Walmart: The economic cost of social wage hikes …

Earlier this year, CNN reported (and editorialized):

Retail workers have just scored an unprecedented win against a retail giant.

Walmart, the nation’s largest private employer, announced that it will raise the wages of approximately 500,000 of its employees by lifting its base wage to $10 by 2016.

To be sure, Walmart’s announcement is an impressive development in the fight for better wages.

It’s a step in the right direction, but not enough.



Let’s fast-forward to this week …



What happened?

Wal-Mart suffered its worst stock decline in more than 27 years after predicting that profits will decline 6% to 12% next year.

Why the drop in earnings?

“Stagnant growth” due to a slow economy and share losses to online retailers and, oh yeah, much higher labor costs.

Wal-Mart has been pumping money into its workforce and e-commerce capabilities in a bid to reignite stagnant sales growth.

The company raised its base employee wages to $9 an hour in April and plans to boost hourly pay to at least $10 next year.

The effort, combined with an expanded training program, added about $1 billion in costs this year and $1.5 billion next year. Source

In other words, the increase in wages wasn’t accompanied by a productivity increase …. sales per employee declined.

That’s not a social observation, it’s an economic observation.

You can’t blame the employees for the “structural”  sales decline, but it does impact them.

How will management get profits moving upward again?


First, the company said that it will slow the pace of new store openings.


Fewer new stores means less hiring, slower growth in its labor force.


Second, Wal-Mart’s CEO said that the company would be “restructuring its portfolio of businesses”.

English translation: more emphasis on labor-light online sales and less emphasis on labor-intensive brick & mortar.

So, of course, the company will be sorting through its portfolio of stores: “rationalizing” employee headcounts and shuttering unprofitable stores … many of which were marginal before the wage hikes and unprofitable after.


Put it all together and you get a predictable outcome.

Jack up wages without an economic rationale – higher productivity, stronger growth —  and eventually the piper gets paid.

Surviving employees get fatter paychecks … but other employees lose their jobs.

That’s the way it works.


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