Myth Debunked: Wal-Mart Can Increase Wages Without Costing Consumers

Wal-Mart strike 3

It is certainly not breaking news that many don’t agree with Wal-Mart’s (NYSE:WMT) current wage practices. The issue has been around for years, causing strikes, boycotts, and demonstrations, but the retailer has come under increased scrutiny recently just as it gears up for its lucrative holiday shopping season. Talk about bad timing.

In the weeks leading up to Wal-Mart’s Black Friday sales — or, really, Black Friday Eve, considering the retailer opens at 6 p.m. on Thanksgiving — the Bentonville, Arkansas-based company has been blasted for its labor violations, reported food drive, and unwillingness to allow workers time off to enjoy the holiday with their families. Rumors of a national boycott have already swirled, and if this Black Friday is anything like Wal-Mart’s last shopping Super Bowl, then the company could be in for some major retail drama.

Wal-Mart has had no choice but to recognize the criticism it faces for its wage rates, but the company has countered the outcry with two general responses: that the majority of its workforce is full-time and making more than $25,000 per year, and that increasing wages will hurt consumers because it will increase the prices on Wal-Mart products that customers currently enjoy. The former is still not proven, and the latter, well, makes you feel kind of ugly inside.

Are we ready to forego lower Wal-Mart prices so employees can enjoy higher wages? Many would say yes, but even for those who would say no, a recent report by Demos shows that the question doesn’t even have to be poised. According to the organization, ”Wal-Mart can invest in its workforce without costing customers a dime.”

Wal-Mart recently released its underwhelming third-quarter earnings, and from the report, investors learned that the retailer’s earnings were on track, but its sales, not so much. CEO Mike Duke blamed the flattened demand on a tough retail environment. However, Demos points out that Wal-Mart has the power and clout to begin changing the climate for the better by setting an example for a higher-wage, higher-sales path.

Wal-Mart caters to the lower- and middle-income classes, but what it neglects to recognize is that many of its own workers fit into that camp, and if they receive better wages, they wouldn’t only increase their productivity and improve the Wal-Mart shopping environment, they’d also spend more at Wal-Mart and inject money back into the company. But the retailer doesn’t see it that way.

It disagrees with employees’ modest wage goal — the equivalent of $25,000 per year in wages for a full-time employee — and would rather use that money to invest in its business future and reward investors. Demos reports that last year, Wal-Mart spent $7.6 billion buying back shares of its own stock — this was supposed to help shareholders see the values of their holdings increase even if the company’s performance was not changing.

The money benefited investors, but not the workers who are responsible for Wal-Mart’s productivity and bottom line. Investors won with the holdings value increase, but employees lost, as did Wal-Mart, as evidenced by its earnings.

Demos found in its research that if Wal-Mart agrees to raise its wages, “the economy would gain from the addition of economy-supporting jobs, taxpayers would pay less to subsidize Wal-Mart’s low-wage business model, and the company would no longer be the leading example of inequality in an economy being rapidly undermined by the shrinking middle class and lack of purchasing power.”

The argument is that if Wal-Mart used its $7.6 billion in share buybacks last year to instead invest in its workforce, customers, stockholders, taxpayers, employees, and their families would benefit. According to the most recent estimate of the number of Wal-Mart’s U.S. employees who are paid less than $25,000 per year — 825,000 low-paid workers — $7.6 billion could result in a raise of $5.83 an hour. That’s a significant jump and would mean that those working for more than 32 hours a week could bring home $25,000 per year. Employees and their families would be the biggest beneficiaries, but who else would win? Wal-Mart.

Demos claims that better pay would not only boost in-store workforce numbers — keeping consumers from complaining that Wal-Mart doesn’t have enough properly trained workers — but it could also improve the customer experience along with increasing worker productivity and encouraging employees to stay on the job and become experienced.

Wal-Mart suffers a high employee turnover rate, with nearly 500,000 employees leaving the company every year, but if it could keep more experienced people on its workforce, consumers wouldn’t be turned off by the lack of disorganization and shelves would be able to stay fully stocked.

In addition, higher wages would also benefit the U.S. economy. Wal-Mart is the nation’s largest private employer and thus sets a precedent for the employment model that too many others replicate. Suffering a pervasive low-wage model hurts America’s economic recovery, but if the company would agree to pay workers more, it is possible that others would follow suit — and the economy could reap the benefits.

As of now, Demos research shows that customers earn too little to generate the consumer demand that supports hiring. Because Wal-Mart’s employees barely make enough to make ends meet, they have little disposable income to afford the basics, lets alone stimulate the economy with extra spending. This results in businesses, including Wal-Mart, suffering lower sales and demand. Lower demand translates to deflated hiring efforts, resulting in higher unemployment, ending in an economic standstill. That doesn’t bode well for an American economy that still has yet to recover fully.

It doesn’t have to end that way, though. Just as the low-wage employment model leads to economic sputtering, a better-wage model could just as easily reverse that trend. If Wal-Mart were to pay its workers more, they would more inclined to spend, help bolster retail sales, and then help companies hire more and stimulate the economy – Demos argues that it is all related.

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