A Whole Lot of Things Can Go Wrong

Last week, in “Economics 101: Wal-Mart Hikes Wages, Prepares To Fire 1000,” we highlighted an internal memo circulated at Arkansas recruiting firm Cameron Smith & Associates.

The letter, which was obtained by the Arkansas Democrat-Gazette, advised employees to prepare for an expected wave of layoffs at WalMart’s home office in Bentonville. “Please remember, these people are our neighbors and friends,” Cameron Smith tells his recruiters, “you have a skill that will be very much in need when this goes down.”

The retail giant has received quite a bit of scrutiny this year (more than usual), after abruptly and simultaneously closing five geographically distinct stores in April. The company cited “plumbing issues“, but many of the 2,500 or so affected employees weren’t buying it and neither was the chorus of Jade Helm 15 conspiracy theorists who suggested that the shuttered stores were being set up as internment camps as part of a wider government plot to institute martial law.

We had a different explanation for Wal-Mart’s “clogs and leaks”: Earlier this year, WalMart became one of several corporate heavyweights to lift wages for its meagerly compensated workers, around 500,000 of which are now set to receive at least $9/hour and $10/hour by Q1 2016. Meanwhile, the move by the country’s largest retailer to pay a few extra pennies to its (basically) minimum wage employees comes at a cost to the company’s suppliers because when you operate on the thinnest of margins in order to be the “low price leader,”someone has to pay for those wage hikes and you can’t pass along the costs to customers because many of your low-income patrons are operating from the same tax bracket as your low-paid employees. If you can’t extract enough pricing concessions from suppliers, well then, “creative” solutions must be found, so bring in the “plumbers.”

But the across-the-board wage hikes instituted in April will cost WalMart around $1 billion this year alone, and because it looks like making up reasons to close entire stores is now off the table thanks to the nation’s newfound fascination with plumbing, it might come down to good old fashioned layoffs in Bentonville, where higher paid workers will ultimately pay the price for the minimum wage hike.

All of this is set against a larger debate about the pay floor.

Pressure has grown in America for employers to pay higher wages to workers who cannot earn enough to make ends meet. Soaring rents and crippling student debt aren’t doing anything to help the situation. Of course there are unintended consequences that go along with raising wages.

The standard criticism is that forcing employers to pay more will simply result in layoffs and/or a reduced propensity to hire, but as we saw with Dan Price and Gravity Payments, there are a whole lot of other things that can go wrong.

For instance, higher paid employees may not understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit. Don’t look now, but that’s exactly what’s happening at Wal-Mart. Here’s Bloomberg:

When Wal-Mart Stores Inc. chief Doug McMillon announced plans to boost store workers’ minimum wage earlier this year, he said the move was intended to improve morale and retain employees.

Yet for some of the hundreds of thousands of workers getting no raise, the policy is having the opposite effect.

In interviews and in hundreds of comments on Facebook, Wal-Mart employees are calling the move unfair to senior workers who got no increase and now make the same or close to what newer, less experienced colleagues earn. New workers started making a minimum of $9 an hour in April and will get at least $10 an hour in February.

“It is pitting people against each other,” said Charmaine Givens-Thomas, a 10-year Wal-Mart veteran. “It hurts morale when people feel like they aren’t being appreciated. I hear people every day talking about looking for other jobs and wanting to remove themselves from Wal-Mart and a job that will make them feel like that.”

If Wal-Mart and other retailers don’t also adjust pay for veteran hourly workers, they could face rising dissent, said David Cooper, an economic analyst at the Economic Policy Institute. Typically, when employers boost their base pay, they also give raises to those making within $1 to $2 of the new minimum to preserve a type of wage hierarchy and keep their longer-time workers happy, studies show.

“Companies want to preserve some type of internal wage ladder, so to do that they have to adjust wages of folks above the new minimum,” Cooper said. If Wal-Mart doesn’t raise wages for these workers, “folks are going to leave or start complaining more vocally,” he said.

Of course raising wages for those “around” the new minimum (i.e. preserving the wage hierarchy) will cost money – a lot of it. “Giving additional raises to employees already making close to the new minimum wage would cost Wal-Mart about $400 million,” one researcher at UMass Amherst told Bloomberg.

So ultimately, raising the minimum for the lowest paid Wal-Mart workers to just $9/hour will end up costing around $1.5 billion if you include the additional raises the company will have to give to higher paid employees in order to retain their “talents” and avoid a mid-level management mutiny.

At the end of the day, it all comes back to one simple thing: this money has to come from somewhere, and since this is one instance where rising labor costs absolutely can’t be passed on to customers, it will need to be extracted elsewhere. Many workers clearly understand this: “…workers also said they suspect their hours are being cut and annual raises reduced to cover the cost of the wage increase for newer workers.”

Their suspicions would be correct. It’s economics 101. It’s also common sense. We’ll give the last word to forklift operator Sal Fuentes:

“They give you some but they are taking away something else. It has always been like that.”

Reprinted with permission from Zero Hedge.