Markets work. That’s the message from Walmart’s decision to raise its starting wage for 500,000 of its 1.3 million US employees to $10 per hour starting next year. That’s 37% above the statutory minimum of $7.25. No, the notably cost-conscious company, the largest private-sector employer in America, the world’s largest retailer, and a company that has prospered by making stuff available at prices that lower- and middle-income Americans can afford -- microwave ovens go for $44 -- didn’t suddenly turn wildly philanthropic. Or decide to bow to pressure from President Obama, who recently attacked office-supply company Staples for what he deemed indefensibly low wages in the face of its high profits, or from trade union organizers. Instead Walmart responded to pressure in two markets.
The first is the retail market in which it competes for customers. Until low gasoline prices fattened the wallets of its customers in the fourth quarter of last year and drove customer traffic up for the first time in two years, Walmart was struggling to retain the loyalty of its customers. In part, but only in part, this was because those customers had not benefitted significantly form the economic recovery.
The second market in which Walmart found itself at an increasing competitive disadvantage is the labor market, a disadvantage that affected its ability to compete for customers. The company found itself employing increasingly unresponsive and at times surly sales staff and poor in-store managers. Waiting times to get to cashiers became intolerable, food past its sell-by date was left on display, stores became dingy and unattractive, and staff were not deployed efficiently, leaving stores under-staffed at peak times. The better employees, from starting-level workers to store managers, were being lured away from Walmart by other retailers such as Starbucks, Gap, and Ikea as a recovering labor market drove the unemployment rate down from 10% in October 2009 to 5.7% last month. Hiring by businesses is at its fastest pace since 2000, and the job-vacancy rate at its highest level since 2001 as employers find themselves unable to find suitable workers to fill out their staffs.
It is true that by the end of this year nine states will have legal minima of $9 or more per hour, well above the federal minimum of $7.25 per hour. But because those statutory levels affect not only Walmart but all its competitors in those states, state action does not account for Walmart’s move, the company having broken with the National Federation of Retailer’s opposition to an increase in the federal minimum. The company feels that if all its competitors are forced to join it in meeting a higher minimum, its costs relative to those of its rivals will not increase, or its market share decline.
Nor can higher statutory levels in several states account for other changes announced by CEO Doug McMillon, completing his first year in the job. The company will improve scheduling so that workers -- “associates” as management prefers to call them -- wanting to work more hours will have a better chance of getting the call, while those wanting more flexibility will be accommodated. The path from entry level wages to a $15 per hour level is made clearer, and 75% of its managers started out as hourly employees. Some make as little as $35,000 per year, others -- not many, but some -- over $100,000.
Don’t misunderstand. Walmart remains a hard-nosed retailer that knows it has to keep costs down in order to keep customer traffic up. The cost of the new wage structure and of health-care coverage for domestic partners and vision problems, is partially offset by cuts in health-care benefits for 30,000 of its part-time employees, who can now avail themselves of subsidized insurance by registering under Obamacare. And average pay at Walmart still lags that of other retailers in some cases. Still, the cost of all of these changes comes to a tidy $1 billion per annum, less any improvement in sales and productivity that might come from what Mr. McMillon calls “associates … that are highly engaged about the business.” That’s not a great deal for a company with sales of $473 billion last year, and a shareholder pay-out of $12.8 billion, but neither is it petty cash.