Minimum Wage, Maximum Frustration

Wal-Mart (NYSE: WMT  ) is the largest private employer in the world. More people receive a paycheck from the company than live in Latvia, Qatar, Slovenia, or 96 other countries.

Wal-Mart has gotten as big as it has -- it will likely do half a trillion in sales this year -- because it's very efficient at what it does. Part of that efficiency means keeping wages low. According to market research group IBSWorld, the average Wal-Mart sales associate earns $8.81 per hour.

The heat over Wal-Mart's low wages turned up this month when Washington D.C.'s city council passed a bill requiring all new stores of at least 75,000 square feet and $1 billion in annual revenue to pay a "superminimum" wage of $12.50 per hour, up from the city's standard $8.25 per-hour minimum wage. Existing employers are exempt for four years. Wal-Mart currently has no stores within D.C. city limits, so the bill effectively forces any D.C.-based Wal-Mart stores built in the next four years to pay a minimum wage 50% above its competitors.

Wal-Mart, which had plans to open six stores in D.C., balked. "We will not pursue Skyland, Capitol Gateway and New York Avenue and will start to review the financial and legal implications on the three stores already under construction," spokesman Steven Restivo said. "This was a difficult decision for us -- and unfortunate news for most D.C. residents -- but the Council has forced our hand."

Now the awkward moment: D.C.'s city council proposed the bill to help provide its residents with a living wage. But Wal-Mart -- which said its six planned D.C. stores could have created 1,800 jobs -- will now be providing no wages to D.C. residents.

The winner: nobody. Minimum wage, maximum frustration.

We still don't know how this story will end. Wal-Mart could change its mind, or Mayor Vincent Gray could veto the bill. But this seems like a good time to discuss the merits of the minimum wage.

There are two sides to the minimum-wage debate. One says it prices low-skill workers out of the jobs market. That's what Econ 101 tells us should happen, and it explains Wal-Mart's experience in D.C.

The other side says these stories are anecdotal, that there's little evidence of employment falling when minimum wages are increased. Wal-Mart very likely can pay a $12.50 minimum wage while covering its cost of capital, and retailers like Costco (NASDAQ: COST  ) have shown that marginally higher wages can pay for themselves through lower employee turnover.

Each side has evidence to back up its arguments.

Economists Alan Krueger of Princeton and David Card of U.C. Berkeley looked at minimum-wage hikes in California in 1988 and New Jersey in 1992, and compared them to regions that didn't raise wages. The pair found that "increases in the minimum wage lead to increases in pay, but no loss in jobs."

Two economists from the London School of Economics looked at different data and used a different statistical technique to show that, indeed, raising the minimum wage does reduce employment, particularly among teenagers.

Andrajit Dube, then at U.C. Berkeley, looked at yet another set of data and found "strong earnings effects and no employment effects of minimum wage increases."

Three separate economists asked fast-food restaurants in Georgia and Alabama how they would react to minimum-wage increases implemented between 2007 and 2009. Fifty-three percent said increasing employee performance standards was very important to deal with the wage hikes. Twenty-nine percent said they'd cut weekly hours of some employees. Eight percent said they'd reduce headcounts.

Bottom line: It's a more complicated issue than we make it out to be.

Here's what we do know. Adjusted for inflation, the federal minimum wage (currently $7.25 per hour) has declined sharply over the last forty years:

Source: Bureau of Labor Statistics, Federal Reserve, author's calculations.

But the problem with a chart like this is that it masks differences in cost of living throughout the country. Some states and cities have their own minimum wages, but differences in pay are often swallowed by differences in costs. The Bureau of Labor Statistics' Cost of Living Index shows that it costs an average of 87% more to live in Honolulu than it does Cedar City, Utah, but minimum wages in the two cities are the same. Whether a worker finds a wage "fair," or how likely he or she is to find a minimum wage worth working for, varies wildly by location.

In the end, the problem with economists looking at the minimum-wage debate is that the issue is far more political than it is economic. And alas, politics being what they are, there are few agreements, and the only constants are frustration and disagreement. 

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Read/Post Comments (32) | Recommend This Article (15)

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  • Report this Comment On July 24, 2013, at 1:57 PM, wswall wrote:

    Too many Marxist.

  • Report this Comment On July 24, 2013, at 2:08 PM, Bob4660 wrote:

    I don't envy anyone trying to provide for a family working for the minimum wage, but to give a truer snapshot, the author should include SNAP funds, tax credits, housing assistance, etc..

    These programs have exploded recently and were not as common in the 60's when the relative min wage was at it's peak....

  • Report this Comment On July 24, 2013, at 2:39 PM, notthisagain wrote:

    The minimum wage has been increased many times. Each has had the reports of how it will destroy america. Instead of reporting on the maybe, might happen, estimated, projected outcome. How about a report on what really did happen each time the wage was raised. Did workers lose jobs, did companies go under, or was there more money being spent and increase in economy.

