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The Ripple Effect of Wal-Mart's Wage Hike

Image: The Ripple Effect of Wal-Mart's Wage Hike
(Mohamed Ahmed Soliman | Dreamstime)

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Friday, 12 January 2018 03:17 PM Current | Bio | Archive

Wal-Mart joined other companies in announcing an employee wage hike and bonus program. Citing “the opportunities tax reform creates for us,” the retailer said Thursday that the measures “will benefit the company’s more than one million U.S. hourly associates.” 

Interest in this announcement extends well beyond the company itself. The move raises relevant questions for those seeking to predict the future economy: Does this event mark the attainment of a critical mass that makes it inevitable the corporate sector as a whole will pass on part of the relief from the recent tax-cut package in the form of higher wages?

Will it translate into greater short-term consumption and growth, as well as greater corporate investment and higher growth potential? And will it assuage those who are concerned about higher government debt?

Starting in February, the starting wages of Wal-Mart associates will increase to $11 an hour. Eligible full- and part-time employees will also receive a one-time bonus to be determined by their length of service (including $1,000 for those with at least 20 years). Combined, these two measures will add $700 million of expenses to the amount the retail giant had already budgeted for in its fiscal-year planning.

Yet the announcement was also met with criticism.

Some have noted that, for most employees, the one-off bonus will be less beneficial than a generalized increase in wages, and that the new starting hourly wage would only catch up to the mandated minimum that is already in effect in some states. And the change is occurring in the context of a tightening labor market that opens greater alternative employment opportunities for the company’s associates. In addition, the announcement came just a few hours before Wal-Mart said it would close 63 Sam’s Club warehouse locations.

Nonetheless, there are three reasons why the news is systemically consequential and, therefore, should be of interest to a broad range of economists:

First, Wal-Mart has joined the growing list of companies passing on some of the benefit from the tax cuts to employees in a public way. This will make it increasingly difficult for other financially viable companies to resist internal and external pressures to do the same. Indeed, we could be witnessing the initial phases of a generalized phenomenon that will help address, at least for 2018, a recurrent problem for the economy: stagnant wage growth.

Second, given a high marginal propensity to consume among many beneficiaries, such corporate decisions will likely lead to higher consumption overall. The durability of the resulting positive growth impetus would increase significantly if the higher aggregate demand were also to induce companies, many of them already both profitable and cash-rich, to expand their investment plans.

Third, a sustainable pickup in growth would help alleviate concerns about the higher government debt associated with the tax reduction for companies.

For years, Wal-Mart’s business plans and decisions were closely followed for insights about what lies ahead for the retail sector. Should this change provide another example, the U.S. would take a further step forward in seeking to reverse too many years of growth that has been too low and insufficiently inclusive.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include "The Only Game in Town" and "When Markets Collide."

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For years, Wal-Mart’s business plans and decisions were closely followed for insights about what lies ahead for the retail sector.
ripple, effect, walmart, wage, hike
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2018-17-12
Friday, 12 January 2018 03:17 PM
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