The Era of Poverty Wages Is About to End. Here's Why

February 24th 2015

Mark Provost

Following years of nationwide protests and strikes, Walmart recently announced they will raise wages for 500,000 associates to $9/hour immediately and $10/hour starting in February 2016. The company's pay increase was welcomed by workers and union organizers and even prompted a warm response from President Obama who called Walmart's CEO, Doug McMillon, to congratulate him.

While many activists recognize the improvement, they still argue that Walmart can afford to pay a living wage closer to $15/hour. Earlier this week, retailers T.J. Maxx and Marshalls followed the lead of Walmart, announcing they would also increase their employees' minimum pay to $9/hour. Carol Meyrowitz, the CEO of TJX (which owns both companies), said in a statement: "This pay initiative is an important part of our strategies to continue attracting and retaining the best talent in order to deliver a great shopping experience for our customers, remain competitive on wages in our U.S. markets and stay focused on our value mission." 

The decisions of Walmart and TJX signal that the poverty-wage business model -- which prospered for decades -- is approaching terminal decline.   

Walmart's decision also wasn't completely unexpected. CEO Doug McMillon telegraphed the company's intentions to the media after nearly a year of internal analysis. This is the important point to understand: Walmart's move is a victory for workers -- but it is not a concession to them. Walmart decision is not necessarily based on a new moral vision, but rather a rational business decision. 

Walmart versus Costco.

Walmart ushered in the era of big-box chains in the 70s. Their low-price/low-wage business model allowed them to become the world's largest retailer and the nation's largest private employer. But in recent years the company has struggled. Walmart suffered six consecutive quarters of flat or declining sales and lowered next year's revenue and profits estimates. Meanwhile, one of Walmart's largest competitors, Costco, reported a 6 percent increase in same-store sales. By contrast, Walmart's same-store sales have struggled to stay above 2 percent.  

Costco credits higher customer satisfaction and profit margins to their employees, who are paid much more than other retail workers. Costco employees earn $15-20/hour, are provided healthcare benefits, and 90 percent are covered by retirement plans. Costco can pay workers significantly more than Walmart and still remain competitive because their turnover is extremely low. Costco's turnover is 17 percent overall and 6 percent after one year's employment. By contrast, turnover at Walmart is 44 percent a year, which is close to the industry norm.  University of Colorado professor Wayne F. Cascio wrote, in the Harvard Business Review, that Costco has upended industry dogma: "These figures challenge the common assumption that labor rates equal labor costs. Costco's approach shows when it comes to wages and benefits, a cost-leadership strategy need not be a race to the bottom." 

Costco isn't the only company to realize the benefits of compensating workers well. Kip Tindell, the CEO of The Container Store, pays his 6,000 retail employees nearly $50,000/year. Tindell told the Wall Street Journal that his company's excellent pay allows them to attract and retain the most talented workforce: "One great person can easily do the business productivity of three good people...You save money, the customers win, and all the employees win because they get to work with someone great." Tindell was recently named chair of the retail industry's most powerful trade group, the National Retail Federation, though he says his views are not shared by the NRF, which has long opposed and lobbied against raising the minimum wage. However, Tindell's position is more common among employers than assumed. A Harris poll from September 2014 found 70 percent of employers who are currently hiring also support an increase in the minimum wage.

Fast food chains are seeing the same result.

Like big-box chains, the fast-food industry also built its fortunes on poverty wages. But that too might change. McDonald's is struggling with declining same store sales and profits over the last 6 quarters. In fact, 2014 was one of the worst years for McDonald's on record as profits plunged, it was voted "the most hated company," and the CEO abruptly resigned. Meanwhile, burger joints In-N-Out and Shake Shack, which pay far above the industry average and provide benefits, have seen impressive sales growth and garnered positive media attention. 

The benefits of raising the minimum wage extend beyond the corporate bottom line to include entire communities and state economies. A San Francisco bookstore recently made headlines by saying it was closing its doors after 20 years because the owner claims he cannot afford to pay the city's new, higher minimum wage, which was approved by voters in November. Conservatives seized on the story to support their long-held claims that raising the minimum wage hurts small businesses and kills jobs. But this might be the exception rather than the rule. San Francisco has had one of the highest minimum wages in the country for ten years and has enjoyed faster job growth than any other big city during that time, according to data from payroll-processor Paychex and research firm IHS. Similarly, Washington state has long had the highest state minimum wage in the country ($9.32) and boasts the nation's fastest job growth

Companies that pay workers well are stealing market share from their low-wage competitors. Cities and states that have raised the minimum wage are enjoying the nation's fastest job growth. The lesson is becoming increasingly clear: paying poverty wages is not only dubious morally but a flawed economic strategy.