    I seem to remember a story of how Henry Ford was trying to figure out how to sell more cars. Solution raise the pay of his workers so they could afford to buy his cars.

    How about some fact check on the Ford story and the wage increase history.

  • Report this Comment On July 24, 2013, at 4:07 PM, Johny205 wrote:

    Employers need workers and they would just raise their rates if they had to and pass the cost onto the consumer. It's not like McDonalds is going to go out of business paying $10 per hour.

  • Report this Comment On July 24, 2013, at 4:35 PM, mdk0611 wrote:

    OK. There are conflicting studies on the impact of an increase in the minimum wage has on employment.

    Have there been any studies where the increase is 50%?

    And have there been any studies where the increase is applied to only 1 employer?

  • Report this Comment On July 24, 2013, at 4:49 PM, astuber9 wrote:

    Good point. 90% of liberal and conservative people see this as a black and white issue and it is not at all.

  • Report this Comment On July 24, 2013, at 5:58 PM, roger142 wrote:

    I wish some one would list how much Wal-Mart store managers and assistant mgrs make. Not every employee is part time.

    I think the DC law is unreasonable, but in an expensive area like that, Wal-Mart should be able to pay a couple dollars an hr more, and only raise prices slightly.

  • Report this Comment On July 24, 2013, at 9:44 PM, malclave wrote:

    I don't understand how DC's law is pertinent to the debate over whether a higher minimum wage is beneficial or hurtful.

    They effectively targeted a law against one company. If they really thought a higher minimum wage was a good thing, why didn't they make it across the board?

  • Report this Comment On July 24, 2013, at 10:26 PM, devoish wrote:

    Fact - whether it is from wal-mart, target or any store dc residents only need one roll of toilet paper a week , no matter who sells it to them.

    Right now they are buying it from someone who does not pass the savings of underpaying employees on to them.

    If walmart moves in they will pass only a portion of the savings from underpaying workers on to the rest of dc residents. - a good thing for most dc residents and walmart investors, and a bad thing for the displaced sellers of toilet paper.

    However, the food stamps, subsidized housing and cost of healthcare will be passed on to dc residents too, which will make it a worse thing for most dc residents, a good thing for walmart investors and a bad thing for the displaced toilet paper sellers.

    Ultimately idt does not create jobs either. It just moves them from their current location to wal mart.

    Best wishes,

    Steven

  • Report this Comment On July 25, 2013, at 8:20 AM, jeepshepard wrote:

    Washington DC's Council tries to force Walmart to pay $12.50 to their employees, but some part-time government employees working in DC make less than $10 an hour. Government hypocrisy at its finest.....

  • Report this Comment On July 25, 2013, at 8:44 AM, jeepshepard wrote:

    Washington DC's Council tries to force Walmart to pay $12.50 to their employees, but some part-time government employees working in DC make less than $10 an hour. Government hypocrisy at its finest.....

  • Report this Comment On July 25, 2013, at 8:54 AM, ETFsRule wrote:

    "And have there been any studies where the increase is applied to only 1 employer? "

    Nothing about this law is specific to Wal-Mart. The average size of a Target store is 174,000 sq ft.

    If Target, Costco, Dollar Stores, etc, can make money in DC - then so can Wal-Mart.

    This will be an interesting story, to see if they are able to adjust their business practices... or if they will simply roll over and give the DC market to their competitors.

    There are 2 solutions: smaller stores, or higher wages. It's not that hard.

  • Report this Comment On July 25, 2013, at 9:23 AM, TMFHousel wrote:

    ^ Existing employers are exempt for four years, which includes Target, Costco, etc. As far as I know the bill will only impact Wal-Mart, and specifically the six stores it planned on building in DC.

  • Report this Comment On July 25, 2013, at 10:17 AM, ETFsRule wrote:

    ^^^ The bill would also impact a new Lowe's store planned for DC:

    http://www.bizjournals.com/charlotte/blog/morning-edition/20...

    Lots of stores are over 75,000 sq ft. Other companies may also have stores planned for DC... whether they have been publicly announced or not.

    And in 4 years, the playing field will be level for all existing stores as well. Wal-Mart needs to stop crying about it.

  • Report this Comment On July 25, 2013, at 10:26 AM, TMFHousel wrote:

    ^ Thanks for pointing out Lowe's; I wasn't aware. A little digging shows it (and others) are seeking to have the bill overturned:

    http://www.washingtontimes.com/news/2013/jul/17/dc-retailers...

  • Report this Comment On July 25, 2013, at 10:32 AM, wswall wrote:

    In the sense of fairness and equality, Wal-mart should get to decide the pay of the DC government officials.

