Everyday higher wages finally come to Walmart

Walmart’s decision to raise the minimum wage of 500,000 of its lowest paid employees to $9 per hour in April — and to $10 per hour from next year — is a sign of something stirring in the US economy that has not been evident for years. Employers have been under little pressure to increase the wages of lower-paid workers since 2007. The fact that the US retailer, along with Aetna, the insurer, is acting to recruit and retain staff is a positive surprise.

There are sound reasons for employers to pay employees wages on which they cannot merely get by, but thrive. Henry Ford’s introduction of the five-dollar day in 1914 was based on ruthless business logic. The auto pioneer, not known for his softness, wanted to curb turnover and ensure the consistent production of Ford Model T cars in a growing economy.

“Any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production,” wrote Alfred Marshall, the economist, in 1890. The stagnation of median wages over the past 30 years in industrialised economies including the US has not stopped them expanding, but it has caused strains.

The fact that employers are starting to increase the rewards to labour on their own, rather than waiting to be forced into it, is welcome. Governments have already been acting — nine US states passed a minimum wage rise last year and seven mandate an hourly wage of at least $9. The Labour party wants to raise the UK minimum wage to £8 per hour by 2020.

There is a legitimate role for minimum wages to prevent abuses at the bottom of the labour market, but employers are better able than politicians to decide what is best for their businesses. They may well raise wages to ensure employee commitment, lower staff turnover and ensure that investment in training pays off.

For societies, a more equal balance of bargaining power between workers and capital has benefits. Wages have steadily fallen in real terms since 2007 and this has particularly affected the low-paid in the private sector, crimping consumption and placing strains on social security systems.

Workers in industrialised economies have been affected for three decades by the growth in the global employment pool, with manufacturing and services being outsourced to emerging economies. Globalisation allowed companies in effect to move work from expensive countries to those where wages are lower, notably to China, India and Southeast Asia.

The rise in unemployment following the 2008 financial crisis exacerbated this effect. In countries with flexible labour markets, there has been no shortage of workers willing to take work at existing rates. There are finally signs of that changing. US average hourly earnings rose at an annual pace of 2.2 per cent last month, and Mark Carney, governor of the Bank of England, last week predicted that UK take-home pay would this year rise at its fastest rate for a decade.

Some companies are clearly trying to beat the trend, rather than waiting for turnover to rise. But investing in labour involves more than raising wage rates. It also means investing in training and productivity to ensure that output can increase together with pay. Even in tighter labour markets, that can produce a virtuous circle.

It has been a long time since many companies needed to think seriously about rewarding workers in short supply. It is still early days but, if Walmart is changing its approach, others will have to make plans.

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Letter in response to this editorial:

Statutory minimum wage prevents abuse of labour / From Sir Christopher Pissarides