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Wal-Mart Sets Off Minimum Wage Race

7 min read

Wal-Mart Store Inc.’s announcement in February that it would start paying employees $9 an hour this year and $10 in 2016 touched off a minimum wage arms race.

Shortly after that news broke, TJX Cos. of Framingham, Massachusetts, which operates T.J. Maxx and Marshalls, said it would raise its minimum wage to $9 an hour, and Target Corp. of Minneapolis followed suit.

The wage announcements by other retailers didn’t surprise Ann Hodges, a labor and employment law professor at the University of Richmond in Virginia.

“It’s pretty much what I thought would happen because Wal-Mart is the industry leader just by virtue of its size,” she said.

And she said the move will benefit low-wage workers in other sectors such as the hospitality industry because both fields compete for the same pool of workers.

Last week, McDonald’s announced starting wages at company-owned restaurants would be $1 more than the locally mandated minimum wage. By the end of 2016, McDonald’s projected that the average hourly wage would be more than $10 at its company-owned locations.

The increase in pay was a change that Wal-Mart had to make, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York.

The labor market is getting tighter, and a number of Wal-Mart’s competitors were already paying $9 per hour or more. In addition, union groups have continued to hammer Wal-Mart for not paying higher wages.

“So when Wal-Mart looks at this whole picture, I think they know they got to do this. And that’s why they did it,” Davidowitz said. “I think it was the right decision.”

With 1.2 million employees in the U.S., Wal-Mart is the nation’s largest private employer. The bump in pay is expected to impact 500,000 of the retailer’s workers.

While some groups praised the Bentonville retailer for increasing the hourly wage, others complained that it did not go higher.

“Certainly it’s great that they did this,” said Alissa Barron-Menza, vice president for Boston-based Business for a Fair Minimum Wage, which calls itself a national network of business organizations, business owners and executives who believe a fair minimum wage makes good business sense. “At the same time, many employers are already at this level or higher. And so we believe that they should have done more.”

Barron-Menza said Costco Wholesale Corp. of Issaquah, Washington, starts its employees at $11.50 an hour. Last year, the Gap Inc. of San Francisco said it was bumping its pay to at least $9 an hour and then $10 this year.

The National Retail Federation of Washington, which touts itself as the largest retail trade association, issued a press release praising Wal-Mart for its move, which was “just another example of the power of the marketplace.”

“Like many other retailers, Walmart made its decision based upon what is best for their employees, their customers, their shareholders and the communities in which they operate,” the NRF said.

Under Pressure

For years, Wal-Mart has been under pressure to raise its rates from the United Food & Commercial Workers International Union of Washington.

In December, the union said in a news release that tens of thousands Americans protested at 1,600 Wal-Mart stores around the country in an attempt have the retailer pay workers at least $15 an hour. The union said in the news release that the majority of Wal-Mart workers are paid less than $25,000 a year, while the company had more than $16 billion in net income. (For the fiscal year that ended Jan. 31, Wal-Mart reported $16.4 billion in net income, up 2.1 percent from the previous year, on sales of $482.2 billion, an increase of 1.9 percent.)

In December, in an interview with Charlie Rose of “CBS This Morning,” Wal-Mart CEO Doug McMillon telegraphed the pay raise and said soon all of the retailer’s U.S. workers would earn more than the federal minimum wage, which is currently $7.25.

He didn’t give a timetable when the raise would go into place, but during a conference call on Feb. 19 he released more details.

Approximately 500,000 full-time and part-time Wal-Mart and Sam’s Clubs workers will receive at least $9 an hour in this month. And by Feb. 1, current workers will earn at least $10 an hour.

Wal-Mart founder “Sam Walton used to say that our people make the difference, I share that philosophy,” McMillon said in the conference call, which was transcribed and posted to the website SeekingAlpha.com. “As a result, we firmly believe that our customers will benefit from a better store experience, which can drive higher sales and return for our shareholders over time.”

The news was even better for Sam’s Clubs workers. They would be starting at $9.50 an hour, unless there is a higher state-mandated minimum wage, Rosalind Brewer, president and CEO of Sam’s Club, said during the conference call. “We believe this investment in our associates will help us attract, retain and develop top-notch talent,” she said.

Hodges, the labor attorney, said Wal-Mart increased pay because the move was inevitable. Currently there are 29 states that have a higher minimum wage than the federal one. Arkansas voters approved an initiated act in November that increased the state’s minimum to $7.50 on Jan. 1 and will add another $1 per hour on Jan. 1, 2017.

“The handwriting was kind of all on the wall with respect to that,” Hodges said. “So why not get out in front of it and get some good publicity while you’re at it? They get so much negative publicity.”

Other companies also made their announcement and cited similar reasons for making the change.

TJX Cos. said in a Feb. 25 news release that it was boosting the pay of its workers to at least $9 per hour starting in June. And sometime in 2016, workers who had been with the company for at least six months will earn at least $10 an hour.

“This pay initiative is an important part of our strategies to continue attracting and retaining the best talent in order to deliver a great shopping experience for our customers, remain competitive on wages in our U.S. markets, and stay focused on our value mission,” said Carol Meyrowitz, CEO of TJX.

Will it Help Sales?

Davidowitz, the retail consultant, said he didn’t think the higher pay would translate into higher sales for Wal-Mart, despite McMillon’s optimism.

Same-store sales were up 0.5 percent for Walmart U.S. for the fiscal year that ended Jan. 31, but that wasn’t enough to make up for a 0.6 percent decline in sales the previous year. Same-store sales are considered a key retail metric because sales are compared with stores that have been open at least a year.

But others think the higher paid Wal-Mart workers will benefit sales. Barron-Menza said the workers will be happier that they are getting paid more.

“If you are being paid enough as an employee that you know you can pay rent, you know that you can put food on the table … you’re going to be able to focus more on your job,” she said. And typically the employer sees an increase in productivity when a business is paying a higher wage.

Mervin J. Jebaraj, a researcher at the Center for Business & Economic Research at the University of Arkansas, said “Theoretically, employees pay for their productivity; you can argue if that actually happens or not.”

Still, he said the bump in pay might help with sales because workers will now have more money to spend at Wal-Mart.

Tighter Market

Another reason Wal-Mart increased the pay was to attract more workers.

“Recruiting is critical for them,” Davidowitz said. “The labor market is getting a little tighter and they’re in competition for the same people that all their competitors are.”

Unemployment rates have been falling. According to the latest figures available, the state’s unemployment rate slid to 5.5 percent in February, down a tenth of a percentage point from January. The national unemployment rate for was also 5.5 in February, down from 5.7 percent in January.

“When the labor market gets tighter, you want to be able to get the best of that group of workers,” Hodges said.

The higher pay should help with recruiting and keeping employees, Davidowitz said.

Wal-Mart is constantly recruiting potential workers. And if they didn’t offer competitive pay, Wal-Mart would be left with lower-skilled workers or those who weren’t as motivated as those that went to work for competitors.

Bill Thorne, a spokesman for the National Retail Federation, said companies have made the decision to increase pay because of competition.

“These companies spend a lot of money recruiting people, training people,” he said. “So by having a competitive wage, there’s a better chance that you’re going to keep them and that initial investment is going to pay off in the long run.”

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