  • Report this Comment On July 25, 2013, at 10:57 AM, jlclayton wrote:

    If the DC politicians want to make this law fair to all employers, they should make it effective for all of the big stores at the same time. It's obvious that they want to take advantage of the fact that WalMart would have to start paying the higher wage now since their stores are not operating yet, which does put the corporation at a disadvantage compared to the other competition in the area.

    The change could be phased in for all employers over the next 4 years more gradually and the same effect would be realized. No company should have to be at a competitive disadvantage as a way for a city to fix it's welfare problems. If their solution is to raise the minimum wage, it should be applied to all companies the same.

    So far the other stores in the DC area have been pretty quiet about the change. However, it would be a different story if they knew they'd have to deal with paying a lot higher wage and still compete with new WalMart stores coming in and not have 4 years of a payroll advantage.

  • Report this Comment On July 25, 2013, at 11:48 AM, damilkman wrote:

    I think what was overlooked is that if wages increase for a worker, their value must increase. If you go into a COSTCO and compare the value that a COSTCO employee is generating verses a WALLMART employee it is night and day. This alludes to a previous FOOL article regarding motivation and employees who are engaged in their job. I can safely say that the COSTO model generates more engaged workers.

    The problem with the minimum wage is it never was intended to be something that you raise a family on. Mimimum wages are for the most basic and unskilled jobs. Fixing the problem by attempting to artificially increasing pay above value is not a fix. The problem is increasing the value and skill of the given worker.

    The basic problem with many minimum wage jobs is they are usually cost centers for a buisness. If the cost for the task becomes too much you either do without or you automate. I will give two examples that affected me when I first entered the labor force. Bottle returns use to be done by having a dedicated employee count the cans and bottles. When the minimum wage was increased, the employees were replaced with automated counting machines and the shoppers were expected to serve themselves. The 2nd example is I used to manually check users into computer stations at a university lab. My job was to verify they were a registered user, take their card, give them a plastic tab, and count the paper checkout requests. This entire task was automated because it eventually became cheaper to automate the task.

    In both cases my value to my employer was marginal. In both cases I increased my value such that I was promoted before my job became obsolete. I professed an ambition to become a grocery store stocker and impressed the grocery managers by working hard and volunteering to work crap jobs at night. When I was employeed at the computer lab I taught myself UNIX and picked up enough network skills to get a job in a Network Operations Center.

    For thoughs who are not motivated, the key to increasing wages is not force feeding a higher wage that will just make them obsolete. With higher wages must come higher value. There are different ways to do this. COSTCO does this by offering a higher wage to attract more skilled and motivated workers and I am sure more extensive training. Germany has an extensive vocational program. But dictating is not going to work as something has to be done on the back end to justify the wage increase. If the DC City Council is really interested in increasing peoples standards of living they have to figure out a way for employees on the bottom to become engaged, and motivated to increase their skills. But that may be hard if someone really has no interest in motivation. Then it becomes a task of tricking them.

  • Report this Comment On July 25, 2013, at 11:54 AM, TMFHousel wrote:

    <<I think what was overlooked is that if wages increase for a worker, their value must increase>>

    From the article:

    "Fifty-three percent said increasing employee performance standards was very important to deal with the wage hikes."

  • Report this Comment On July 25, 2013, at 2:07 PM, jlclayton wrote:

    damilkman, I wholeheartedly agree--too many people think that the minimum wage should ensure that they can raise their family at that rate. In reality, it was created so that companies could not take advantage of uneducated and unskilled workers by paying what would amount to a slave wage.

    Forcing certain companies to pay a higher wage means that their employees have no motivation to work harder to move up. It also means that the companies will pass this cost on to the consumer, thereby negating some of the benefits of getting a higher wage. If you pay someone $50 more per week, but they need to spend an extra $50 per week when they go shopping to buy the things they need, they haven't been helped.

  • Report this Comment On July 25, 2013, at 3:28 PM, kyleleeh wrote:

    <<I think what was overlooked is that if wages increase for a worker, their value must increase. If you go into a COSTCO and compare the value that a COSTCO employee is generating verses a WALLMART employee it is night and day. This alludes to a previous FOOL article regarding motivation and employees who are engaged in their job. I can safely say that the COSTO model generates more engaged workers>>

    This is a very good point. I used to know a lot of COSTCO managers and most of them bad mouthed Wal-Mart for not paying their employees enough. But I pointed out to them that several employees that they had let go off for low performance were not only working at Wal-Mart but getting great performance reviews. I know it sounds elitist but I think a portion of the population is always going to be lazy and incompetent, Wal-Mart provides a niche of jobs for people that employers like COSTCO would not waste their time with. It may not be much of a living but 50% dependence on government safety nets is better then 100% dependence.

