No, higher wages won't destroy earnings growth

The US job market is strong, and employers are raising wages.

Average hourly earnings jumped 0.5% month-over-month in January, the biggest increase since 2008. The consensus for February earnings, due Friday, is +0.2% according to Bloomberg.

Additionally, last month Wal-Mart, the largest retailer in the US, announced that it will raise all its hourly employees’ wages to $US10 an hour by next February. This was followed by a similar announcement from TJX, operator of TJMaxx, Marshalls and HomeGoods, which will pay all employees who’ve worked for at least six months $US10 an hour in 2016.

While workers rejoice, some investors are nervous about the impact that higher wages (and the cost to companies) may have on earnings growth.

But according to Citi’s Tobias Levkovich, these concerns are overblown:

In a note Tuesday, Levkovich wrote:

“When one looks back over many decades, we believe there is little reason to be overly worried given that the higher sales generated by more and better paid workers allows for improved overhead fixed cost absorption variances and earnings actually grow faster for the most part. In addition, not everyone gets a wage increase at the same time so such cost changes tend to be staggered over time.”

And as Levkovich’s chart shows, it’s clear that higher compensation tracks EPS growth — not a decline — quite closely.

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