Why wage hikes are actually good news for Wal-Mart

Wal-Mart and other discount retailers like Target are beginning to implement higher minimum wages for their employees. Analysts say that higher minimum wages lead to more consumer spending at lower income levels, which boosts the economy.

Nacho Doce/Reuters
A man talks on his mobile phone in front of a Wal-Mart store in Sao Paulo, Brazil (February 16, 2016).

When Wal-Mart began raising  wages for its lowest-paid workers last year, there was worry that it would impact the company's bottom line in the short term. But in the long run,  analysts say  such hikes will actually benefit low-cost retailers like Wal-Mart in the longer term. The reason? Workers will have more pocket money to spend -  and they will spend much of it at low-price stores like Wal-Mart. 

Some of the nation’s largest employers, including Wal-Mart and T.J. Maxx, are set to raise their minimum wages even higher this year.

Wal-Mart already hiked wages for its lowest-paid employees to $9.00 per hour in April 2015, but entry-level wages are scheduled to increase again in February, this time to $10 an hour, a pay raise that will total approximately $1.5 billion. Other big-box chains like Target and TJX -- the company that owns HomeGoods, Marshalls, and T.J. Maxx -- have followed suit and raised their own employees’ wages on a similar schedule.

Because of Wal-Mart's ubiquity, it can have a major impact on the economy at both the local and national level. Many of the retailers' stores are located in pockets of the country that are disproportionately rural and lower-income, and those areas are hit hard when Wal-Mart decides to close one of its stores.

Conversely, when Wal-Mart decides to raise wages, both the chain and its lower-income employees are benefitted. A wage increase provides more money for immediate spending power, which also gives them greater ability to spend at the very same discount stores, like Wal-Mart, that are providing them with higher wages. That trend then repeats itself at companies who compete with Wal-Mart for  workers. In the wake of Wal-Mart's announcement last year, several other major retailers enacted their own wage hikes. 

“Increasing the minimum wage puts more money in the pockets of precisely those people who spend it the fastest,” Dr. Wallace Hopp, a University of Michigan business professor, told Bloomberg.

Wal-Mart frequently gets criticism for low wages and poor employee benefits. It is one of the largest employers in the United States, employing approximately 1.4 million people at nearly 3,467 supercenters and 449 discount stores around the country.

Wal-Mart's wages are higher than the federal minimum, but lower than the $12.96  national average for full-time hourly wage work. Many Wal-Mart employees rely on federal assistance programs like food stamps and Medicaid to subsidize their small wages.

This has invited criticism that contends the government is footing the bill for large retail chains to pay their employees less than a living wage. A 2014 report by Americans for Tax Fairness found that it costs taxpayers between $904,542 and $1.75 million to provide federal assistance programs for employees at just one Walmart Supercenter.

When Wal-Mart announced that it intended to raise its employees’ wages last year, ahead of similar proposals in cities and states nationwide, it brought in a rush of good PR for the company. It remains to be seen whether this latest wage increase will bring in a similar wave of goodwill.

Still, the pay increases have not been well-received on Wall Street, at least in the short term. The retailer's shares slid by about 30 percent in 2015, and it projected its  earnings outlook for fiscal years 2016 and 2017 downward. The retail chain is focusing on improving its financial outlook this year by closing 269 stores globally, 154 of them in the United States.

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