Tom: Today we are talking about the minimum wage – again! What’s the latest, Mellody?
Mellody: It certainly is a topic that keeps popping up, as we continue to have discussions in this country about the increasing wealth inequality, the challenges that are facing many Americans on the lower rungs of the economic ladder, and the fact that wages are not keeping up with cost of living. But this past week we learned that, starting in April, Wal-Mart announced it would give raises to half a million of its us employees.
The company said Thursday that they will bump these employees up to $9 per hour, $1.75 over the federal minimum wage, and that by next February, hourly employees who complete 6 months of training will make at least $10 per hour. Now this may seem like a small gesture, but as the largest private sector employer in the United States, the company employs over 1.3 million Americans – nearly 1% of the U.S. workforce – so this is not something that is easily dismissed. So once again, we are seeing wage rates pop up as a point of discussion, and it is something we should keep an eye on!
Tom: This is interesting news! What motivated Wal-Mart to do this?
Mellody: Everybody knows that Wal-Mart has been one of the primary targets when it comes to the minimum wage and living wage battles in this country. They have had image problems for years on this issue, as people believe that they take advantage of their employees, many of whom are literally the working poor. Just a couple years back, a Wal-Mart store in Ohio held a holiday food drive for the needy, and many of those in need were full time employees of the company. So, the company has been under pressure to do this for a long time.
However, this is not just an image problem, it is a business problem. As a labor-intensive company, one of the biggest problems that Wal-Mart faces is turnover. Some estimates have shown that as many as 70% of employees leave in their first year. The recruitment and onboarding costs associated with this turnover, at a company this large, are huge. Finally, now that the economy is improving, the labor market is getting tighter, and competitors are raising their wages, I think Wal-Mart is feeling labor pressure for the first time in a number of years.
Tom: A lot was made of the costs of this move, Mellody. Wal-Mart says it will cost $1 billion. Is this big for Wal-Mart?
Mellody: Absolutely not. It is not a huge cost on the part of a company with a market cap of nearly $270 billion, and profits of $17 billion, particularly when they announce it in the same breath as better than expected quarterly sales numbers. Another way to look at this is in terms of the social costs that are picked up by the taxpayer when large companies like this do not pay their workers a living wage.
One estimate put the amount of taxpayer subsidies that Wal-Mart receives at $6.2 billion annually when you consider that some of their employees have to rely on food stamps, health care and other taxpayer-funded programs because their wages are not enough. Another boost to the company that is indisputable is the fact that Wal-Mart captures nearly 1 in every 5 dollars of the federal SNAP (supplemental nutrition assistance program), raking in $13.5 billion out of $76 billion in food stamp sales in 2013. So, in the grand scheme of things, $1 billion dollars in wages is not that costly.
Tom: Are there any other positives here? Will this spur movement on better wages among other employers?
Mellody: Obviously, any increase in wages for workers is a good thing. This is particularly true for workers who are at the lowest pay grades in our society. If you were at the federal minimum wage rate of $7.25, moving to $9 an hour increase is a 24% pay bump. And it should definitely motivate other large retail companies to look at their wage structure, particularly other who have faced scrutiny and pressure surrounding their employee compensation.
Look for large fast food companies to acknowledge the writing on the wall over the next few months and years. But beyond companies, i expect that we will continue to see momentum at the state and municipal level to raise the minimum wage and ensure that it is a living wage. And, as i mentioned before, as the labor market continues to improve, i think companies across the board will be forced to compete for workers, and that is good news for everyone.
Tom: Thanks for keeping us up to date, Mellody! Have a great week!
Mellody: You too, Tom!
Mellody is president of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
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