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What Retailers Said Then Reveals Itself As False

May 20, 2015

(From 1997)

The latest proposal to raise the $5.15 wage floor by $1 has retailers in a difficult spot.

With labor among the industry’s highest expenses, following inventory, it is strenuously objecting to any further increase, yet its usual arguments that higher payrolls will cost jobs and close stores have lost some weight in the current economic boom.

mmwageRetailers are riding the high tide of the current economy. According to Labor Department figures, department stores’ employment in May was 100,000 jobs above a year ago, and the overall unemployment rate is at a 28-year low of 4.3 percent. The situation has employers scrambling for workers and has forced many to enhance benefits packages and pay entry-level workers more than the current $5.15 minimum.

Kennedy is banking on election-year momentum to propel his idea through the House and Senate and to the White House, where President Clinton is eager to sign it into law. Aides to Kennedy say he may attach the minimum wage increase to the bankruptcy reform measure now moving through Congress.

“It’s like retailers are arguing with a full pocketbook,” said Irwin Cohen, managing director of consumer business practice at Deloitte & Touche.

“But we can’t assume the economy will stay like this forever. I’m not going to predict when the economy will turn, but at some point we’ll have a downturn and another increase will have an impact.”

The biggest argument that Morrison Cain, vice president for legal and public affairs with the International Mass Retail Association, makes against the proposal is that the wage floor was last raised less than one year ago, in September 1997.

“We just did it,” Cain said. “It’s too soon. We should give it a rest and let employers digest the last increase.”

A recent study by the Economic Policy Institute, a Washington think tank, on the last wage increase, which benefited about 10 million low-wage workers, showed there was no negative employment impact. A study of employment trends since the first boost on Oct. 1, 1996, and the second on Sept. 1, 1997, fails “to find any systematic, significant job loss associated with the increases,” the report said. “Not only are the estimated employment effects generally economically small and statistically insignificant, they are also almost as likely to be positive as negative.”

Jared Bernstein, a labor market economist at EPI and co-author of the report, acknowledged that employer costs will rise with the proposed hike, but he noted, for the past 20 years, the wage floor fell in real terms: “If employers are complaining about a price increase now, they benefited from a decrease in labor costs over the long, lean years for minimum wage workers. Even with this proposed increase, the minimum wage is still 18 percent below where it was in 1979 in real terms. Employers are still well ahead of the game.”

Rebel Cole, chief economist at the Employment Policies Institute, another Washington think tank with a more conservative bent, is critical of the proposed hike. Despite recent job increases, they could have been even heftier if the last hike had not been made, he said.

“This is a smoke screen that proponents of a hike use,” he said. “They say that employment is up, but how much would it have gone up without the wage increase?”

Emanuel Weintraub, president and chief executive officer of consulting firm Emanuel Weintraub and Associates, in Fort Lee, N.J., predicts nothing but gloom for retailers if the wage is increased.

“Profits in retailing aren’t terribly high,” he said. “There is huge competition. If the wage is increased, the more efficient companies can pay it, but for the less efficient ones, it will erode their margins. When you pay the increase, it must come out of profit, increased efficiencies or a reduction in the head count. For most firms, they will try to inch up prices where they can.”

Weintraub estimated that employers’ personnel costs will rise at least 22 percent if the wage floor is raised, in part because of wage-based expenses such as state and local payroll taxes, Social Security, workers compensation and the Federal Insurance Contributions Act.

Also, fringe benefits such as vacation time and health benefits will rise incrementally as wages rise, he said. Weintraub also predicts a ripple effect that will force wages above the minimum wage up even more.

“Human resources will have to maintain equity,” he said. “People will moan and complain.” If a store is not unionized, Weintraub estimated, it could take up to a year for the wage increase to ripple through the ranks. Unionized stores would see it immediately, he said.

Many retailers pay above the federally mandated minimum wage. According to the National Retail Federation, the average hourly earnings for department store nonsupervisory workers in 1996, the most recently available, were $7.92.

Nonsupervisory workers in apparel and accessory stores earned on average $7.73 an hour, NRF said.

Wal-Mart, with 720,000 workers in the U.S. and 115,000 internationally the largest employer in the world, does not pay the minimum wage anywhere, a spokeswoman said. Even part-timers start at salaries above the wage floor, she said. The lowest hourly wage paid by Wal-Mart is 25 cents above the minimum federal requirements, and so an increase would force up beginning wages, she said.

Wal-Mart unlikely would pare employment or raise costs to absorb the costs, she said. Instead, the retail giant would attempt better management of scheduling and better productivity, she said.

At Sears, Roebuck & Co., where the benefits package has increasingly been enhanced to compete for workers in the tight employment market, a wage increase could mean fewer benefits, a spokeswoman said.

Recent additions to the package include tuition reimbursement and goal sharing that provides bonuses to every Sears employee and not just management.

She also noted that entry-level full- and part-time workers at Sears also are paid above the minimum wage.

“It would be difficult to quantify the impact,” she said. “We’d have to look at the entire compensation package.”

Steve Pfister, executive vice president for government affairs for the National Retail Federation, said it’s the ripple effect that will most hurt retailers operating on the margin of profitability.

“We have to protect those people,” he said, noting that they are primarily in the South, Southeast and upper Midwest.

Bernstein at EPI acknowledged that there is a ripple effect and notes it will affect those making from 75 cents to $1 above the current minimum.

“That’s a lot of people,” he said. “But a higher wage will lower inefficiencies such as a high turnover rate, since workers are less likely to move to a job that pays a few cents more. Turnover is a big problem for low-wage employers like retailers.”

The lower turnover also will cut training costs, Bernstein predicted.

“I don’t doubt that there are smaller firms and those closer to the edge that will go under. But companies like that are born and die all the time. Whether a higher minimum wage will make that happen more quickly, I doubt it.”

Cain at IMRA scoffed at this reasoning. “Obviously a stable, productive workforce is something employers value, but it doesn’t mean there is no cap on what they can productively pay,” he said.

Yet Weintraub sees a silver lining to the proposed hike. “Competitively, retailers are all in the same boat,” he said. “Wal-Mart and Kmart have the same set of problems. The competitive impact will be universal.”

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