  • Report this Comment On July 25, 2013, at 4:01 PM, hbofbyu wrote:

    While there is much to be said about Walmart efficiencies on a national or global scale, locally they are a net killer of jobs while siphoning money away from local business into corporate and shareholder hands. It's a fact that efficiencies kill jobs.

    Research conducted by Civic Economics of Chicago shows the amount of revenue returned to the local community by locally-owned, independent businesses. It shows that 52 percent of all revenues from local business go back into their communities compared to about 14 percent for national chain stores.

    The report also indicated that local eateries returned nearly 79 percent of revenues compared to just over 30 percent for national restaurants.

    In a consumption economy, there may be a point where improved efficiencies don't improve your lifestyle; they just make you fatter.

    Say no to Walmart.

  • Report this Comment On July 25, 2013, at 4:20 PM, Costanzawallet wrote:

    Same old threat, don't like your job at minimum wage, leave. Goodbye "great Wall of China" Mart, we don't need you. There are plenty of companies that offer good wages (Costco) and make a profit. Our downtown areas have been devastated by these mega stores, and we need to return to supporting our communities.

  • Report this Comment On July 25, 2013, at 6:49 PM, ScottPletcher wrote:

    This is absurd. A govt council shouldn't be SELECTIVELY enforcing confiscatory laws. (What about the "takings" clause of the Constitution, ultimately?)

    Just because "you think they can afford to pay more" doesn't mean you should be able to force them to. Wal-Mart replacing several smaller, higher-cost businesses with a larger one IS more efficient for the economy overall.

    How about this: ALL DC council members, being public representatives for DC, agree to pay EVERYONE that works for them, in ANY capacity (lawn service, baby sitter, etc.), $12.50 or *more* an hour? Plus sick time and other benefits, of course. How about it DC members -- do you really BELIEVE in this, or is it just grandstanding?

  • Report this Comment On July 25, 2013, at 6:51 PM, ScottPletcher wrote:

    They're mainly anti-Wal-Mart. Govt should NOT target specific businesses.

    Btw, I am consistent -- govt should also NOT subsidize ANY business. Personally, I'd end ALL govt subsidies to ANY business.

  • Report this Comment On July 25, 2013, at 7:00 PM, ScottPletcher wrote:

    @jlclayton and @damilkman:

    Actually, the intent of the Davis-Bacon Act of 1931, the first federal law AFAIK that required a minimum wage be paid to certain workers, was to get contractors to hire white workers instead of black workers. Really ... sad but true.

  • Report this Comment On July 25, 2013, at 7:04 PM, xetn wrote:

    The "minimum wage" equals unemployment for the people who have no work experience or lack education.

    An employer hires a new employee because he believes that employee will add more to profit that he costs. If the wage (price of labor) exceeds the marginal profit, he will not hire the new applicant.

    That is how minimum wage reduces employment.

    Fact: A "living wage" is a fiction make up by labor unions. In a free market, employees and employers would negotiate wages and there would be virtually no unemployment except for those that value leisure over income.

  • Report this Comment On July 25, 2013, at 9:56 PM, deadcarp wrote:

    If raising the minimum wage for big box stores is such a good deal how come unions are exempted?

  • Report this Comment On July 26, 2013, at 6:37 AM, devoish wrote:

    "If raising the minimum wage for big box stores is such a good deal how come unions are exempted?" - deadcarp

    So free people are not divided against themselves by government law.

    Everybody who does not like the local law still has the freedom to leave DC for greener pastures. When everybody leaves for lower wages and worse living conditions elsewhere the DC legislators will know they messed up.

    Best wishes,

    Steven

  • Report this Comment On July 26, 2013, at 8:04 AM, dbtheonly wrote:

    "In a free market, employees and employers would negotiate wages and there would be virtually no unemployment except for those that value leisure over income."

    Best joke of the day!

  • Report this Comment On July 26, 2013, at 8:47 AM, Jamesband wrote:

    Minimum wage goes up, every non minimum wage earners true pay value goes down. That should effectively take us from the current 1999 pay value to about 1993 or so. This is what happens when Ignorance elects Stupid into government orifice. What is the true cost to fold and hang cloths, tidy up a shelf, or ring someone out (at our WM you ring yourself out and they just watch now). My guess is whatever Target is paying, or Kmart/Sears. These are warm body jobs, not even close to the skills required to serve customers at a restaurant, or even a fast food joint, but that might be getting off topic a bit. Enjoy the weekend fellow Fools!

  • Report this Comment On July 26, 2013, at 11:10 AM, TMFHousel wrote:

    <<In a free market, employees and employers would negotiate wages and there would be virtually no unemployment except for those that value leisure over income>>

    The first minimum wage was set in 1933. Before it was implemented the unemployment rate was 25%, which I guess is pretty close zero.

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