If You Care About the Poor, Don’t Support Big Minimum Wage Hikes

In my last post, I talked about how Christians (and all people, really) should avoid the narrow confines of the private charity/government welfare debate when thinking about how best to help the poor. I argued that capitalist economies and free markets have historically done far more to ease the plight of the poor than either private charity or government welfare. That is because in these economies, we have seen a markedly faster rise in the overall standard of living and quality of life such that the poor of capitalist countries tend to be better off than the middle class of non-capitalist countries.

So, in short, if you care about the poor, you should care about economics. And you should support having a generally free-market economy.

One way that some who advocate for the poor err in their thinking is by supporting a significant hike in the government-imposed minimum wage. On the surface, it doesn’t sound like such a bad idea. In a time when corporate executives are getting paid huge salaries and bonuses, supporters of minimum wage hikes tend to think that the money needed to increase employee pay will just be shifted from the corporate higher-ups to the hourly little guys. They think it will decrease income inequality and give the hourly workers a higher standard of living while not significantly affecting the life quality of the rich guys on top.

This narrative is persuasive, and if true to reality, Christians and those who care about the poor ought to seriously consider supporting a big minimum wage hike to, say, $15/hour.

The problem is, this narrative is not true to reality. Let’s look at the case of Walmart.

Minimum wage hike supporters look at the well-paid corporate executives and heirs of the Walton family, compare them to average hourly worker pay, and naturally feel disgusted at the extreme income disparity. But think about the numbers: about 14,000 people work at Walmart’s headquarters in Bentonville, Arkansas. Compare that to the 2.2 million people Walmart Stores Inc. employs worldwide, including Sam’s Club (owned by Walmart). In America alone, Walmart employs about 1.4 million people.

Let’s say about 5,000 people at Wal-Mart’s headquarters are very highly paid (which is probably a high number), the rest earn enough to put them somewhere in the middle class. Those 5,000 Wal-Mart corporate higher-ups make up about 0.35% of the total Wal-Mart employees in America and about 0.23% worldwide.

Now let’s say those 5,000 Walmart Corporate employees make an average of $1 million a year (which, again, is probably high considering the CEO, Doug McMillon–the guy at the very tippy top–makes about $19 million per year in total compensation, most of that being equity in the company). The average Walmart associate, according to glassdoor.com, makes $20,656 per year. Divide McMillon’s entire compensation package evenly among all American Walmart employees and they’ll each wind up with. . . about $13.50 extra a year.

What if Walmart became completely egalitarian and divided its total employee compensation equally? Assuming that those 5,000 corporate higher-ups make an average of $1 million per year, that makes $5 billion which goes to them alone. Divide that evenly among all American Walmart employees and each employee’s yearly salary goes up by. . . about $3,500. That makes everyone’s salary about $24,000 per year. Now everyone in America who works for Walmart lives right around the poverty line.

The folks who think that minimum wage hikes can be paid for by lowering executive compensation are mistaken. If the minimum wage were set at $12 an hour, as some say it should be, the total compensation of all Walmart executives and corporate higher-ups would not be able to cover it. Thus, instead, employees would have to be laid off, prices would have to go up, and the quality of customers’ experience would go down. In other words, what made Walmart successful in the first place would cease to exist.

And this doesn’t even touch worldwide employee compensation. If Walmart divided executive compensation among all of its employees around the world, average hourly workers in America would get only half the spoils.

(This whole scenario indulges the fantasy that Walmart could continue to function if its executives were not highly compensated. It, of course, could not.)

What about profits? According to Henry Blodget at Business Insider, Walmart makes about $22 billion in pre-tax profits per year. If it divided that up evenly among its 2.2 million employees, they could each get a $10,000 salary increase per year. That sounds impressive, but it would also leave Walmart stagnant. Without profits to be used for down payments, no new stores would be able to open, and average hourly workers would only be making about $30,000 per year anyway. So current workers would benefit, but there would not be a net gain of employees or a drop in nationwide unemployment.

What if half their profits went to employees? That brings average hourly salary up to $25,000 per year, but that alone certainly doesn’t lift them out of poverty.

Minimum Wage Rises, Employment Falls

In general, it is true both in principle and in practice that rising minimum wage laws make minimum-wage employment go down. Why? Because as the cost of employing a low-skilled person goes up, that number inevitably gets closer to the cost by which companies can automate the tasks performed by that person. If the cost of employment goes up and the cost of automation (machines & robots) goes down, eventually it will be cheaper to replace jobs with machines.

We have seen this in Walmart’s case with point of sale (POS) stations. Instead of a relatively large number of employees working the checkout aisles, there are relatively few employees and an increasing number of self-checkout stations.

This can also be seen in another infamous case: minimum wage employees vs. McDonald’s. (Fast Food is an industry, like retail, that has very slim profit margins overall, which decreases its ability to raise average worker pay without also raising product prices.)

