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How an Increase in Minimum Wage Could Affect Retail Profitability

The story of minimum wage in the United States is one of incremental yet halting progress. The first minimum wage standard was passed as part of the Fair Labor Standards Act, in 1938 at a rate of $0.25 per hour—long before the days of big-box retailers. Over the ensuing eight-plus decades, the rate has ticked up little by little, with the most recent increase bringing the federal minimum wage from $6.55 to $7.25 in 2009, where it has held ever since.

Historically, the current rate isn’t a great bargain for workers when adjusted for inflation—it’s a far cry from the late 1960s, when the federal minimum wage of $1.60 would be more than $12 in today’s economy.

The most recent minimum wage increase came on the heels of the Great Recession. And with the pandemic’s effects continuing to pose even greater economic hardship to a wide swath of American workers, momentum is building for another minimum-wage increase. The Biden Administration’s stimulus bill passed by Congress in March originally sought to increase the federal minimum wage to $15 per hour by 2025. Ultimately, this increase wasn’t included in the final bill, but the notion remains popular with two-thirds of Americans, and many progressives in Congress are determined to continue pushing for a raise.

Whether it ends up happening remains to be seen. In the meantime, many major retailers across America are planning for an increase by raising their own pay levels accordingly.

But while an across-the-board raise sounds like a winning proposition for workers, the realities of retail staffing have already provided a few cautionary tales. It’s a complex issue with strong arguments both in favor of, and against, an increase. Just ask the nonpartisan Congressional Budget Office, which forecasted that an increase to a $15 minimum wage would raise 900,000 people out of poverty, but also cost 1.4 million jobs.

Here’s a look at how the possibility of a minimum-wage increase is playing out across retail.


What do retail wages look like now?

The effects of an across-the-board minimum wage increase wouldn’t be distributed evenly across the country. More than half of states have minimum wage standards well above $7.25—Washington D.C. is already at $15, and California, currently at $14 for employers with more than 26 employees, will be there by 2023. A 2019 analysis by NPR concluded the functional minimum wage is actually closer to $11.80 per hour.

Wages for hourly retail workers fluctuate from market to market as well, but the national average for jobs like cashier ($11.15), stock clerk ($12.61), sales staff ($13.55) and customer service representative ($14.18) are all well above the current minimum wage as well, according to 2018 data from Statista. And some of these figures may in fact be suppressed by the retail industry’s reliance on younger, lower-paid or short-term hourly associates, obscuring the fact that hourly wages for more tenured associates could be even higher, according to an analysis by the National Retail Foundation. Add it all up, and a sweeping increase of the federal minimum wage promises to be far less damaging to the profitability of the retail sector as it would be to an industry like restaurants, where 55 percent of employees earn minimum wage or less‚ compared to 8.5 percent for sales jobs.


How some major retailers are preparing for $15 and beyond

Even before President Biden was elected on a pledge to boost the minimum wage, retailers like Best Buy, Costco and Target all raised their minimum hourly pay to the $15 mark last summer, while others like Home Depot and Starbucks announced significant boosts in compensation for their associates. At the time, analysts thought that the increases owed not only to the growing sense that a federal mandate would soon arrive, but that it was overdue, particularly in light of the risks front-line retailers were exposed to by the pandemic.   

But these raises also came with a cost, as some executives, particularly in the food and beverage space, prepared for the coming minimum wage increase by cutting costs, reducing hours or raising prices in the face of higher labor costs. Some major retailers also offset wage increases with changes to in-store operations—and the wage increases weren’t always popular with associates.


Higher wages, fewer shifts

As retail profit margins narrow—as might be expected to happen in such a $15-across-the-board scenario—some retailers have shown a propensity to simply make do with fewer workers overall, eliminating some higher-paying positions and replacing them with hourly associates. When looking at overall earnings, the effect has been pronounced: despite rises in hourly pay for associates, the average hourly wage earned by retail workers fell, according to one set of data reported in The Washington Post

Target is among the retailers to pre-emptively boost its minimum wage to $15 per hour. But according to one report by CNN, the dollar-amount raise yielded several examples of associates receiving smaller paychecks due to reduced hours, or a streamlining of in-store operations. Variable hours are part and parcel of the American retail experience, but a sudden, rapid increase in wages could sadly have unintended consequences for the bottom line of workers who can least afford them.


Lower margins, more effective employees?

Part-time hourly employees are those likely to be most impacted by a minimum wage increase. And they’re the backbone of retail: nearly 40 percent of Walmart’s workforce is part-time—it’s cheaper to employ part-timers, who don’t typically receive health benefits or paid time-off. But if retailers want to insulate themselves from the potential impact of a minimum-wage increase while also improving in-store operations, bypassing hourly wages altogether in favor of more salaried employees is one option to consider. It might not be for everyone, but some employers swear by the practice.

Full-time work means less-stressed employees and greater employer loyalty, which can translate into increased productivity and lower turnover. It likely isn’t the cheaper option from the outset, and would represent a sea change for some retailers who rely on seasonal employees and flexible scheduling. But in an environment where employee wages are increasing, fixed salaries can provide cost certainty for both employee and employer alike. 



Given the fractious state of American politics at the moment, the prospect of a comprehensive minimum-wage increase being passed through Congress seems unlikely… despite popular support and motivated progressive lawmakers.

But major corporations aren’t sitting around waiting for it to happen—many of the country’s largest retailers are proactively boosting hourly compensation in an effort to head off the impact of any eventual changes, or at least to help improve brand perception—if not profit margins.

Given the leadership on this issue from players like Costco, Target and potentially even Starbucks, the possibility of a minimum-wage increase negatively affecting the bottom line for retailers might be moot: it might already be the new reality.

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