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.

Business Owners for a Higher Minimum Wage? Say It Isn’t So

In a July 23rd  press release, a group calling itself “Business for a Fair Minimum Wage” calls for a three step increase in the Federal minimum wage from the current $7.25 per hour to $9.80 per hour by 2014 and then to index the rate to inflation beyond 2014.  Before laying out the case against a minimum wage and specifically a Federal minimum wage, it is instructive to look at the businesses who are ” signatories” to the call for “fair” (which means ever higher) minimum wages.

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Reaction to Saks Closing Announcement Will Be Telling

"Based on the current circumstances, we cannot justify such an investment since it is unlikely that we could achieve a reasonable return on the investment due to declining sales volume". This comment from a Saks Fifth Avenue spokesperson during an announcement the upscale store will be closing its Downtown location when its lease expires next September because it failed to gain a commitment for $10 million in improvements from the store’s landlord and the City. Perhaps this was too much honesty from the spokesperson in terms of trying to solicit taxpayer help.

The failure of heavily subsidized Lazarus and Lord and Taylor’s stores in Downtown during the past seven years has substantially lowered competition for Saks. The fact that the store still cannot make a go of it is very instructive about the shopping patterns in southwestern Pennsylvania.

How the City, the County and the state, react to the Saks announcement will be very telling. As short as a dozen years ago the development "vision" for Downtown was as a retail destination. In pursuit of that vision, several publicly funded schemes were put together to promote Downtown retail establishments. Should Saks close, Macy’s will be the lone downtown department store, a company that is reacting to economic conditions by downsizing its footprint, not asking for a subsidy.

If the owner of the building is not willing to meet Saks’ terms, why should taxpayers be on the hook? The apparently honest statement by the spokesperson that future sales will not justify Saks undertaking the needed investment is a clear signal to elected officials: they would be ill advised in putting tax dollars into this situation. In light of previous bad experiences with subsidizing retail, they would be incredibly tone deaf if they spend $10 million to prop up a store that caters to high income shoppers.

Macy’s is Downsizing-Not Asking for Government Help

Macy’s is reducing its Downtown store’s active floor space by 32 percent. Of course, employees are worried about possible job losses. This downsizing comes on the decades long trend toward smaller downtown retail operations. Since the early 1980s Horne’s and Gimbel’s have left, Kaufmann’s sold and downsized while heavily subsidized Lord and Taylor’s and Lazarus have come and gone quickly.

Meanwhile, Saks Fifth Avenue is telling City officials that it will need government financial help if it is to keep its Downtown store open. One can hope that after the horrible experience and financial losses Pittsburgh has suffered had in trying to prop up or grow Downtown retailing, and in view of the City’s own fiscal problems, elected officials will resist the temptation to waste even more money subsidizing an upscale retailer.

The encouraging part of the Macy’s downsizing story is that the store has not asked for government financial help to maintain its current size or to avoid possible employee cuts. Perhaps the company is being a good citizen expecting to pay its own way and to rise and fall on based on its own efforts and resources. Or perhaps the company simply has seen the pushback to the Saks request and understands the City and state are not in a position to subsidize retail outlets.

Not that there is ever a justification for subsidizing retail. Retail is driven by consumer spending. Helping selected retailers creates an unfair competitive disadvantage for non-subsidized retailers and produces no long term net increases in total sales. It merely attempts to redistribute where sales occur. As Pittsburgh has learned to its chagrin, fighting long term retail trends by throwing money at Downtown department stores is foolish. Too bad City officials refused to listen to folks who tried to tell them back in the mid 1990s what was going to happen if they embarked on a massive scheme of subsiding Downtown retail.

Saks Salvo Smacks of Past

Downtown Pittsburgh, September 24, 2010. The department store Saks Fifth Avenue has intimated that it needs help for renovation of its store, preferably from its landlord, but it would not turn down assistance from the City or its agencies, either.

"If it is important to the community for us to remain a viable retail presence in Downtown, it is necessary that the city and/or the landlord provide Saks an economic incentive for us to continue to operate" said the store’s spokesperson.

She also noted that "we are not looking to expand, but to comprehensively remodel both the interior and exterior of the store to meet the standards of both our customers and our design partners". The chain does not want to invest much in the building "because it’s unlikely there would be a reasonable return on investment because of reduced sales".

Downtown Pittsburgh, October 12, 1995. In a proposal outlining projects that would comprise the Center Triangle Tax Increment Financing District in Downtown, the Urban Redevelopment Authority (URA) noted that "the retention of a major department store in the downtown is considered to be very important" and a tax increment finance arrangement was critical to make the project viable. The development costs of that store totaled $78 million. Five years later the URA’s chairman noted that "…this store will become one of the most popular places to shop in a revitalized Downtown". Four years later it was gone.

It probably won’t come as much of a surprise that the store was Lazarus and is now a condominium project, which itself has received a fair share of public subsidy to help with its conversion. Is history repeating in Downtown?

Urban Planning Missed the Mark

The City development community is celebrating a big win today with the announcement that national retailer Target is going to set down roots in East Liberty after a seven year effort to lure the company began. There is a loan ($20 million) and a tax credit backed investment ($12.6 million) on top of $14 million in site development from U.S. Housing and Urban Development funds.

One official noted that "if we were able to stay on the short list during one of the world’s largest global recessions, I think that proves there’s a really good market in East Liberty".

What it might prove is that communities might be able to overcome the huge mistakes made by urban planners of decades past. East Liberty’s pedestrian mall was labeled as a prime example of "…Pittsburgh’s cockeyed urban planning" in a 2000 op-ed piece in the PG. Five years later when announcing plans for a pedestrian bridge near the development the head of the URA noted that the structure would go a long way toward "undoing 30 years of bad urban renewal".

Unfortunately there are no repercussions for bad urban planning or bad urban renewal, only vows to do better the next time.