Markets work. That’s the message from Walmart’s decision to raise its starting wage for 500,000 of its 1.3 million US employees to $10 per hour starting next year. That’s 37% above the statutory minimum of $7.25. No, the notably cost-conscious company, the largest private-sector employer in America, the world’s largest retailer, and a company that has prospered by making stuff available at prices that lower- and middle-income Americans can afford -- microwave ovens go for $44 -- didn’t suddenly turn wildly philanthropic. Or decide to bow to pressure from President Obama, who recently attacked office-supply company Staples for what he deemed indefensibly low wages in the face of its high profits, or from trade union organizers. Instead Walmart responded to pressure in two markets.
The first is the retail market in which it competes for customers. Until low gasoline prices fattened the wallets of its customers in the fourth quarter of last year and drove customer traffic up for the first time in two years, Walmart was struggling to retain the loyalty of its customers. In part, but only in part, this was because those customers had not benefitted significantly from the economic recovery.
The second market in which Walmart found itself at an increasing competitive disadvantage is the labor market, a disadvantage that affected its ability to compete for customers. The company found itself employing increasingly unresponsive and at times surly sales staff and poor in-store managers. Waiting times to get to cashiers became intolerable, food past its sell-by date was left on display, stores became dingy and unattractive, and staff were not deployed efficiently, leaving stores under-staffed at peak times. The better employees, from starting-level workers to store managers, were being lured away from Walmart by other retailers such as Starbucks, Gap, and Ikea as a recovering labor market drove the unemployment rate down from 10% in October 2009 to 5.7% last month. Hiring by businesses is at its fastest pace since 2000, and the job-vacancy rate at its highest level since 2001 as employers find themselves unable to find suitable workers to fill out their staffs.
It is true that by the end of this year nine states will have legal minima of $9 or more per hour, well above the federal minimum of $7.25 per hour. But because those statutory levels affect not only Walmart but all its competitors in those states, state action does not account for Walmart’s move, the company having broken with the National Federation of Retailer’s opposition to an increase in the federal minimum. The company feels that if all its competitors are forced to join it in meeting a higher minimum, its costs relative to those of its rivals will not increase, or its market share decline.
Nor can higher statutory levels in several states account for other changes announced by CEO Doug McMillon, completing his first year in the job. The company will improve scheduling so that workers -- “associates” as management prefers to call them -- wanting to work more hours will have a better chance of getting the call, while those wanting more flexibility will be accommodated. The path from entry level wages to a $15 per hour level is made clearer, and 75% of its managers started out as hourly employees. Some make as little as $35,000 per year, others -- not many, but some -- over $100,000.
Don’t misunderstand. Walmart remains a hard-nosed retailer that knows it has to keep costs down in order to keep customer traffic up. The cost of the new wage structure and of health-care coverage for domestic partners and vision problems, is partially offset by cuts in health-care benefits for 30,000 of its part-time employees, who can now avail themselves of subsidized insurance by registering under Obamacare. And average pay at Walmart still lags that of other retailers in some cases. Still, the cost of all of these changes comes to a tidy $1 billion per annum, less any improvement in sales and productivity that might come from what Mr. McMillon calls “associates … that are highly engaged about the business.” That’s not a great deal for a company with sales of $473 billion last year, and a shareholder pay-out of $12.8 billion, but neither is it petty cash.
Federal Reserve Board chair Janet Yellen is undoubtedly delighted to see Walmart forced to respond to a tightening labor market. But also a bit worried. She is under increasing pressure from Fed colleagues to begin raising interest rates in June. In my view, she remains a bit more reluctant than her colleagues to move quite that quickly. On Tuesday and Wednesday, members of House and Senate committees will try to extract from Yellen a clearer statement of the direction and timing of the Fed’s policy, which so far is to be “patient” before beginning to raise rates from their current level of zero. Republicans who now constitute a majority in the Senate as well as the House, and therefore chair the relevant committees, worry that failure to raise interest rates in the face of a tighter labor market will result in wage-push inflation. The inquisition aimed at certainty and clarity will fail -- not because the Fed chair seeks to obfuscate in the great tradition of one of her predecessors, but because the Fed has yet to decide how it wishes to balance the risk of too much too soon versus too little too late. Move too soon and too fast, and risk damaging the recovery; move too late and by inadequate increments, and risk setting off difficult-to-control inflation. Liberal economists such as Larry Summers, former Treasury Secretary, and Paul Krugman, columnist for the New York Times, would have Yellen hold the line until growth accelerates and wages of the lower paid are on a solid upward path; more conservative economists, such as Allan Meltzer, Carnegie Mellon professor and author of a magisterial two-volume history of the Fed, and the Manhattan Institute’s Diana Furchtgott-Roth, disagree. Meltzer says the Fed is “paying excessive attention to the near term,” and Furchtgott-Roth that “The Fed cannot use the slack labor market excuse any longer -- it’s time to start gradually raising interest rates.”
Republicans such as presidential wannabees senators Rand Paul and Ted Cruz are also demanding that Fed policy-making be subjected to congressional “audit” in the future. The Federal Reserve Transparency Act would sharply reduce the Fed’s independence from political pressure, something Yellen can be counted on to resist with unambiguous clarity and quiet ferocity. To applause from Krugman, who contends that “the whole audit-the-Fed thing is just an excuse to impose hard-money policies, based in turn on fantasies about currency debasement.”
The Fed’s monetary policy gurus will know more on March 6, when the new jobs report is to be released. So at its March 17-18 meeting the monetary policy committee will for the first time have the January and February jobs report and Walmart’s bow to the pressures of an increasingly tight labor market to mull over. Instead of a puff of smoke we will have to settle for Yellen’s post-meeting press conference as a signal of the Fed’s decision.