This year, some American executives who heeded loud calls for across-the-board wage hikes for America’s lowest-paid workers received a complimentary refresher course in undergad economics courtesy of the free market.
Take Dan Price for instance, the 31-year old CEO of Seattle-based Gravity Payments Systems who found out the hard way [2] that setting the pay floor at $70K comes with all manner of unintended consequences.
And then there’s Wal-Mart.
Earlier this year, the retail behemoth became one of several corporate heavyweights to raise wages for its meagerly compensated workers, around 500,000 of which are now set to receive at least $9/hour and $10/hour by Q1 2016. The move will cost somewhere around $1 billion this year.
Now one thing that should have been abundantly clear from the start is that if ever there were an employer that could ill-afford a $1 billion across-the-board pay raise without immediately making up the difference by either firing some employees, cutting hours, or squeezing the supply chain it’s Wal-Mart. After all, they’re the “low price leader”, and you don’t hold on to that title by passing labor costs on to customers.
Predictably, the company moved to extract more “value” [3] from its suppliers and when that didn’t prove sufficient, the folks in Bentonville brought in the “plumbers [4].”
But the story didn’t stop there. Late last month we highlighted [5] an internal memo circulated at Arkansas recruiting firm Cameron Smith & Associates which looked to be an attempt to prepare the firm’s employees for layoffs at Wal-Mart’s home office. Then, not a week later, Bloomberg ran a story [6] detailing the grievances of some senior Wal-Mart employees who suddenly realized [7] that although they may still be making more than their subordinates, the wage hierarchy had been distorted and that distortion had nothing to do with merit. As we put it, “higher paid employees don’t understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit which means that, for Wal-Mart, raising the minimum for the lowest paid workers to just $9/hour will end up costing the company around $1.5 billion if you include the additional raises the company will have to give to higher paid employees in order to retain their 'talents'and avoid a mid-level management mutiny.”
Well, don’t look now, but undergrad economics is rearing its ugly again at Wal-Mart as the retailer cuts workers’ hours in a desperate attempt to offset wage hikes. Here’s Bloomberg with more [8]:
Wal-Mart Stores Inc., in the midst of spending $1 billion to raise employees’ wages and give them extra training, has been cutting the number of hours some of them work in a bid to keep costs in check.
Regional executives told store managers at the retailer’s annual holiday planning meeting this month to rein in expenses by cutting worker hours they’ve added beyond those allocated to them based on sales projections.
The request has resulted in some stores trimming hours from their schedules, asking employees to leave shifts early or telling them to take longer lunches, according to more than three dozen employees from around the U.S. The reductions started in the past several weeks, even as many stores enter the busy back-to-school shopping period.
A Wal-Mart employee at a location near Houston, who asked not to be identified because she didn’t have permission to talk to the media, said her store had to cut more than 200 hours a week. To make the adjustment, the employee’s store manager started asking people to go home early two weeks ago, she said. On Aug. 19, at least eight people had been sent home by late afternoon, including sales-floor associates and department managers.
The employee said she’s covering an area once staffed by multiple people at one of the busiest times of the year -- the back-to-school season. On a recent weekday, she had a customer who had to wait 30 minutes for an employee to unlock a product the shopper wanted to purchase, she said.
The staff at a location in Fort Worth, Texas, were told that the store needed to cut 1,500 hours, according to a worker who asked not to be named for fear of being reprimanded.
So there you have it. Further proof that across-the-board wage hikes - like socialized medicine and free college - is a concept that sounds good when considered in a vacuum, but when implemented is subject to economic realities that conspire to make the end result look far less desirable than proponents might have imagined.
And therein lies the problem. Projecting how these "experiments" might turn out isn't difficult, which makes one wonder how policymakers and corporate management teams seem to get them wrong on a fairly consistent basis. Then again, when you live in a world governed by the principle that the cure for debt is still more debt, it's easy to see why some still believe, despite all the evidence to the contrary, that you can have your cake and eat it too.
