international analysis and commentary

Why corporate America is rethinking minimum wage

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Over the course of just the last few months, a series of household names in corporate America announced, in an unexpected show of concern for rising income inequality, a curious change in policy: they would voluntarily raise the hourly salary they paid their lowest-ranking employees so that it would be clearly above the long-standing federal minimum wage of $7.25 an hour.

Among others, US-based retailers Walmart and Target said in March that their entry-level workers would start making at least $9 an hour, with Walmart pledging to bring that threshold to $10 next year. European furniture giant Ikea went a step forward, increasing pay to $10.76 an hour, and even to $13 an hour in certain areas that have particularly high costs of living, in 2014. Gap, which also owns the Old Navy, Banana Republic and Athleta brands, went to $9 last year and to $10 this year. It certainly wouldn’t be the first time in the United States that the private sector gets ahead of the federal government in terms of implementing more liberal policies, gay rights being an example of this. Yet, it might be naive to hail these corporations as protectors of the downtrodden. Obviously, a series of self-interested calculations underpin this move, making it more a consequence of how things have been turning lately rather than an engine of progress to come. Nevertheless, this remains an interesting development, for its actual impact on workers but, even more so, for what it tells us about the US economy.

“I don’t think it’s the private sector in general coming out ahead on this,” says David Cooper, an analyst at the Economic Policy Institute in Washington, D.C. “I think it’s the states, and municipalities, getting ahead of the federal government.” In the last couple of years, while Congress dithered, a number of state- and local-level laws have been implemented across the country, from California to Massachusetts, which hike the respective minimum wages. So much so that, today, this is already the reality in 29 states plus the District of Columbia. Additionally, 24 states and DC have further minimum wage increases scheduled for next year. At the same time, corporations, particularly in the retail and food sectors, have been under a lot of pressure by their workers, who have been successfully organizing one-day strikes across the country and launched the “Fight for $15” campaign to bring their battle for a living wage to the attention of the general public.

These factors help add context to the decisions of Walmart & Co. “If these companies want to be seen as good corporate citizens, they have to take a long hard look at what they are paying their workers,” says Cooper. “This has motivated a lot of them to raise their minimum wages.” But this is probably not the only driver behind such policy shift. Cooper identifies two more areas where increasing workers’ salaries makes good business sense: research has shown it might lead to cost savings as these companies might have a better shot at retaining their employees for the long run and therefore avoid having to invest in recruiting, hiring and training new workers all the time. “If you raise your pay, people are going to stick around longer,” he says. “You are also probably going to create a higher morale and get more productivity from your workers in return.” Finally, for mass retailers like Walmart, employees, who are generally of a low socio-economic status, also happen to match the typical profile of costumers. “It is likely that a lot of their staff shops in their stores,” says Cooper. “So when these companies are raising salaries among their lowest paid workers, a portion of that will probably come back to them in the form of more customers coming through the doors and therefore increased sales”. 

At this point, one would be right to ask: but why now? Why have all these corporations decided to do this today when it seems to be a good business practice regardless of the circumstances. Certainly, one reason is the pressure they’ve been under by workers’ protests and the resulting media coverage. But the fact of the matter is that, because states and municipalities are moving in the direction of gradually increasing minimum wages on their own, these companies are bound to find themselves legally required to pay them soon enough anyway, so they might as well move swiftly and get a round of positive press out of it. It is also very likely that an improving US economy has played as much a role in their decision as anything else. It might in fact be getting a bit harder, albeit slowly, to put one’s hands on the most qualified American workers for any one job now that unemployment is decreasing. “As these companies have to start competing to maintain staffing, they are going to have to pay higher wages to retain employees and attract the best hires,” says Cooper. “Though we might not be fully there yet, since the American economy is still displaying weaknesses, if this is the direction in which things are going, these major corporations might just be trying to get ahead of the curve and pick up the cream of the crop so to speak, before the labor market gets to a point where they are really fighting to fill vacancies.” Reportedly, since Gap implemented its minimum wage rise last year, it has been receiving a much higher number of resumes than usual, allowing its management to cast a wider net and become ever more selective.

All in all, then, this is a good sign. And it could help kick in motion a virtuous cycle, with more and more corporations feeling the heat and wanting to follow suit in order to continue competing. It might also contribute to dispelling the myth, held dearly in some conservative business circles, that the minimum wage actually undermines the bottom line by artificially increasing costs. If these companies can do it and survive, it’ll be hard for others to continue making the case that they must say no in order to stay afloat.

Nevertheless, we are still talking about a rather small step forward. “When you look for example at the fine print of a similar announcement made recently by McDonald’s, you’ll see that they’ve only raised their minimum wage in company-owned stores, which are 10% of all McDonald’s locations, so this move isn’t going to affect very many people,” says Cooper. Overall, even in the more generous instances, the pay increases put forward are far from dramatic. In some cases, particularly of large employers like Walmart, this decision will probably have an impact on workers and the overall economy anyway, because of the sheer number of people affected (by Walmart’s own count, half a million among that company’s ranks alone). But even $9 or $10 dollars an hour still only makes for a yearly salary of around $21,000 for a full-time worker, which remains below the federal poverty line for a family of four.

For all these reasons, concludes Cooper, “ultimately we are still going to need an increase in the statutory minimum wages, particularly at the federal level, if we are going to really see the broad based wage growth among low wage workers that is really necessary.” It is just possible then that this bet by big box stores, alongside with polls showing overwhelming voters’ support for these kinds of policies, might even help assuage the fears of Republican politicians, especially those that are running in the party primary for the 2016 nomination to the White House, prompting them to take a slightly braver stance and pave the way for a minimum wage hike in Washington as well.