Why are Retailers Offering Higher Pay?

Of late there have been a number of news accounts reporting the decisions of some retail chains and fast food restaurants to boost their wage rates for lower skill and entry or near entry level workers.  Nationally, Walmart, Target, McDonalds, The Gap, Starbucks and IKEA—to mention a few companies— have decided to boost their entry level and lower rung employees’ wages.  Locally, Sheetz, Aldi’s, and across the state, Wawa stores have all announced plans to raise their lower rung pay as well.


Walmart recently announced that “All associates hired before Jan. 1, 2016 will earn at least $10/hour and new entry-level associates will continue to start at $9/hour and move to at least $10/hour after successfully completing the company’s new retail skills and training program known as Pathways.” Just last year Walmart announced the increase of entry level pay to $9 per hour.


On January 13th, Altoona based Sheetz released a statement saying, “The starting hourly wage for sales associates will rise to $10 this month, with shift supervisors making $13 and assistant managers $16.” The vice president of human resources said “the company believes that paying wages at the upper end of the retail scale is necessary to attract and retain the best employees.”


Some groups who push for higher minimum wages place the impetus for the voluntary wage hikes on threats by states to raise their minimum wage.  Attractive as that rationale might seem to those groups, it does not explain what is happening.


More likely, market forces and other considerations are the cause. Companies have offered various explanations, but the prime motivation seems to be a desire to keep good employees as the labor market improves and competition for reliable employees intensifies. One cannot rule out genuine concern for employee welfare on the part of employers in a competitive environment, but at the same time, companies must earn a decent profit to stay in business and continue to create and retain jobs and therefore cannot be more altruistically generous than the bottom line allows.


What is driving the recent spate of announcements regarding pay increases by large retail chains and fast food restaurants?  The foremost consideration is that high turnover rates are costly both in dollar terms and customer satisfaction when quality of service suffers because of poor performance by unmotivated, disgruntled or ill-equipped employees. When jobs are being created faster than the expansion of the pool of qualified applicants, turnover will rise as well; unhappy but skilled and motivated employees will be tempted to seek, and are likely to find, opportunities elsewhere. This is implicitly recognized by the statement of the Sheetz spokesperson quoted above.  No doubt Walmart, Target, and the other chains have recognized the turnover problem as a threat to long term profitability and are taking the steps they think necessary to stabilize and strengthen their workforces.  And pay is certainly a prime consideration for most employees.


And those concerns at these companies are well justified by recent labor market data.  Retail job openings, after falling dramatically by more than 30 percent between 2006 and 2010, have climbed sharply in the last three years and are now above levels reached before the late 2008 to early 2010 recession.  At the same time the “quit” rate of retail employees has also rebounded to near pre-recession levels after a 40 percent decline between 2006 and 2009.


The hefty rise in job openings and employee quit rates have no doubt been an impetus to the faster hourly earnings gains in overall retail, in the restaurant sector, and in general merchandise stores. In short, an increase in job openings reflects stronger demand and, in the face of a dwindling surplus of suitable workers, puts inevitable pressure on employers to offer more compensation, either in wages or benefits to attract and retain employees.  Failure to respond to the changing supply-demand situation could mean a more rapid loss of good workers than the affected companies can sustain and still maintain production levels and quality, especially as the need to increase output is strengthening.


In retail, hourly earnings climbed 5.7 percent from 2013 to 2015 after a more tepid gain of just 3.7 percent from 2011 to 2013 and the same in 2009 to 2011. Restaurant employees enjoyed an even larger 6.7 percent boost in earnings from 2013 to 2015 after a weaker 3.9 percent gain over the two years 2011 to 2013. And, general merchandise store workers did even better with earnings up 7.3 percent from 2013 to 2015 following a slight dip in the previous two years.  Given the share of the general merchandise market held by Walmart and Target, their decision to raise wages significantly no doubt played an important role in the recent sector wide jump in employee earnings.


The big questions at this point are whether the small non-chain companies will be able to match the compensation increases being offered by the big chains and what the localized economic effects will be.  Another key issue will be the extent of a labor supply response from people who have dropped out of the labor force or who have maintained little connection to the work force because of a paucity of good opportunities.  Indeed, the decrease in labor force participation following the great economic downturn of 2008 to 2010, along with negative effects of regulatory requirements on hiring of full time workers, combined to greatly impede labor supply growth. A sustained rise in compensation will likely induce some of these folks to return to the labor force, look for jobs and begin to limit the need for further hikes to attract workers.


Nonetheless, for the time being, the increase in compensation is good for workers and reflects stronger demand for products and services—a very desirable situation.  One thing is sure, notwithstanding the incessant calls and demands by some for minimum wage increases; there is no need for minimum wage hikes.  As economists have pointed out for years, not only are minimum wages not necessary, they are harmful interferences with competitive market forces and inevitably lead to less than optimal outcomes for the economy. They should be avoided.