In the last five years or so, McDonald’s has devoted a large chunk of funding to the development of automation systems, including touchscreen ordering systems and robotic burger makers that can churn out 360 burgers an hour, in order to save money long term. It is cheaper to invent high-tech methods of replacing employees than it would be to employ people under the new minimum wage laws.

Walmart’s Upcoming Wage Increase

Look at what is happening now with Walmart. Because their business model has been so successful, they have decided (on their own) to raise starting pay to $10 per hour. This is up from their current starting hourly pay, $9, which is already well above the federal minimum wage. Partially, the money for this pay increase will come out of profits–about $1.5 billion. What created the circumstances wherein Walmart decided to raise minimum starting pay by its own accord?

The short answer is: market forces.

Walmart, like all retail companies, needs hard-working, reliable employees, and its low starting pay leads to high employee turnover. Employee turnover decreases productivity, which decreases profits. So one of the main reasons Walmart decided to raise its minimum starting pay is, likely, to decrease employee turnover and to attract and keep quality employees.

This raise in minimum starting pay will almost certainly affect starting wage rates at many other retail companies like Target, TJ Maxx, Ross, Marshall’s, etc., as it did when Walmart raised its starting hourly wage to $9. Likewise, Sam’s Club will be raising its wages again after the $10 starting pay is implemented. This will be a good thing for low-skilled, minimally-educated workers all over the country.

There are downsides to this starting wage increase, however. For instance, it will be partially offset by continuing the trend of decreasing bottom-rung employees’ hours and lowering full-time workers to part-time as much as possible. But, to be fair, that trend was already in place before the announcement of the wage increase. It was exacerbated far more by the Great Recession and the Affordable Care Act.

Overall, though, rising wages with decreasing hours is better than stagnant wages with decreasing hours. This shows that there is a natural market-set minimum wage. In other words, there is a market price for labor, and in the case of Walmart and many other retail stores that price is above the federal minimum wage.

What happens when the government-imposed minimum wage is set above the market minimum wage?

Walmart’s Upcoming Store Closures

Walmart has plans to close 269 stores across the United States, and many of these are closing because of rising government-imposed minimum wages. This is true in the case of the Oakland Walmart as well as the LA Chinatown Walmart. Many plans for proposed stores, such as in poorer neighborhoods of Washington DC, have been scrapped due to rising minimum wage laws.

Walmart’s profit margins, like many retailers, are already very small. Overall, Walmart’s profit margins are about 3.15%. Some stores are higher and some are lower, but that is the average. Being forced to raise employee compensation by 20-25% often makes otherwise profitable stories unprofitable, hence the reason so many are closing.

Walmart would rather shut its stores down early rather than raise its prices (corresponding to the higher minimum wage), see their sales suffer, and ultimately have to close it down eventually anyway.

Bottom Line

First, it must be acknowledged that the way Walmart works is not perfect, and it does not survive without effective subsidies from government. It’s stock buybacks (which tend to go toward executive compensation) total only a little more than the amount of food stamps Walmart’s own employees use at Walmart stores every year. If Walmart couldn’t rely on this implicit government subsidy, it would be forced to adjust its employee compensation system.

Perhaps that problem could be solved by progressively shifting food stamp (SNAP) welfare to other forms of welfare (such as housing vouchers) the longer a person has been employed at their current job. This could decrease the total amount of income Walmart gets from food stamps without altering the net benefits a low-income person receives from welfare.

Another way of incentivizing Walmart to pay its workers a higher wage would be to institute a stipulation that a person’s food stamps cannot be used at store owned by the company that employs them. So Walmart employees could use their food stamps at Target or another grocery store, but not at a Walmart store. It would be inconvenient for Walmart employees, but also for Walmart. The company would lose a lot of income, which it could gain back simply by paying its employees better. The most obvious place that money would come from would be stock buybacks, decreasing the salaries of only those who are compensated in stock options.

Second, we must remember the basic facts: most households in which minimum wage workers live (including but not limited to Walmart employees) are collectively above the poverty line (about 80%). Most of the 3 million minimum wage workers in America are young (70% under 35 years old). And somewhere around 3/4ths to 2/3rds of minimum wage workers earn a raise within a year. Lastly, since most states have minimum wage laws above the federal minimum wage ($7.25/hour), only about 2.9% of workers in America work at the federal minimum wage.

The main lesson to be learned from the case of Walmart is that there is such a thing as a market minimum wage, and it is dangerous to set the government-imposed minimum wage above this rate. It would not have the unequivocally positive effects that its supporters think it would. Rather, it would result in more store closings, fewer new Walmart stores, fewer “associate”-level employees working fewer hours, more expensive products, and less customer satisfaction.

In short, in the case of Walmart, a big minimum wage hike would result in killing the goose that lays the golden egg. It would be bad for both customers and workers alike.