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Shopping Centers Today -> September 2007
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U.S. RETAILERS PONDER IMPACT OF WAGE HIKE
It took 10 years and seemingly endless wrangling in Congress, but the U.S. minimum wage was finally raised by 70 cents in July, bringing the federally mandated base pay to $5.85 an hour. The big questions now: Who will notice the difference, and when?
Many economists and retailers believe the impact will be relatively modest for now, since 30 states and the District of Columbia already have their minimum wage above the new federal level. Besides, the increase “is very marginal, a tiny incremental amount,” said Richard Hastings, vice president and senior retail analyst at Bernard Sands LLC, a New York City retail research firm.
The impact seems sure to intensify, though. The July increase was the first of three annual raises that will eventually bring the federal minimum wage to $7.25 by July 2009. When the final increase kicks in, the existing minimums will be superseded in 35 states. Measured another way, by the fall of 2009 some 12.5 million workers will have gotten a raise, according to the Economic Policy Institute, a labor-backed think tank.
Still, “the fact that it is being phased in over three years will help to lessen any overall impact,” said Rob Green, vice president of government and political affairs at the National Retail Federation. “We thought that was a positive approach by Congress.”
Analysts say the initial increase will most affect independent retailers and chains with a heavy presence in lower-wage states, most of which are in the South and the Midwest. The impact will be muted, they say, on the larger, national chains, many of which already pay above minimum wage, and on chains with a large urban presence, where competitive pressures keep wages relatively high.
“The places that will feel the largest impact are those that were below the federal level,” said Green. “In places where it was higher, employers already adjusted. Within the retail industry, the impact is hard to quantify, but smaller specialty stores would probably feel the largest impact.”
Also likely to be hit are national retailers that employ large numbers of young people, many of them part time. Executives of the teen-centric Abercrombie & Fitch, for instance, told analysts in a May conference call that they expect the initial increase to add $3 million a quarter to payroll costs. The stories were much the same on the conference calls of other teen-apparel retailers, such as Hot Topic and Pacific Sunwear.
But Hastings insists that even retailers with lots of minimum-wage workers will be able to offset the higher labor costs without much difficulty. “They will be able to make adjustments that will basically cause this to disappear,” he said. They can do so mostly through small staff cutbacks during peak hours and seasons, he suggests. “It’s very elastic. It will get washed away.”
Some analysts say the increase will bring an upside for discount retailers, such as Dollar General, Dollar Tree of Wal-Mart, all of which stand to benefit from bigger paychecks for their primary customers.
In fact, Wal-Mart CEO H. Lee Scott Jr. surprised industry observers in 2005 by calling for an increase in the national minimum wage. “We can see firsthand at Wal-Mart how many of our customers are struggling to get by,” he said. “Our customers simply don’t have the money to buy basic necessities between pay checks.”
In advocating for the increase, Wal-Mart, which pays its full-time U.S. employees about $10.11 per hour, came out against the position of the U.S. Chamber of Commerce, which strenuously opposed the increase. The Chamber of Commerce took the stance that the burden of a higher minimum wage falls disproportionately on the small businesses, the ones least capable of absorbing such an increase in labor costs. The organization said its own research indicates that 60 percent of small businesses would be unable to offset the higher labor costs.
To counter such objections, Congress added a sweetener for small businesses in the form of a $5 billion tax-relief package. The law extended the life of the Work Opportunity Tax Credit, which aids employers who hire disadvantaged employees, and increased deductions for small businesses making new purchases of equipment.
It seems clear that the first wage increase will cause little more than a ripple for most retailers. The Bureau of Labor Statistics says only 2.6 million people earned less than $5.85 an hour in 2006, and about three-quarters of those worked in service jobs, such as health care, landscaping and food preparation.
So who are those making minimum wage? According to a study by The Heritage Foundation, most are not the working poor but are instead young part-time workers; 52 percent of them are between 16 and 24. “They tend to live in middle-class households that do not rely on their earnings,” the study said. “A minimum wage hike, then, is a raise for suburban teen-agers, not the working poor.” | Current Issue December 2008 |