WASHINGTON, February 21, 2015 – Walmart recently announced that they were raising the minimum wage paid to workers from the current $7.25 per hour up to $10 or more per hour. This is almost $3 more than the minimum wage required by law. This action clearly shows that there is no need for the government to get involved with setting wage rates. In fact the government action, especially if it discourages growth, is counter-productive.
Walmart is an extremely successful world-wide retailer. Last year, their total world-wide sales were nearly half a trillion dollars with about $280 billion of that coming from the U.S. Walmart employs about 2.2 million associates world-wide, which includes more than 100,000 US veterans. They have accumulated more than $200 billion of assets for which they earn an 8% return, which is somewhat below the industry average.
Why then, is Walmart willing to increase the minimum hourly wage to $10 per hour? Won’t this cost them up to $3 billion per year?
Walmart, like all companies, has responsibilities to their stakeholders, who are the parties that have an interest in their operations. These include the stockholders who own the company, the customers who purchase the company’s products and the employees who allow the company to function.
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While all stakeholders are extremely important to the organization, in terms of priorities the shareholders are first, then the customers and then the employees. In fact, in Walmart’s annual report they say, “Returning value to shareholders remains a key priority.” So raising the minimum wage to $10 per hour must first benefit the stockholders, then the customers, and then the employees.
Because last year’s profit resulted in a below average return on assets, Walmart is seeking ways to increase their returns. For the last six or seven years, they were able to hire workers at the minimum wage who performed their jobs extremely well.
The reason good workers were available at low wages was that the workers had lost their jobs during the great recession and the economy was not providing new jobs at their skill level. They were forced to take whatever job was available to them. This usually meant taking a job that was way below their skill level, like a minimum wage job at Walmart. Starting last year, things began to change for these under-employed workers.
Finally in 2014, the total number of employed people in the US exceeded the number prior to the great recession. This allowed some skilled worker who were in minimum wage jobs to move upward to a position that more closely matched their skills, which left openings at the minimum wage level for Walmart.
Walmart found that the workers hired at the minimum wage to replace the workers who moved on, had little or no skill in retailing, perhaps explaining why their increase in sales last year, barely exceeded population growth. The only sensible move for them was to raise the minimum wage in order to attract more highly skilled workers.
The people willing to work for $10 per hour are generally much more skilled than those willing to work for $7.25 per hour. They view the $3 billion annual cost to hire more qualified associates as an expense that will lead to greater returns for their stockholders, better service for their customers and a higher living standard for their employees. All stakeholders are satisfied.
This is a clear example of how the market works and why a federally mandated minimum wage is really not needed. It was the typical market forces that resulted in the increase lowest wage paid by Walmart. And it is typical market forces that cause all other wages to rise. The real trigger in the process, is growth in the economy.
Unfortunately for the past six years the government’s economic policy has not been growth oriented, even considering the massive increase in the money supply and the equally massive increase in government deficit spending. It is mostly the tax increases, the overly burdensome regulations and increased real (and anticipated) costs for business, that has kept our economy growing at under a 2.5% annual rate. Following a severe recession, market forces would have produced a growth rate nearly twice that, as was the case in after the 1981 recession.
Our government policy makers should take a good look at Walmart. They will find that the minimum wage law is unnecessary, often counter-productive and tends to dramatically increase the unemployment rate for unskilled workers. They will also find that if they could institute policies that encourage economic growth, most of our economic problems “would melt away faster than the snows of winter in the warm spring sun.”