Why Did Walmart Raise its Minimum Wage?

Beginning April of this year, Walmart will bump its entry-level wage to $9 an hour, with an eventual increase to $10 an hour next year.  Protestors and living wage advocates are giddy – confident that their black Friday demonstrations, blocking traffic, yelling at shoppers and carrying misspelled signs frightened Walmart into paying up.  But this is probably not the reason.

Citizens can debate all day on what Walmart, or any other retailer, should pay its employees.  But what Walmart will not do is implement a policy that hurts its bottom line.  Thus, from an economic standpoint, there are a few caveats to a $9 wage.  Having read various commentaries as to the “whys” of the new wage policy, I cannot speak for Walmart, but I will presume the following:

  • Walmart will not pay an employee more than she is worth.  (Who would?)  This all goes back to basic economics.  In equilibrium, the wage is equal to the marginal product of labor, so at the point where the wage is greater than the marginal product of labor, workers will not be hired or may be layed off.  Simply put, Walmart may hire workers at $9.00 an hour, but may hire less than they would if they paid $7.25 an hour.
  • However, Walmart has probably determined that turnover, rehiring and training costs more than paying a higher wage.  Turnover is a common problem in the retail and service industries.  Thus, if Walmart hires better quality workers that will stick around longer, their training and hiring costs will fall.
  • The lowest-skilled workers will likely lose out.  The unemployment rate for 16 to 24-year-olds is over 12 percent.  If this age group, consisting of both high school students and college graduates, is applying to retail and service industries in a still sputtering economy, college graduates will be hired over high school students or high school graduates with no college degree.

For further analysis on Walmart’s decision, see Forbes, Bloomberg and Daily Finance.

 

 

Comments (3)

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  1. Brian Williams. says:

    Excellent post, Pam. So many people look at these business decisions and don’t realize they are BUSINESS decisions.

  2. Frank says:

    Great article, Pam. I agree that turnover has a large part of it. Costco is known for above average industry wages, and I think they aim to reduce employee turnover and therefore costs.

  3. Wes Baker says:

    “However, Walmart has probably determined that turnover, rehiring and training costs more than paying a higher wage. Turnover is a common problem in the retail and service industries. Thus, if Walmart hires better quality workers that will stick around longer, their training and hiring costs will fall.”

    Glad to see this mentioned as part of the calculus. Such dynamics get largely brushed aside in the debate around wages. Many things affect the bottom line in addition to the wage figure.

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