will benefit retailers, The Associated Press reported.

    The proposed legislation will raise the minimum wage three times -- first to $5.85 an hour 60 days after the president signs the legislation into law; a year later it would raise again to $6.55; and finally to $7.25 two years after it was signed into law.

    A minimum wage increase could affect 6.6 million workers that currently receive less than $7.25 per hour, in addition to the 8.3 million workers whose earnings are just above that level, wrote Oppenheimer & Co. analyst Christopher Jones in a client note.

    Analysts are mixed on the impact that the wage hike will have on retailers. Some agree that higher paychecks will lead to additional spending cash for consumers to use at retailers.

    While discretionary spending is tied to sales in industries such as foodservice and restaurants, additional wages could lead to more eating out, a willingness to pay higher prices and higher rings at checkout counters, the report stated.

    While the increase might put pressure on operating profits, higher prices on menu items could offset the increase, according to Morgan Joseph & Co. analyst Dean Haskell.

    "We note our view that the proposed minimum wage impact is minor, affecting only 20 percent of total restaurant employees," Haskell added in a client note.

    In addition, discount retailers such as Dollar General Corp., Dollar Tree Stores Inc., 99 Cents Only Stores, Family Dollar Stores Inc. and Fred's Inc. would see a boost if low-income consumers shop more, the report stated.

    "While a higher minimum wage would also increase Fred's labor costs, we believe that the net impact of an increase would be positive for the company, as management has noted, it has more customers than employees, and the last major increase was a positive," SunTrust Robinson Humphrey analyst David Magee stated.

    The nation's low-income workforce will have to wait for any proposed increase, however, as legislation is caught on a dispute over business tax breaks, a separate the AP report stated.

    The bill passed in the Senate offers an additional $8.3 billion in tax breaks over 10 years, to assist small businesses offsetting the cost of paying higher wages. However some labor leaders and Democrats would like to remove this provision before it is passed on to President Bush for signing into law. The House passed a version last month that does not contain tax breaks, the report stated.

    How the differences will be solved is still unknown, but party leaders in both the House and the Senate agree that the minimum wage increase will become law.

    Senate Democrats believe that the tax cuts are needed to win over Republicans that would otherwise block the legislation. Meanwhile, House Democrats have maintained that a "clean" bill continuing no tax breaks is necessary and pressed Senate Democrats to challenge Senate Republicans, the report stated.

    "We believe that this bill ought to move on its own merits and be sent to the president," House Majority Leader Steny Hoyer told the AP. "We're hopeful that that will happen."

    Sen. Richard Durbin (D-Ill.), assistant Senate Democratic leader, told the AP Democrats would "rather spend $8 billion on other things. They think there are higher priorities and there are more serious challenges than to come up with additional breaks for businesses."

    In addition, Democrats and their labor allies disagree that small businesses need tax breaks to offset the minimum wage. "We don't want to validate the claim that small businesses that have been paying below-poverty-level wages need relief before they can start paying decent wages," Bill Samuel, legislative director for the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), told the AP.

    While House Democrats support tax breaks, they emphasize that the breaks should be considered separate from the minimum wage increase. Meanwhile, Republicans are warning Democrats that the removal of the tax breaks will hinder the bill's success in passing into law.

    Negotiations are further complicated with constitutional precedents that require tax legislation to originate in the House. To solve the problem, the House could draft a small business bill and pass it onto the Senate, where it would be tacked onto the "clean" minimum wage bill, the report stated.

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