Not the best target for labor activists.

Photographer: Daniel Acker/Bloomberg

Beware: Wal-Mart's Raises Are Not a Victory

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
Read More.
a | A

The past year has been a very interesting one for Wal-Mart. For years -- decades, really -- the low-cost retailer has been a stout bulwark for low prices and low wages, against increasingly fierce pressure from left-wing activists who want Wal-Mart wages to be closer to those of the old manufacturing jobs that have disappeared. Wal-Mart ferociously refused to cave into pressure -- until suddenly in February of last year, the company announced a substantial hike in its entry-level wages.

This has not gone quite as you might have expected. The labor activists were not as pleased as you might have thought; they complained that the company offset its higher wage costs by cutting back on the hours that people worked, at the same time as investors complained that the higher labor costs were coming out of corporate profits. And longtime Wal-Mart workers seem to have been made unhappy by the rising minimums, which meant that they would be getting less of a premium for their loyal years of service.

The company has just announced another wage hike, this one for everyone, in order to mollify some of those complaints. It's also announced that it's closing a bunch of stores, and in my own fair city, declining to open stores long-promised for low-income neighborhoods, much to the fury of District political leaders.

Given my longtime interest in Wal-Mart’s wage and business model, a professor of my acquaintance e-mailed me to ask whether these two broad raises and the reversal in the expansion strategy were related and revealing. They are.

The motivation for the raises is not charity. The company is trying to reduce turnover and retain a more skilled labor force. Why now? It's not because something has changed. It's because … nothing has changed. The company is reliably churning out cash, but it’s no longer the steamrolling into new markets and minting upside surprises for shareholders.

It could hardly be otherwise, given that the company’s annual revenue runs close to half a trillion dollars. Wal-Mart had a great business model -- “big stores in small towns,” as my business school professor James Schrager used to say. It had an amazing facility for logistics. Over the course of a few decades, it revolutionized how retail works in this country, even for people who rarely or never shop there.

But even the greatest revolution has a natural stopping point. Wal-Mart ran out of small towns to conquer. Its foray into urban locations -- "small stores in big towns" -- didn't go that well. And so the company has entered a graceful middle age, what consultants used to call the “cash cow” phase of its life cycle.

Investors used to prize shares in such companies, for their ability to reliably generate dividends. These days, however, investors are all about GROWTH! They want growth every quarter. They want growth that’s really hard to generate when your revenue already equals almost 3 percent of American GDP. It’s not enough just to sit there and cut a dividend check every quarter.

So Wal-Mart has to do something. And raising wages is, apparently, that something.

However -- and I know that this will upset those of you who have been told that Science Has Proven higher minimum wages don’t cause unemployment -- this move is not free. Wal-Mart’s margins are not particularly plump: 3.3 percent for 2014, the last full year for which data are available. Hiking labor costs substantially likely means that some locations, previously marginal, will now be unprofitable, or at least, not profitable enough to bother keeping them open. Those locations will close.

However, it will be hard for outsiders to tease out which location closings are driven by higher wages, and which are driven by other factors -- like apparent failure of Wal-Mart’s foray into a smaller-store format. Many of those locations would have closed anyway -- and indeed, the factors driving those closures may also be the ones driving the higher wage promises, rather than the other way around.  

Nonetheless, this should still give labor activists pause. The immediate takeaway is: Getting higher wages for workers seems to have, somewhat predictably, resulted in the company cutting back hours. There's a larger lesson here, too, about the labor movement, which has focused too much of its energy on a handful of firms.

It’s easy to see why activists have put so much of their effort into a couple of favorite targets: Wal-Mart and McDonalds. They’re huge, they have instant name recognition, and they’re faintly despised by the educated Mandarin class at whom such appeals are frequently aimed. But both companies have slowed down of late, with McDonalds coming close to an existential crisis (narrowly escaped, at least for now, by the clever introduction of "all-day breakfast").

If you become exclusively associated with a handful of big firms, there’s a substantial risk that one of those firms will go south, and your wage campaign will share some of the blame. And companies like Wal-Mart and McDonalds are particularly bad targets because there’s so little value to claim. Old-line manufacturers like steelworks and auto manufacturing made large profits per worker; there was a fair amount of room to get some for the workers, skim the union fees off the top, and still leave plenty of money for the shareholders. Even in these straitened days of foreign competition, Ford Motor Company made about $18,000 in profit per employee. Wal-Mart workers, by contrast, generate about $7,800 apiece.

Investors got very upset with the raises, when a larger slice of that profit was transferred to employees -- and when I say “investors,” don’t just think of the Walton family; think of your own retirement, sensibly invested in pension or index funds. You’d probably be pretty upset if management transferred the whole value of your savings to the workers. You might even demand that your fund managers do something about it.

Which is why the best that labor activists can get from Wal-Mart and McDonalds is something like what Wal-Mart just offered voluntarily. Far short of the “living wage” demanded by the activists. Any further raise in wages will most likely come at the expense of the lower-income folks who patronize these establishments, in the form of higher prices, or from the workers themselves, in the form of unemployment and underemployment when shoppers decline to pay the new, higher prices and the company has to cut back.

Labor activists are getting what they say they want: higher wages at Wal-Mart. But if the company starts shedding stores and jobs, that may not be best for workers, or a great advertisement for their movement.

Inside Wal-Mart's Shift in Strategy

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net