Wages With Minimal Wiggle Room - WSJ

Wages With Minimal Wiggle Room - WSJ

Long the target of progressives looking to increase the minimum wage, Wal-Mart announced earlier this year that the company would increase its base wage to $9 an hour in April and $10 an hour by February 2016. How’s that working out so far?

In November Wal-Mart announced a 10% decline in earnings per share, for the fiscal year’s third quarter. Higher wages were “by far the biggest driver of the decline in consolidated operating income,” as CEO Doug McMillon put it in the earnings conference call. In October Wal-Mart predicted a 6%-12% decline next year in earnings per share—despite the company’s plan to reduce the number of shares in a $20 billion buyback. Wal-Mart’s hourly wage increases accounted for “approximately 75%” of the reduction, according to CFO Charles Holley.

Plummeting earnings wasn’t the plan, and presumably management took other steps it assumed would prevent the decline. The lesson is that America’s largest private employer—known for its ability to control costs and operate efficiently—lost profit because the company couldn’t offset a wage increase to $9 an hour by increasing prices, automating tasks or scheduling employees more efficiently.

Unlike the government, Wal-Mart can’t survive if it isn’t profitable. When profits decline, companies must react—or shareholders will. Wal-Mart’s stock suffered its worst single day in 25 years when the company predicted the earnings-per-share dip. The stock is still more than 10% down.

So at what point do minimum-wage increases force employers to eliminate jobs and reduce growth, hurting the working-class Americans the policy intended to help?

The answer varies by company and industry. For example, Apple is the most profitable company on the Fortune 500. With $39.5 billion in annual profit and about 97,000 employees, Apple’s annual profit per employee is $407,000. This is the amount Apple’s employees contribute to the success of the business, on average.

Apple could absorb a minimum-wage increase easily. Its employees are typically highly compensated and thus not many workers would be affected. Second, each employee produces a hefty amount of profit for the company, on average.

The situation is far different for America’s retail businesses, where a minimum-wage increase would be most deleterious. Combine every retailer, restaurant, supermarket and retail pharmacy company in the Fortune 500 as a proxy for the retail industry. That is more than 20 companies, including Wal-Mart, Target, McDonald’s, Starbucks and Walgreens.

The total adds up to $36.4 billion in annual profit (about $3 billion less profit than Apple alone), 5.8 million employees (about 60 times as many as Apple employs) and annual profit per employee of $6,300 (1.5% of Apple’s profit per employee).

How would a minimum-wage increase affect the retail industry? According to the Bureau of Labor Statistics, the average hours worked a week in the retail trade sector is 31.5. Assuming an employee earns the current minimum wage of $7.25 an hour and works only 30 hours a week, an increase to $9 an hour would result in an annual wage increase of $2,730.

Generally, highly compensated employees contribute more to a company’s success than minimum-wage employees, who are often less experienced and entry-level workers. But even assuming that minimum-wage employees contribute $6,300 on average to a business’ success, an increase of $2,730 a year would decrease the profit per employee by 43%.

That makes those jobs less valuable to the company and creates an incentive to eliminate positions. Not surprisingly, the Congressional Budget Office found that increasing the minimum wage to $9 an hour would cost the economy about 100,000 jobs.

At $10.10 an hour, these employee would make $4,446 more a year, decreasing profit per employee by 71%. At this level, the CBO found that the economy would lose about 500,000 jobs.

At $12 an hour, the employee would make $7,410 more a year resulting in a loss per employee of $1,110, eliminating the employee’s entire contribution to the company’s success. At $15 an hour, the employee would make $12,090 more a year, resulting in a loss per employee of $5,790.

There is no CBO estimate for the job losses if the government makes entry-level labor so expensive that companies actually lose money by having such employees on staff. The potential harm seems self-evident.

Both these averages and Wal-Mart’s experience indicate that retail businesses would be unable to absorb such labor-cost increases absent dramatic price increases or severe cost-cutting. With low inflation and the economy growing at an annual average of about 2.2%, dramatic price increases are unrealistic. Most businesses would turn to slashing costs, and hardest hit would be the most vulnerable among the working class.

With the percentage of people working or actively looking for work hovering at lows not observed since the 1970s, does it make sense to use the force of law to drive up the cost of employing working-class Americans? Instead of creating a living wage, the fight for dramatic minimum-wage increases could leave millions with no wage at all.