Edward Harrison is the founder of the blog Credit Writedowns and is a finance specialist at Global Macro Advisors. Previously, Edward was a strategy and finance executive at Deutsche Bank, Bain, and Yahoo. He started his career as a diplomat and speaks German, Dutch, Swedish, Spanish and French. Edward holds an MBA from Columbia University and a BA in Economics from Dartmouth College.
One of the top news items today was an announcement by Walmart that it plan to raise the minimum pay for some employees to $11 an hour. US President Donald Trump is already touting this move on Twitter as “a result of our TAX CUTS & JOBS ACT!”. I think this is genuinely good news for Trump and the Republicans. It also is good news for wage rates more generally.
Here’s what Walmart did: the company announced that it will increase its starting wage for US-based hourly employees to $11. The retailer also said it would expand maternity and parental leave benefits. Walmart is also going to pay cash bonuses totalling some $400 million, with individual employees receiving up to $1,000. Bonuses will be based on seniority, with those who have worked for Walmart for 20 years getting the full $1,000 bonus. Walmart has about 2.1 million employees worldwide. 1.4 million of those are in the US.
While this payout to employees is clearly a political move by Walmart – and I will have more on that later — the most important takeaway here is that Walmart feels confident enough in its future business prospects to both increase wage rates and pay out cash bonuses of $400 million. And this is true even though Walmart was trounced by Amazon in the online holiday season.
In short, while retailers have been struggling, so much so that retail bankruptcies alone were responsible in increasing bankruptcy filings at the end of last year, the largest American retailer is hugely confident in its future and lifting employee payouts as a result. This is bullish. To the degree we see Walmart as an economic bellwether — and given its size, we should — the Walmart move saying that the US economy is doing well and likely will continue to do well over the near term.
Here in Washington, DC, a lot of talk has been about the politics. What you have to remember on the wage rate is that there has been a campaign to raise wages to $15 an hour for the past three years. That’s double the federally-mandated minimum wage rate of $7.25 an hour. So Walmart’s boosting its minimum pay from $9 (and $10 after a training program) to $11 an hour is a big deal. Walmart operates and competes for lower-skilled labor everywhere in the United States. They are essentially putting a floor on wage rates that a wide panoply of companies that compete for the same workers will feel compelled to match. So while we’re not talking about $15 an hour, this is still a big win for Walmart politically then.
President Trump should also consider this a win. Before the Walmart announcement, a number of companies like AT&T decided to hand out one-time bonuses to employees, and many took these announcements as proof that the tax bill Republicans recently ushered through Congress was having a ’trickle down’ impact on workers. Muddying the waters though was the fact that AT&T had also announced staff cuts around the same time. Walmart’s announcement is more positive for Trump and the Republican Party because — irrespective of whether the tax bill was a true motivating factor for Walmart —we see both a bonus and an increase in salary. (UPDATE: Walmart has now also abruptly announced it is closing 63 Sam’s Club stores and laying off thousands of workers. This makes the announcement more akin to AT&T.)
My view: Right now, the Democrats have no discernible election strategy for 2018 and 2020 except being anti-deficit and anti-Trump. The anti-Trump narrative had a powerful effect in recent election contests in Virginia and Alabama. But, with the economy doing so well right now, it is not clear to me that it will continue to do so until November 2018, when the midterm elections are held. In an economy in which the headline unemployment could conceivably hit 3.6% or 3.7% by November, the Democrats need more to their platform than being anti-deficit and anti-Trump.
On the economic side of things, the Walmart announcement could have a galvanizing effect on wage growth more generally. And that will lift the economy through additional consumer spending. If indeed we do continue to growth in the 3% range later in the year, but coupled with rising wage growth, inflation won’t matter. The Fed will definitely stick to its three rate hike timetable. It may even add a fourth hike for good measure.
P.S. – Contrast this announcement today with two years ago when Walmart announced it would shutter 260 stores on the back of weak earnings and holiday season competition from Amazon.
UPDATE: Here is a clip of me on CBC’s “On The Money” program explaining some of the points I tried to make here.