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Blazing Wages Set Economy on Fire

By Linda McDonough on January 17, 2018

Don’t look now but wage inflation is on the rise.

Walmart’s (NYSE: WMT) news that it is raising the minimum wage is making big headlines. Many market seers are trumpeting the news as the start of a new upward and worrisome trend.

But retailers have been raising wages for some time. Just last February Walmart enacted a less publicized raise and Target bumped up its wages last fall.

These higher wages are simply a response to supply and demand and are a good thing for the economy.

Walmart is raising its minimum wage to $11. Benefits for new moms and new dads are being expanded. New parents can expect paid leave from 6-10 weeks. Some workers will also receive a one-time cash bonus of up to $1,000.  

CEO Doug McMillon focused on the company’s gratitude to its workers,

‘Today, we are building on investments we’ve been making in associates, in their wages and skills development. It’s our people who make the difference and we appreciate how they work hard to make every day easier for busy families.’

But he made sure to give credit to the recent tax cut:

‘We are early in the stages of assessing the opportunities tax reform creates for us to invest in our customers and associates…Tax reform gives us the opportunity to be more competitive globally and to accelerate plans for the U.S.’

But Walmart isn’t blazing new paths, this is its second wage hike in a year and follows many hikes by competitors.

Four months ago, Target (NYSE: TGT) announced an even more generous comp plan.  Not only did it increase its minimum wage to $11 per hour but it promised a steady ramp to $15 in the next two years.

Target CEO Brian Cornell focused on the human side of its pay raise,

“Target has a long history of investing in our team members. We care about and value the more than 323,000 individuals who come together every day with an absolute commitment to serving our guest,” says Brian Cornell, CEO and chairman.

Two years ago, Walmart began a program to improve pay for hourly workers.

The company increased the lowest wage for new workers to “at least” $10 per hour last January and introduced a company-wide pay raise. The hike in wages had nothing to do with lower taxes and received little notice.

The 2017 increase lifted average full-time hourly pay to $13.38 and part-time hourly pay to $10.38. The raise included a bonus too, just like this years. Clerks already earning more than the new rate received a 2% one-time payment. Someone earning $12/hour full-time enjoyed a bonus of roughly $500.

The U.S. has been close to full employment for some time, yet wage inflation has been muted. Data from the government labor division notes that average hourly earnings rose a puny nine cents in December.

Full employment is a term describing a labor market in which almost everyone able and willing to work has a job. It has taken years for the U.S. to reach this level. Only after months of low unemployment did discouraged workers re-enter the workforce. The increase in the number of workers has helped the economy reach this metric.

And when almost everyone capable is working, wages begin to rise.

Wages have already been jumping for more skilled laborers. A boom in building matched with back to back hurricanes soaked up any idle construction workers. Industry sources note that wages for these workers rose 3% in December and are moving higher as employers try to lure new workers.

It makes sense that wage inflation is finally filtering down to retail associates. As wages rise, workers move up the food chain to better-paying jobs. Part-time hourly paid stints are the easiest for new workers to access. However as higher paying, more rewarding opportunities show up, these workers are the first to leave.

Higher wages will be the icing on the cake for the U.S. economy. I’ve been bullish on the retail sector for several months and believe most of these pay hikes will be funneled back into consumer goods.

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