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October 2, 2014

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Wal-Mart’s ‘aha moment’ on wages

Wal-Mart last month announced a 21 percent drop in its fourth-quarter earnings for 2013, citing, among other factors, cuts to the federal food stamp program. William Simon, CEO of Wal-Mart U.S., explained that reductions in government benefits had eroded the buying power of his customers. On Nov. 1, Congress cut food stamps by $5 billion when it declined to renew a 2009 increase in the program, putting a dent in fourth-quarter spending just as the crucial holiday shopping period began.

Because Wal-Mart is the nation’s largest retailer, it is a sensitive barometer for changes in the economy, in this case the stimulative effect of government spending. Most economists agree that poorer people are more likely to spend any increase in their incomes quickly — the so-called accelerator effect — giving an immediate boost to the economy. With programs like food stamps, public-sector money churns through the system and helps keep the private sector humming.

The opposite is also true: Remove $5 billion from the pockets of low-income people and a place like Wal-Mart will feel it, especially since 20 percent of Wal-Mart’s customers depend on food stamps. After the November budget cut, the average recipient had $90 less a month to spend on discount goods and groceries. Attention, Wal-Mart shoppers: Congress just squeezed your wallets further, since the federal farm bill passed last month reduces spending on food stamps by another $8.7 billion.

But Wal-Mart is also the nation’s biggest employer, and here is where the economic trade-offs get interesting. The company employs 1.3 million Americans, most in low-pay “associate” jobs, many at wages low enough to qualify for, you guessed it, food stamps. That’s the great circular genius of Wal-Mart’s low wages and low prices: The superstores offer shoppers values they can afford, but by exerting its huge influence to keep wages low, the company also helps create a class of consumers who can’t afford to shop anywhere else.

Indeed, Wal-Mart’s creed, articulated by founder Sam Walton, is that keeping prices low for consumers is akin to raising their incomes. “Save money, live better,” was his pithy formula. But why not just raise incomes directly, with higher wages? Today, Wal-Mart is paying its workers less than the beloved patriarch did when he opened his first store in Rogers, Ark., in 1962. In that year, the minimum wage was the equivalent of $8.91 an hour. Today, the average Wal-Mart associate earns $8.81.

Wal-Mart is officially neutral on proposals to raise the minimum wage, including the plan put forth by President Barack Obama to increase the current $7.25 hourly minimum to $10.10 over two years and then index it to inflation. The company has both supported and opposed minimum wage increases in the past. But its own quarterly report sends a clear signal: A rising income tide lifts all shopping carts.

Other giant retailers have gotten the message. The Gap clothing chain recently announced that it would voluntarily raise its minimum wage for new employees to $9 an hour this year and $10 in 2015. Costco, one of Wal-Mart’s main competitors, supports the proposed national hike and itself pays a starting wage of $11.50 in the states where it does business.

The Congressional Budget Office recently issued a report estimating that 500,000 jobs could be lost if the minimum wage were raised along the lines of the president’s proposal. But that effect would likely only be temporary, as the estimated 16.5 million Americans who would see their incomes rise start to increase demand. And, the CBO noted, raising the minimum wage would also lift 900,000 working people out of poverty.

Pause on that a moment. You would think the term “working poor” would be an oxymoron in this country, but nearly a million Americans with full-time jobs earn so little that they fall below the federal poverty line for a family of three. For the good of those hard-working people — not to mention their own bottom line — Wal-Mart executives should be clamoring to increase the minimum wage. And while they’re at it, they might oppose any more cuts in the food stamp program that keeps their customers shopping for those rock-bottom bargains.

Renee Loth is a columnist for the Boston Globe.

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