In June, our blog talked about the steps taken by Wal-Mart and others to increase the minimum wage for many of their employees. One quarter later, we can examine early indicators of the effect of that decision. The 15% fall in Wal-Mart’s Q2 profits was attributed to the company’s efforts to overhaul its stores, investments in online operations, currency fluctuations, the hike in minimum wage to $9 (with plans to take it to $10 by Feb 2016) as well as the ongoing price wars with deep-pocketed competitors like Amazon. In response, Wal-Mart has asked some of its stores to schedule workers for a fewer hours in stores that reflect more hours worked than anticipated. Since this is the first action taken in response to unsatisfactory quarterly results, it begs the question of whether the pay hike is viewed as the main source of Wal-Mart’s problems on the Wall Street (See Figure 1 showing the falling stock price of Wal-Mart on NASDAQ)! Currently, Wal-Mart is trading around three-year lows after its stock fell 25% in 2015 – so the assumption is that workers’ hours are being cut to boost its bottom line.
In fairness to Wal-Mart, we must state that the negative reactions are blown out of proportion because the company posted $3.48 billion in profits from revenues which exceeded expectations at $120.23 billion. Short-term results, measured after one quarter, are not reasonable indicates of whether the company will reap the benefits of its strategic decisions down the road.
However, the Wal-Mart experience has added fuel to the debate of what the consequences of a much desired wage hike would really be, if a company is in no position to afford it! Imagine celebrating a wage hike only to find that your employer/client ended up with business losses and decided to cut the standard number of work hours or reduce the size of the workforce. If work hours, set at x, are curtailed and have become x-1, the worker’s actual income will actually be lower than before!
A hike in minimum wages has spawned a raging debate among the interest groups which seek to voice an opinion on the issue. According to the Bureau of Labor Statistics, workers under 25 represent about 20% of the workers paid the federal minimum wages or less, while about 23% of teenagers are in the same wage bracket. Some believe that these young minimum wage workers in America hail from affluent families, and will not suffer much discomfiture from the low wages; others point out that the workers who are not teenagers, with families to support, cannot be expected to live off such wages.
Let us take a look at the effects of a wage increase and look at the positive and negative effects of a raise in minimum wages. Each of the statements below faces a strong rebuttal from the opposite camp, and is mentioned here only as an argument against intrepid liberalism:
Surely, no one can really predict the outcome of such a move as the complexity and interdependence of economic events make for highly unpredictable outcomes. A mountain of data supports arguments for – and against – an increase in the minimum wage. If a raise in wages increases productivity, it may prove worth the effort and cost. Ultimately, it is a decision which can only be made by individual businesses, as a calculated business strategy and not in a protracted debate which offers no conclusion. Let us not forget that the laws of supply and demand are at the core of capitalism. Each company must establish strategies for attracting and retaining the most productive workforce. Would you agree?
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