Attention interest rate watchers: Walmart is raising wages so the U.S. Federal Reserve is likely to be hiking interest rates. It is not as simple as that, but it kind of is actually.
In case you missed it, here is the New York Times’ take on Walmart’s move. Basically the company is raising the wages of its lowest level retailer workers to $9 this year (the U.S. minimum wage is $7.25) and taking that that to $10 next spring. They also plan to pay $13 for Department Managers this year, and $15 next. In total, it is a move that is going to cost the company a cool $1 billion.
I don’t want to go over the top and say it is the economic story of the year that Walmart is raising wages, but I’d say its close. The fact that the largest retailer in the world is upping compensation is significant on so many levels, and as economic indicators go it is a huge one. Let’s say it is the story of the quarter, at least.
Walmart is not raising wages to be nice. Yes, they have gotten bashed for not paying enough, and yes they will get some decent publicity because of the move. But $1 billion for good PR is pretty expensive, even for Walmart. I’d say that the good PR is a secondary benefit of the pay upgrades, not the primary reason for them.
Walmart is raising wages because the U.S. labor market is tighter than it was a year ago, and you can get better employees if you pay more. There is competition for workers, apparently, even at the lowest levels. That is the huge news, and don’t think that a lot of people aren’t noticing.
People like Janet Yellen over at the Federal Reserve, for example. The Fed has been mulling when to raise rates, and Ms. Yellen (she’s the Chair, so what she says matters) has hinted that the first move might be as early as June. Or it could be later – the communiqué that came with the last Federal Reserve decision used the word ‘patient’ to describe the Fed’s attitude to when to hike. Too early, and you could destroy that nice little economic expansion the U.S. has going. Too late and you could unleash the inflation genie, and no central banker wants that.
Which is where Walmart comes in. Throwing a billion into wage bills is not going to throw the whole U.S. inflation picture out of whack, but if Walmart is indicative of a lot of the rest of retail – and of a lot of the rest of U.S. companies – then we are talking about some serious money. As of the end of 2014, employment costs were not a big deal: as measured by the U.S. Labor Department, over the twelve months ended in December, they were up by 2.2 percent. That is higher than the 1.9 percent experienced in 2013, but certainly not back to the pre-recession average of 3 to 4 percent. Still, given the recent decline in the U.S. unemployment rate to 5.7 percent (it was 6.6 percent a year ago, and close to 10 percent in 2010) there is clearly going to be pressure for higher wages.
So there is good news for the Walmart employees, and good news for the American economy too. As we know, however, central bankers hate good news so let’s start the countdown to the first punchbowl-snatching, interest rate hike which is surely soon to come.