Wal-Mart wage hike may be economy’s missing link

February 19, 2015 | Jeff Cox, NBR, CNBC.com

When the biggest retailer in the world talks wages, other companies are going to listen.

Wal-Mart‘s shock announcement Thursday that it is going to begin increasing the minimum wage for its employees sparked hopes that a movement toward higher pay for those at the the lower rungs would gain momentum.

If so, that would generate long-awaited wage inflation, the lack of which has been a main contributor to the lackluster post-recession economic recovery in the U.S., the worst since the Great Depression.

“What Wal-Mart has done today is set the new benchmark for employee pay for big-box stores,” said retail expert Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors.

“If you’re a teenager working in an Abercrombie & Fitch and getting paid minimum wage, it might be cooler to work at a Wal-Mart, where you get training and a higher pay,” he added. “It could not only spread to the big-box retailers, but also spread throughout the mall.”

Read More Wal-Mart CEO: Pay hike will boost morale

In terms of direct economic impact, the move doesn’t carry a lot of actual dollar weight. The company, which employs 1.3 million in the U.S. alone, plans to boost its minimum pay to $9 an hour by April and $10 an hour by Feb. 1, 2016. The current federal standard is $7.25.

Patrick T. Fallon | Bloomberg | Getty Images Employees assist shoppers at the check out counter of a Walmart store in Los Angeles.

Patrick T. Fallon | Bloomberg | Getty Images
Employees assist shoppers at the check out counter of a Walmart store in Los Angeles.

Using a set of “very generous” assumptions, such as figuring that all Wal-Mart workers put in the maximum 30 hours to be considered part time, and they all work 52 weeks a year, that would generate an additional $1.5 billion annually to a national wage base of $7.5 trillion, said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a phone interview.

“The impact is without question small,” Porcelli said. “The question is … what are the knock-on effects of what Wal-Mart did?”

That question becomes even more important when it comes to setting policy.

The Federal Reserve has been stuck at near zero for its short-term rate target for more than six years, holding it there as the labor market mends but inflation remains perilously low as measured by the central bank’s preferred gauges. Until it sees signs of inflation, and specifically the type that higher wages would generate, the Fed is likely to move slowly and cautiously toward a normalized rate environment.

Wal-Mart’s announcement comes after a solid two years of lobbying both from worker advocate groups and President Barack Obama‘s White House, which has set up a Web link—Raise the Wage—that monitors the progress companies, states and municipalities are making toward hiking the benchmark.

Read More Middle class stagnation: What Obama plans to do

Already in the past year some high-profile announcements from companies including Aetna, Ikea, Disney and Starbucks have declared minimum wage increases. State and local governments have independently raised as well. Sozzi sees the Wal-Mart announcement putting pressure on competitors including Target and Sears among others.

States that hiked in 2014

State
New Wage
Workers benefiting
Connecticut $10.10 by 2017 138,000
Delaware $8.25 by 2015 30,000
Hawaii $10.10 by 2018 71,000
Massachusetts $11 by 2017 540,000
Maryland $10.10 by 2018 286,000
Minnesota $9.50 by 2016 347,000
Michigan $9.25 by 2018 482,000
Rhode Island $9 by 2015 51,000
Vermont $10.50 by 2018 20,000
West Virginia $8.75 by 2016 95,000
WhiteHouse.gov

Overall wage growth in the retail sector outpaced the broader workforce in 2014, according to an analysis from payroll processing firm ADP. The trade sector, which includes retail, saw wages grow 4.4 percent during a year in which all groups rose by just 2.3 percent.

However, advocates for a higher minimum wage tempered their enthusiasm over the latest development.

“Because it’s Wal-Mart, because it has such a massive impact on our economy, it’s a significant announcement,” said Tsedeye Gebreselassie, senior staff attorney at the National Employment Law Project. “But it’s definitely not enough—$10 is not enough. … This is still poverty wages.”

Those working at that level are, though, getting more optimistic.

Read More Jim Cramer: Thumbs up for Wal-Mart pay hike

Turnover rate for 2014 among those under 25 years old—a demographic that makes up just more than half of all minimum wage workers—was 49 percent, indicating that job mobility was high, especially when compared to the overall rate of 23 percent, according to ADP.

Nick Colas, chief market strategist at ConvergEx, used a novel method to determine the general climate for wage hopes—Google Trends, which shows traffic on the search engine for various terms. In his morning note Thursday, Colas explored a number of areas, among his findings for job searchers:

“Ask for a Raise” shows wage inflation is finally (almost) here. Some Federal Reserve policymakers would like to see wage inflation heat up, since this should theoretically push overall inflation closer to the central bank’s 2 percent goal. When you look at the pace at which Google users query “Ask for a raise,” you’ll find that should be here soon. Workers interested in asking for more money are searching for this term at rates equal to the period before the Financial Crisis. So if we don’t have much wage inflation yet, it may be because employees are still working out how to ask for more money. Once they get their pitch down, look out…

“Get a Raise” gives wage inflation a Southern drawl. As you work with Google Trends you grow to appreciate regional variations for the same term. In Kentucky, the Carolinas, Kansas and the Deep South you Google “Get a raise,” not “ask for a raise.” Same trends though—more people are searching for this term than in 2005-2009.

Colas concludes that amid the hopes that stronger wages will accelerate the recovery, “the U.S. economy may, by the traditional numbers, be solidly on the mend but the actual foundations of this recovery are still shaky.”