Roosevelt Institute | Cornell University

Minimum Wage Increase a Sign of Things to Come

By Victor ZhaoPublished March 13, 2015

Walmart, a company notorious for its ruthless commitment to cutting costs, has recently voluntarily decided to raise the minimum wage for its employees to $10/hour. The move is part of a growing national sentiment and campaign to increase the official minimum wage set by federal law of $7.25/hour.

Walmart's recent announcement that it will raise wages for its employees to a minimum of $10/hour was significant in several ways. For one, the move by the notoriously cost-efficient retailer to voluntarily increase wages is surprising to most, if not to all. Moreover, Walmart's sheer size and status as the largest employer in the United States means that its move has an impact not only on hundreds of thousands of its own workers, but potentially on its rivals' workers as well. Finally, it reflects a growing recognition nationally of the minimum wage as an economic issue and represents a small, but concrete, step towards progress.

As a company, Walmart thrives on its ability to control costs. Its ability to leverage market power to extract lower prices from its suppliers, and manage its operations efficiently to extract cost savings has contributed a large part to its success. On the surface, the announced wage increase seems to signify the opposite of that philosophy.  Raising the minimum wage for its employees will cost Walmart more than $1 billion a year and affect 500,000 workers.  With annual net income of $16 billion, the company undoubtedly can afford the wage increase, but any expenditure of that size will have a measurable impact on its finances. Indeed, Walmart's stock price fell immediately after the announcement, reflecting investor pessimism about the potential impact of the move.

Yet, Walmart's motivation for raising wages may not be entirely benign. While the federal minimum wage currently stands at $7.25/hour, states and localities across the country have begun instituting minimums much higher than that. Chicago, for example, has already instituted a minimum wage of $10/hour that is set to rise to $13/hour by 2019. New York State has explored raising the minimum wage to $10.50/hour, a move that is strongly supported by current governor Andrew Cuomo. Meanwhile, Seattle made headlines last year when it raised its minimum wage to a nation-high $15/hour. Faced with the need to adjust wages higher in those areas, and the possibility of that need arising elsewhere, Walmart's move may simply be preemptive in anticipation of future changes.

In addition, the public relations benefit to Walmart should not be discounted. Walmart has faced mounting criticism over the past few years for its employment practices and relentless focus on cutting costs at the expense of compensating its employees. In particular, many have claimed that Walmart is one of the biggest beneficiaries of the "food-stamp economy" because federal laws allow the company to pay its employees a low wage expecting them to rely on government programs like food stamps to cover their living expenses. The minimum wage increase may thus be a public relations move to rehabilitate Walmart's image in public opinion.

Finally, as the economy improves and the unemployment rate falls, the labor market will tighten as more potential workers find jobs elsewhere, making it harder for Walmart to attract new workers without increasing compensation. While federal minimum wage legislation has stalled in Congress despite strong national support, it appears that the private marketplace has responded to increasing sentiment that the minimum wage should be raised. Following Walmart's announcement, several of its competitors quickly followed suit, with TJX Cos, which operates TJ Maxx, Marshalls, and Home Goods, announcing a similar wage hike. It appears only a matter of time before the employee wages at the lower end are increased, whether by legislation or by natural market forces.