Today’s Headlines: Walmart Raises Wages

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Today’s Headlines: Walmart Raises Wages
February 24, 2015

Minimum Wage Walmart Employees to Receive a Raise

Walmart (NYSE: WMT) has long been a target of labor groups, in part because of their relatively low pay scale. Labor’s efforts to change Walmart’s comp structure have finally succeeded, as the retailing giant announced a major pay raise on February 19th that will affect over 40% of its workforce.

Currently, the lowest wage at Walmart is $7.25 per hour. Starting in April, entry-level workers will receive $9 per hour with the ability to earn $10 per hour after a successful six-month training period. By February of 2016, all workers (full and part-time) will be paid no less than $10 per hour.

According to Walmart, only 6,000 out of their approximately 1.2 million employees currently make the $7.25 per hour starting wage. However, taking into account other employees who receive slightly more than minimum wage, some 500,000 employees will be benefiting from this raise.

The move will cost Walmart approximately $1 billion. For the lowest-paid workers, the wage increase from $7.25 to $10 represents a 38% jump. However, because of the massive size of their workforce, average salaries are not increasing a great deal. After the original increase to $9 per hour, the average full-time retail worker salaries will increase only slightly from $12.94 per hour to $13 per hour. Approximately half of Walmart employees are part-time workers, and their average pay will be near $10 per hour, according to Walmart Vice-President of Investor Relations Carol Schumacher.

Why Change Now?

Labor groups are claiming at least partial credit for Walmart’s change of heart. OURWalmart, a union-supported protest group, expressed a typical sentiment. Emily Wells of OURWalmart said, “…by standing together we won raises for 500,000 Walmart workers, whose families desperately need better pay and regular hours.”

This could be a partially pre-emptive move, as this raise puts Walmart employees near President Obama’s requested minimum wage of $10.10 per hour. Walmart may also see the writing on the wall from other retailers that are raising their minimum wages, including Gap (NYSE:GPS), Panera (NASDAQ:PNRA), Ikea, and rival Costco (NASDAQ: COST). Costco currently starts their new employees at $11.50 per hour.

There is no clear evidence Walmart is having trouble attracting employees at current wage levels, but they may sense future vulnerability. Walmart also announced plans to make their flexible schedules more accommodating to workers struggling with child-care and other scheduling conflicts. Perhaps we should look at this as a corporate decision that hours and pay needed to be improved to increase employee retention – an important component to a healthy bottom line.

Will There Be a “Walmart Effect” on Retailers and the Market?

Considering Walmart’s dominance in its marketplace — and that its 1.2 million workers constitute 1% of the total U. S. workforce, this decision is likely to have some impact on other retailers. However, the effect may have more to do with other market forces, including locally influenced wage growth, than with direct pressure exerted by this company-wide increase. According to many retailing experts, Walmart is playing catch-up, and has simply reached the tipping point of collective opinion on where starting wages in America need to be.

As for the market, the knee-jerk reaction was predictably punitive. After the announcement, Walmart’s stock price dropped 2.9% to $83.77 even though recent profit levels have beaten forecasts. Lower gas prices are cited as one of the reasons for the improved profit, and Walmart has already dropped sales projections for the next 12 months citing a strong dollar – so it is possible that the market is just reacting to short-term concerns.

Longer-term, the real issue is where the minimum wage should be to balance consumer spending and job growth. Even conservative analysts have pointed out the increasing wage gap as a problem that needs to be addressed. Since consumer spending provides between 60%-70% of GDP growth, it is imperative that wages rise to “prime the economic pump” and increase the purchasing power of lower-income Americans (which has not changed appreciably since 2009). The current economic recovery has not provided enough pressure to raise wages for most workers – thus, almost everyone agrees that wages must rise, even if they disagree on how (and by how much).

The Takeaway

Wall Street may have punished Walmart in the short term, but its long-term stock price is more likely to be affected by other factors, including a poor perception of their customer service. (According to the American Customer Satisfaction Index, they frequently finish last or near last in customer satisfaction.) Perhaps improved pay and hours will positively impact this perception. Time will tell.

It will be interesting to see if entry-level wages in retailing — or the broader economy — rise as other employers compete for talent with the Bentonville, Arkansas, colossus. It will also be worth noting if groups opposed to raising the national minimum wage point to Walmart’s action as evidence that such a raise is unnecessary. For example, Matthew Shay, President of the National Retail Federation, referred on Friday to Walmart’s action as “just another example of the power of the marketplace.”

In the end, Walmart’s effect may be more psychological than tangible, but it does at least seem to be driving the discussion in a more reasonable direction.

The bottom line is that wages will be going up from some combination of two drivers: pressure from labor groups and the political process; and market forces inherent in worker retention. Whatever the mix, reasonable growth of entry-level wages will help spur consumer spending and drive the broader economy forward.

That said, expect some short-term grumbling by the market — with a potential dip in some retail stocks — until spending growth kicks in and Wall Street accepts higher wages as the new normal.

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