Feb. 21 (Bloomberg) -- In 1914, Henry Ford announced he was more than doubling the average wage of Ford Motor Co. factory workers to $5 a day, in part so they could afford a Model T. His act took the world by surprise, spurred auto sales and helped create an American middle class.
One hundred years later, U.S. companies including Gap Inc. and Wal-Mart Stores Inc. are caught up in the debate over raising pay -- this time an increase in the federal minimum wage. President Barack Obama and Senate Democrats want to raise it to $10.10 an hour from $7.25, saying doing so will bolster the economy and reduce income inequality. House Republicans and industry groups oppose the plan, deeming it a job killer.
“When Henry Ford announced the 5-dollar-day, the response was that it would diminish the auto industry and bankrupt his company,” Harley Shaiken, a labor economist at the University of California, Berkeley, said in an interview. “Instead it jump-started purchasing power, reduced turnover and increased the profitability of Ford Motor Co. There’s a lesson we can still learn from that.”
A boost in the minimum wage to $10.10 would add $200 million -- or less than 1 percent -- to Wal-Mart’s annual labor bill, the University of California Berkeley Center for Labor Research and Education estimates.
If Wal-Mart passed along the estimated $200 million in extra labor cost to consumers, it would equal about a penny per $16 item, said Ken Jacobs, the Labor Center’s chairman. Meanwhile, the rise may boost purchases among the chain’s core shoppers, many of whom could see their earnings climb, he said.
The corrosive effects of income inequality on companies came into renewed focus yesterday when Wal-Mart said profit this year will trail analysts’ estimates as its low-income U.S. customers continue to struggle. The Bentonville, Arkansas-based retailer, which previously backed a higher minimum wage, is trying to assess whether raising it again would help or hurt.
Gap Inc. didn’t wait for Congress to act and announced raises for store workers starting next year. Obama hailed the San Franciso-based chain’s action and urged others to follow.
The 1914 pay increase was a more dramatic change than the one currently proposed. Raising wages to $5 gave workers an extra $62.22 daily in purchasing power in 2014 dollars, based on a Bureau of Labor Statistics inflation calculator, assuming they were earning the $2.34 industry average. Today, workers will gain $22.80 per 8-hour day with a $7.25 to $10.10 raise.
Still, economists say raising the wage will help low-income workers. In a report this month, the non-partisan Congressional Budget Office said that while raising the federal minimum wage to $10.10 an hour could wipe out as many as 500,000 jobs, it could also boost the incomes of 16.5 million low-wage workers by $31 billion in 2016.
“High wages make your employees better customers,” Wallace Hopp, associate dean of faculty and research at the University of Michigan’s Stephen M. Ross School of Business, said in an interview. “You’re putting this money in the hands of people who are most definitely going to spend it. They’re not socking it away in mutual funds. The money goes back into the economy pretty quickly.”
While the U.S. economic recovery is in its fifth year, disposable incomes only inched up in 2013, for the fourth year in a row. Low-income shoppers have been buying mostly necessities even as more well-heeled consumers shell out for bigger-ticket items such as appliances and cars. As a result, Ford and General Motors Co. last year posted the strongest auto sales in the U.S. since 2007. By contrast, retailers from Wal-Mart to Lululemon Athletica Inc. have cut their forecasts.
For Wal-Mart, the question is whether a higher minimum wage that puts more money in shoppers’ wallets would boost sales enough to offset higher labor costs. Figuring that out isn’t easy because it’s hard to predict consumer behavior, David Tovar, a company spokesman, said in an interview.
Would increased consumer spending “offset and maybe even exceed whatever impact you pay out to associates?” he said. “It’s really hard to model behavior based on these kinds of changes.”
Wal-Mart won’t reveal the potential added costs or potential impact. The calculations for the Berkeley study are based on Wal-Mart’s wage distribution data, which the company published as part of a lawsuit more than a decade ago, Jacobs said. That data is indexed to Wal-Mart’s average full-time wage, which the company updates each year, and his estimates of its state and federal minimum wage workforce are very close to the retailer’s, he said.
“It’s a rough estimate, but however you change the parameters, at $10.10 you are not going to come up with a big number vis-à-vis their overall cost structure of business,” Jacobs said.
Other large discount retailers and dollar stores may similarly see higher sales, which may help them to cushion the additional labor costs. Such an outcome reinforces the view of minimum wage supporters that a hike bodes well for consumer spending, 70 percent of the economy.
Much of the extra cash that workers would get is likely to go to basic goods, such as clothing and food, resulting in a “very modest” impact, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Labor-intensive businesses like restaurants could find the wage hikes more difficult to absorb than large retailers.
Even so, the debate about raising the minimum wage goes beyond the immediate lift it would provide to purchases, according to Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.
“There is plenty of merit in the economic argument, but that’s hardly the entire argument,” Shapiro said. People “are stuck in a cycle of crappy jobs” and “we need to ask ourselves, why do we have this situation? In general, paying people wages that they can live on is something every industrialized society should be able to do.”
Nine years ago, Wal-Mart was making purchasing-power arguments similar to the ones being made by Obama and Democrats today. In 2005, H. Lee Scott, then Wal-Mart’s chief executive officer, urged Congress to raise the minimum wage, saying the company’s customers “are struggling to get by.”
“The U.S. minimum wage of $5.15 an hour has not been raised in nearly a decade and we believe it is out of date with the times,” Scott said in a speech to company executives. “Our customers simply don’t have the money to buy basic necessities between pay checks.”
Support from Wal-Mart helped Democrats push through the last increase in the wage floor after the party won control of both chambers of Congress in the 2006 midterm elections. Just three Senate Republicans opposed the 2007 rise, which also drew the backing of more than a third of House Republicans.
This time Wal-Mart has staked out a neutral position. The political optics have changed too. Senate Majority Leader Harry Reid, a Nevada Democrat, plans to bring the latest minimum-wage proposal to the Senate floor next month. The legislation faces long odds on Capitol Hill. Democrats, who control 55 seats in the 100-member Senate chamber, may struggle to garner 60 votes to advance the bill.
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