Michael Swartz / October 23, 2015

Walmart Wage Hikes Come With a Steep Price

The retail giant raised its own minimum wage.

After years of being the whipping boy of the Left, Walmart finally capitulated to both the market and the catcalls by agreeing to raise the minimum wage it pays its employees. Walmart workers received at least $9 per hour beginning this past April, and that will rise to $10 per hour starting next February. That decision, though, came with an ongoing cost, as 450 workers at Walmart’s Arkansas headquarters were axed earlier this month.

Meanwhile, the company’s bottom line is also hurting as the retailer warned its earnings per share could drop as much as 25% by the end of next year. Share prices have also declined 11% for the year. While the Left has put forth plenty of theories about how Walmart could afford to give its workers a raise, the reality isn’t panning out as planned.

Wages are getting upward pressure from the overall retail market, so Walmart isn’t alone in its dilemma. The Gap began the wage-raising trend last year, with Walmart and Target following a few months later. Retailers remain concerned about keeping employees as competition in their labor segment intensifies, but some have also adopted more automation and self-service options, shrinking the labor pool over what it may have been before the wage hikes.

Spending more on labor, though, makes profitability more difficult. Craig Rowley, a retail consultant, warned that “we are still in a slow-growth economy,” adding, “when you take on an expense like raising wages, you’ve got to take less profit.” Overall, it’s predicted that retailers could spend as much as $4 billion trying to match Walmart and the others edging up to the $10 minimum wage. The solution will likely lie in cutting jobs and unprofitable locations, as legacy retailers JCPenney and Macy’s have already done or still plan to do this year.

It’s worth noting, though, that these companies are increasing pay without being forced by Uncle Sam. Earlier this year, a minimum wage hike pushed by Senator (and now presidential hopeful) Bernie Sanders failed in the Senate as Sanders tried to sneak it into a GOP budget resolution. Executive action by Barack Obama and some local and state legislatures, however, has increased the minimum wage in some areas with negative effects on job creation and retention when the raise was too steep.

Yet what’s missing in this minimum wage debate is the question of value. In simple terms, is the employee bringing as much worth to the company as he’s being paid? Minimum wage has always been considered a floor for beginning employees, with the experience and skills they gain increasing their worth to the employer. In return, the employer either increases their wages or risks losing those employees to a competitor. It’s been the way of capitalism for decades — at least until economic conditions over the last 50 years hollowed out the center of the job market for men ages 25 to 54. From 1948 until 1972, more than 95% of that group was employed. That number has now fallen to near 88% under Obama.

Minimum wage or not, this drop in labor participation will have long-term detrimental effects, as skills either atrophy or are never acquired. There’s a fine line in almost any business between being profitable or going bust — in Walmart’s case, the margin runs just 3%. Changing market conditions will always affect its bottom line, but if Walmart is struggling, those rose-colored economic glasses through which the so-called experts see the world may need a new prescription.

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