Partners - Stock market, economic and political commentary by Patricia Chadwick

Archive for May, 2015

The Minimum Wage — A Two-Edged Sword

Tuesday, May 12th, 2015

It’s been interesting (and gratifying) to observe that a number of the largest employers of minimum-wage workers in this country have “voluntarily” pre-empted Congress by announcing an increase in their base wages to a level that is higher than what Congress proposed in the Fair Minimum Wage Act of 2012.

For those who think that the minimum wage is paid primarily to teenagers, the statistics may be surprising. According to the U.S. Bureau of Labor Statistics, in 2013, over 75% of minimum-wage earners were older than twenty, and about one-quarter of them were above the age of forty. Fewer than 3% were over sixty-five, and women comprised 62% of minimum wage earners.

This past month, Walmart raised its starting pay to $9/hour with the promise of a further increase to $10/hour in February of 2016. Target, Gap and McDonald’s (at its 1,500 owned outlets in the U.S.) have made similar announcements.

For years, we have heard that any legislated increase in the minimum wage would actually hurt workers because companies would be compelled to lay them off in droves. But it’s the employers themselves who are now upping the ante! Is this a case of: (1) “moral suasion,” (2) guilt, (3) economic reality, or (4) doing what management believes is in its own best interest?

Perhaps it’s a combination of all four.

Increasing the base pay for workers at large and profitable companies like Walmart and Target will surely translate into a happier workforce (and there are many studies that indicate a positive correlation between employee satisfaction and improved productivity). In addition, workers at retail and supermarket chains tend to do their shopping with their employer, so increasing the employees’ pay will likely lead to enhanced revenues.

It seems to me that Walmart and others have made a logical business decision, even if it took them years to get there. Now let’s hope they will stay ahead of the curve and increase that minimum wage as they continue to reap productivity increases. Remember, wage increases that don’t outstrip productivity gains will not cause inflation.

I can still hear Sam Walton (founder of Walmart) when he would discuss his growing company in the late 1980s. “Walmart is unlike any other retailer,” he’d say. “Every quarter you should see our gross profit margins fall.”

Fall? That seemed like heresy in the retail industry.

“I plan to pass on the cost savings I get from my manufacturers to the consumer,” he said over and over again. “The reward will be in my revenue growth.” He was right — that’s what made Walmart the outstanding retailer it is today.

Let’s keep an eye on the earnings growth of these companies that are leading the pack in terms of raising wages for their employees. I bet we’ll be pleasantly surprised to see that rising wages won’t hurt profits.

But there’s another side to the minimum wage debate. Many of the businesses that hire minimum wage workers are not highly profitable corporations. Rather, they are the core of what makes up middle America — myriad small enterprises that rely on temporary and relatively unskilled (and often youthful) employees. For them, the burden of a significant mandatory increase in wages could be devastating.

Going from $7.25 per hour to $10.10 (as President Obama has called on Congress to do) is a nearly 40% increase, far higher than any previous raise. Inflation (CPI) since 2009 (when the rate was last raised) has been a cumulative 10.5%. That would suggest a minimum wage of $8.

It appears that the government has a separate agenda — namely to bring minimum wage earners to the point that their income will exceed the poverty level. That sounds like a noble cause, and it may even be a sound economic one. Why should the public be funding a transfer payment to subsidize those on the minimum wage? (And if anyone today is trying to live solely on a minimum wage income, they will require welfare payments.)

On the other hand, if the minimum wage is raised too sharply, it will likely backfire. Small companies really will have to lay off workers.

The history of minimum wage increases in this country is odd, to say the least. Unlike Social Security payments, which have been indexed to inflation since the 1970s, the minimum wage, first introduced in 1938, is not. In fact, there have been ten-year gaps when it wasn’t changed at all.

Congress could mitigate the negative impact on small businesses by phasing in the change and also legislating that the minimum wage be increased in January of each new year by the CPI of the prior year (as is done with Social Security). That would treat minimum wage earners no worse than most other employees and would provide small businesses with more predictable labor costs.

After years of Congressional gridlock, it’s been gratifying to see a number of bipartisan issues be resolved since January. Congress needs to address this issue in a common-sense way. Much of the rhetoric from the right about how “any” increase in the minimum wage would have serious negative impact on the economy has been de facto refuted as the large companies have become the leaders in this round of increases.

And maybe the leadership taken by these major corporations will serve as a catalyst for other companies. At the least, the bar has been raised. Workers know that some companies will pay more than others.

© Copyright 2015 Patricia W. Chadwick