U.S. Economy

The Real Reason Walmart Raised Its Minimum Wage

Not because of the corporate tax cut, but because the labor market is tight. Which is great news!

Cupcakes and TVs: The many-SKU model.

Photographer: Patrick T. Fallon/Bloomberg

“Walmart workers” used to be a handy synonym for “low-paid.” But over the past few years, the company has steadily raised the wage it offers its lowest-paid employees, and it has now announced that base pay will go up again, to $11 an hour.

If you are one of the majority of people who do not work at Walmart, why should you care about this? Other than the possibility that this will slightly raise the outrageously low prices you pay for goods there?

Actually, there are a lot of reasons to care. The first is that this tells us interesting things about what’s going on in the labor market. While CEO Doug McMillon credited the new Republican tax bill with freeing up cash the company could use to pay its workers more, I (like other observers) tend to take these pronouncements with a huge grain of salt.

The Trump administration obviously enjoys hearing companies announce that they’re giving employees more money because of the tax cut, and large companies, which benefit immensely from a friendly relationship with Washington, are eager to give the administration what it wants. If you can manage to get credit for something you needed to do anyway, so much the better. (There is a lively dispute, for example, over whether unions or Republicans should get credit for many of the bonuses that have been rolled out to much fanfare.)

In this case, there’s good reason to think that Walmart needed to raise wages anyway: Labor markets are tight, and in a number of areas, the company is now contending with locally imposed minimum wages that are already forcing Walmart to raise wages to $11 an hour, or even higher. Establishing a higher floor across the company ensures parity between regions, and allows Walmart stores to compete for good workers in local markets.

What’s especially interesting is that we are seeing tight labor markets even though labor force participation (the percentage of the population that is either working, or looking for work), remains well below where it was in 2007. Normally, you would expect the people who have left the labor force to come back in as job prospects improved, functioning as Karl Marx’s “reserve army of the unemployed” to keep wage growth moderate. But labor-force participation in December 2017 was the same as it had been in 2016 and 2015 -- yet employers complain of tight labor markets, and wage growth has been robust. The fact that Walmart, which employs a substantial fraction of Americans all by itself, sees good business sense in an hourly wage increase is good evidence that that labor-force-participation number is sticky.

We don’t know what it is those folks are doing with their time. Intuition suggests that this phenomenon is partly driven by the demographic bulge of the baby boom entering retirement, but that doesn’t seem to be all, or even most, of the story.  What we do seem to be learning is that whatever those not-working folks are doing, it will take higher wages to coax them away from it and back into the workforce -- or to persuade employers to give up and hire folks they’ve previously regarded as unemployable for one reason or another.

Another reason that you should be interested in this is what it suggests about Walmart’s business model. For years, there has been a left-wing cottage industry in comparing Walmart to Costco, which pays its worker much more for what superficially seems like similar work. And for years, I’ve had a related business in pointing out that Costco and Walmart actually have dramatically different business models, for all that they may look the same from the vantage point of a coastal professional. Costco sells a small number of bulk goods to an affluent demographic. Their stripped-down number of stock-keeping units, and habit of leaving the goods stacked on their shipping pallets, means that they need to employ fewer workers, and that those workers enjoy much greater productivity. Those workers are also catering to a wealthier consumer who is willing and able to pay a premium for excellent service.

Walmart, on the other hand, sells about 20 times as many different goods to a customer base that is on average much poorer, and shops primarily on price. More SKUs means more labor unpacking, shelving and straightening up the stuff. Which in turn means that it’s harder for your labor to be exceptionally productive, or your service to be exceptionally great. For example, it is probably beyond the limits of any human’s cognition to be familiar with 100,000 different products, and their location within the store. That’s why the checkout clerks at Trader Joe’s (which also follows a minimal-SKU model) can wax knowledgeable about almost anything you buy, and the folks at Safeway can’t.

As I have pointed out more than once, shifting to a higher-wage labor model wouldn’t just mean Walmart paying its workers more; it would mean major operational shifts to make those workers profitable. The more Walmart executives raise wages, the more we should be looking to see what else they’re doing to complement this dramatic shift in their business model. Because one thing we can be fairly certain of is that the wage increase will not be coming out of profit, at least over the long term. The company’s profit margins have always been razor thin, and they’ve been looking particularly slender recently. If Walmart is pouring the benefits of the tax cut into worker pockets rather than investment or placating shareholders, that’s because the company thinks it needs to to survive.

And the last reason it’s interesting is because of what it (potentially) tells us about the tax cut. To the extent that this boost really was a windfall from the tax cut, that actually suggests something quite odd.

Of course, Republicans did promise that the tax cut would put more money in worker pockets. But the mechanism of that enrichment was not really supposed to be a one-for-one transfer of money from the government to workers, using corporations as an intermediary. Rather, corporations are supposed to grow their businesses, making workers more productive, and increasing demand for labor, which will eventually translate into higher wages.

Obviously, there hasn’t been any time for any of that to happen yet. So if the money is going out this soon, and this obviously, the mechanism is very different from what I’d have expected. And instead of heralding this as great news, the Trump administration should be quite alarmed.

For if companies really have nothing better to do with the money than give an unnecessary bonus to current workers, that means that companies don’t see great opportunities to use it to expand their current operations, or invest in exciting new inventions and markets. Instead they’re just going to split it with workers and shareholders.

And hey, as both a worker and a shareholder, that makes me happy. But not as happy as I’d be to know that companies were finding great new businesses to build that would make us all a whole lot richer 10 or 20 years down the road.

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

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