Several Companies to Raise Minimum Wages

In recent months, three large retailers including Wal-Mart, Target and T.J. Maxx have announced an increase in the minimum wage paid to their employees.  Other retailers who also pay above the minimum wage include The Gap, Costco, IKEA, REI and Whole Foods, to name a few.  For perspective, the current minimum wage is $7.25.  Wal-Mart, Target and T.J. Maxx are now paying $9 per hour and this level is expected to rise to $10 per hour within the next 12 months.

We view these developments as positive but taken as a whole, not likely to have a measurable impact on our economy.  Yet, this move is reflective of the following:

As our economic recovery continues, hiring is picking up and as expected, the unemployment rate is falling.  As a result, the labor pool is beginning to shrink.  Given the high cost to attract, train and retain workers in an industry beset with high employee turnover, retailers have found that paying a higher rate than the minimum wage makes economic sense.  Not only can they attract a higher skilled worker, the employees’ length of employment is generally longer.

Unfortunately, oftentimes these jobs do not result in full-time work.  Instead, they may be seasonal employees and work for only a few months out of the year.  Alternatively, they may be employed throughout the year but work less than a 40 hour a week shift.  For illustration purposes, below are the salaries of a full-time employee working a 40 hour week and 48 weeks out of a year.  Let’s assume a part-time worker makes 50% of a full time employee.  Let’s also recognize that many of these positions may have limited benefits.

                                      $7.25                                       $8.00                               $9.00                            $10.00
Full-Time          $13,920                                 $15,360                         $17,280                         $19,200
Part-Time            $6,960                                    $7,680                            $8,640                            $9,600

This compares to poverty thresholds suggested by the U.S. Department of Health and Human Services:

# People in Household                                             Guideline

1                                                                                             $11,770

2                                                                                             $15,930

3                                                                                             $20,090

4                                                                                             $24,250

During the last recession, many highly skilled and experienced workers lost their jobs as companies downsized.  For purposes of discussion, let’s assume that on average, these workers were making $50,000 to $100,000 per year, if not more, and oftentimes had great health care insurance and other benefits.  As these jobs are lost and replaced by jobs that pay minimum wage, one can quickly see that our economic recovery, while solid, may not be as robust as the monthly statistics may suggest.

As a nation, much needs to be done to foster higher paying jobs, and providing the opportunity for individuals to find meaningful employment that can sustain a respectable quality of life.

All questions or comments are welcomed.

Christopher J. Kress, CFA®