What Walmart Giveth, It Taketh Away?
So Walmart has decided both to raise the minimum wage it pays its workers to $11/ hour and to permanently close some of their Sam's Club branches at the same time.
The raise is supposedly linked to anticipated benefits from the lower corporation tax rates they will face and other incentives brought about by the tax reform law, hence the trickling down of the benefits from the Corporations to the workers. However the tradeoff is not supposed to be seen in job losses still related to retail as that is supposed to expand as the higher after tax incomes that start to show up this year for households should lead to spending growth and higher retail sales.
This leads me to three questions and perhaps three observations to make...
The first question. Given the growing list of Who's Who among corporations reacting to the tax reform by promising higher wages and additional incentives to their workers makes me wonder, are these corporations doing their workers a favor, perhaps to boost morale? If not, it appears that they are suggesting an ability to deprive workers off their true hourly contribution and chucking it up to whatever government constraints are or were in place i.e. taxes etc.
Second question. Throwing around numbers like I have read in the Bloomberg article on this like $300 million and an additional $400 million in costs associated with this generous decision sounds laudable, but against what backdrop of benefits received from tax reform?
Third question. If a retail giant like Walmart does not appear to see immediate expansion in retail sales in its projection, what might we predict as the likely outcome from tax reform? Importantly, it appears instead that they have proceeded with a PR/ morale boosting/ signaling device, and tempered the cost with cost reductions elsewhere.
My first observation will be a reaction to the second question. A recent Bloomberg article reports that the effective tax rate for Walmart over the last three years was roughly 31%, and for a particular year the tax bill for Walmart was about $6 billion. So think about the benefit of tax reform that has reduced the statutory corporation tax rate to 21%. At that rate, Walmart only has to pay approximately $4 billion instead in taxes, so it saves $2 billion.
Now lets backup a little. Corporation tax rates under the old law were at 35%, it is obvious not too many loopholes were really closed with the tax reform other than a few deductions that have been eliminated. Besides there are additional incentives to perhaps reduce tax liability through immediate expensing, so it is very likely that the effective tax rate that Walmart will face from tax reform will be below 20%. This is a rate that is expected, from the permanence of the corporate tax rate reform, to continue until, and if, any new tax reform happens. So their savings will be more than $2 billion.
Now when you think of these savings, not even factoring in the savings from the Sam's Club closings, the numbers that suggest trickle down really are trickles... in drops. I have not even factored in the other incentives associated with a reduction on deferred foreign profit taxes that are repatriated back to the US. So the wage increases by Walmart and the many other corporations promising the equivalence of pittances to their workers relative to the benefits received from tax reform amounts largely to meeting PR expectations. This leads me to my second observation which is a reaction to the first question.
Ordinarily what workers get paid in a strict economics sense should be the competitive valuation of their contribution. So I do not have any qualms per se if the wealth does not even trickle down, that is, if workers are already being paid their true hourly contribution. The position of cashiers and stockers is largely where the minimum wage is being earned in the company. There is something to be said about the fact that it is not just the actual job done per hour but the "reliability" of the existence of a worker where and when needed that is perhaps overlooked in the payment equation.
There are many modern economic models that try to provide explanations for why businesses might pay workers wages that are higher than the competitive market wage. In large part these models try to address the fact that labor is not like capital, as workers can always choose their level of effort, and this level may actually not be easily observable by the employers so that employers may tend to pay them their workers higher than market wages to encourage them to raise their game to justify those wages, or they are paid the higher wages to discourage turnover or which they stand to lose if they are caught shirking, and are fired.
Let me suggest another theory, that is a combination of some of these given the exact actions taken by Walmart. It is possible to see that if people are laid off from Sam's Club that they might more readily look to find jobs first in a very similar establishment, so this creates a greater pool of workers with the basic capabilities and experience levels seeking employment at the now higher wages being paid. Existing workers will need to raise their productivity and do more tasks as required by them to "justify" the higher wages, or they will be replaced by a ready pool of candidates looking for similar employment. In short time, these productivity levels and additional tasks become the norm expected in that position and what we have instead is a wage rate that truly corresponds again to the assumed marginal hourly contribution.
Now my final observation, which corresponds to the third question, and hopefully follows from my second observation. If there is an expectation of sales growth then it is clear that Walmart expects to reap that by increasing productivity of workers on its now leaner overall retail operations, not necessarily by hiring more workers. What if the sales growth does not materialize? They still come out as winners. The cost to Walmart of this adjustment is still very very small and comes from the windfall received from tax reform. What about the benefits of tax reform? Walmart (and quite possibly other firms following similar strategies) come out as perhaps the only winners.