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March 11 2015

Should Target Follow Walmart's Lead on Raises?

Hadley Heath

Everybody likes a pay raise, right?

Last month Walmart announced that 500,000 of its lowest-wage workers would see their pay increase first to $9 an hour, then to $10 an hour. This is above and beyond the federal minimum wage of $7.25 an hour. Plenty of other companies start their payscales above the government-mandated minimum, like Chipotle, The Gap, Starbucks, Whole Foods, Costco, and now Walmart. (TJ Maxx and Marshalls immediately followed with a similar pay raise for their workers.)

Minimum-wage activists seem torn about this: Some cheer the decisions and point out that if these companies can seemingly "absorb" these pay increases, this is evidence that an increase in the federally-mandated minimum won't hurt the economy.  Others say that the pay raises to $10 an hour are still not enough.

First, let's look at the names of the companies I listed above. Ever heard of them?  You probably have, because they are giant corporations.  Bigger businesses can more easily absorb the cost of government regulations. It's smaller businesses that are usually harmed the most. Second, it's hard to say what mandated minimum wage would be "enough." Price controls and central planning always struggle with this question because of what F.A. Hayek called The Knowledge Problem.

But then there's one big retailer that hasn't followed suit on raising their workers' pay, and that's Target. Why won't Target take on its "fair share" of "social responsibility" and raise wages? 

Importantly, Walmart, and other low-wage employers who offer jobs above minimum wage are NOT doing so out of the kindness of their hearts. They obviously have some business reason behind their decision, whether that’s lowering their quit-and-replace rate or attracting better workers. In fact, that's exactly what Walmart CEO Doug McMillon said in an interview with CNBC. 

Obviously for-profit companies seek to maximize profits, and this puts downward pressure on all their input costs, including labor.  We, as consumers and as investors generally want to see companies operating with the lowest costs, because this allows them to offer us better prices and maximize their profits.

So Target should only raise wages if they have a legitimate business reason for doing so. Their executives are best positioned to make that decision, not government regulators. If they did raise wages, they’d have to compensate for this somehow, by reducing some other input cost (like hours worked or number of workers) or raising their retail prices for consumers. Have you ever been through a check-yourself-out line?  They are becoming more and more common, which might allow these retailers to pay workers more (and hire fewer workers).

It could be that the variable that wage-raising businesses are trying to affect is harder to see, for example, they may have a high worker-replacement rate and the cost of constantly replacing workers is the cost they are seeking to decrease. 

Or, as progressives seem to want, they could post lower profits, but this isn’t how the economy should work. Companies should seek to maximize profits because economic growth is ultimately the driver of new job creation, which in turn gives us all more opportunities and more prosperity, no matter where we are on the income scale.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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