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Maximizing the minimum

22 May 2014 By Daniel Indiviglio

Wal-Mart Stores can win by leading the way on the minimum wage. The mega-retailer’s labor costs would rise significantly if the U.S. government were to increase the national pay floor. But the company also has far more low-wage customers than it does employees. That would translate into a net gain in earnings, according to a Breakingviews analysis.

President Barack Obama and his party want to raise the lowest hourly wage in the United States from $7.25 to about $10. Almost half of Wal-Mart’s 1.4 million domestic employees make less than the higher rate, according to PayScale, which crunches corporate pay data. Those workers earn on average $8.45 an hour on a 34-hour workweek. After accounting for payroll taxes, a higher minimum wage would increase Wal-Mart’s costs by about $2 billion.

At the same time, $10 an hour would mean about a quarter of its shoppers take home more pay, according to Breakingviews calculations, using data from Prosper Insights & Analytics. If they were to spend proportionately more – since the average low-wage worker’s pay would rise 20 percent, so might the amount that person spends at Wal-Mart – then the company’s revenue could increase by $13 billion.

Apply Wal-Mart’s gross profit margin and subtract the additional labor costs, and its earnings before interest and taxes would rise by 4.5 percent, or $1.3 billion.

In fact, the retail giant would break even if its minimum-wage customers increased spending only about 60 percent as much as their pay goes up. And that may miss others who would have more in their pockets. In addition to the 17 million Americans directly affected by a minimum wage hike, another 11 million would see their pay rise indirectly, the Economic Policy Institute reckons. That means more wallets opened wider. And low-income workers generally devote most of a modest wage increase on spending, probably favoring discount stores like Wal-Mart.

The company so far has shied away from the minimum wage debate. Preemptively paying its own workers more carries some risk but would undoubtedly put pressure on rivals as well as policymakers. And while Wal-Mart may want to avoid the political ramifications, the economic ones look compelling.


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