Wal-Mart, notorious for low pay, is suddenly on the wage march

No firm in the world matches the economic imprint of Wal-Mart. The retailer, based in Arkansas and known across America for its vast "supercenters" and low prices, is the world's largest company by revenue.

Its 2.2 million worldwide workforce is about the same size as China's army, excluding reservists. Sam Walton built his empire with a relentless focus on costs: "Control your expenses better than your competition. This is where you can always find the competitive advantage," he said.

Yet change is afoot. In April 2015, Wal-Mart abruptly raised the wages of its lowest-paid staff: All now earn at least $9 an hour. Now, that is rising to $10 an hour for trained-up workers — fully one-third higher than the U.S. minimum wage.

The change is curious, because in the past Wal-Mart has paid notoriously little. In 2014 the average hourly wage of an American cashier was $9.93. According to data from Glassdoor, a jobs website, Wal-Mart's cashiers then made $8.62. Retail salespeople made $12.38 nationwide; at Wal-Mart, only $8.53.

Wal-Mart wages were low, but not pitifully so; for both cashiers and salespeople, average pay at Wal-Mart was close to the 25th percentile nationwide. What has made Wal-Mart look mean is the firm's enormous size. It employs 1.4 million of America's 16 million retail workers. Almost 4.5 million others toil in small shops with fewer than 100 employees. Wages there are expected to be low. But, typically, big firms pay more. One study from 2014 found that high-school graduates earn 15 percent more at retailers with more than 1,000 workers, compared with those who have fewer than 10 staff. Not so at Wal-Mart, which paid corner store wages while making mega-chain profits.

This — combined with a fierce resistance to unions — made the firm a target for campaigners. One common accusation against Wal-Mart — whose shareholders made a 17 percent return in the year to January 2015 — is that its low wages mean it benefits from hidden government subsidies. Many low-wage workers rely on government programs to top up their low wages, and on Medicaid for health insurance. Without this support — the argument goes — firms relying on cheap labor would collapse. In May 2013, congressional Democrats produced a report which furiously alleged that a typical Wal-Mart supercenter in Wisconsin, employing 300, costs the taxpayer $900,000 a year in welfare payments to its staff.

That was hyperbole; it assumes some other employer would be willing to hire Wal-Mart's workers at higher wages. Looks matter, though, and the benefit of today's pay rises is partly cosmetic. Other factors are in play, too.

"In some ways it demonstrated leadership, in other ways it [was] a market reaction," Doug McMillon, Wal-Mart's boss, told investors in October 2015. Recently, wage growth has been higher for junior retail staff than for other workers, suggesting that competition for staff may be heating up. Wal-Mart's first pay rise, to $9 an hour, was emulated by Target and TJX, which owns the retailers T.J. Maxx, Marshalls and HomeGoods.

The pay rise is also a strategic investment. Wal-Mart wants to boost its productivity and give its workers more freedom to innovate, as it seeks to make its stores more pleasant and, perhaps, appealing to more affluent customers. That requires motivated staff. It's too soon to judge conclusively whether the rise to $9 an hour has worked, though Wal-Mart says the number of stores rated as sufficiently "clean, fast, friendly" by customers has risen from 16 percent in February 2015 to over 70 percent today.

That will please advocates for higher minimum wages, who argue that better-paid workers are more productive. Opponents of higher minimum wages note that pay rises cannot be free. Some combination of Wal-Mart's customers, shareholders, suppliers and other employees must be paying for the increase.

Wal-Mart's customers are unlikely to feel the pinch soon; low prices are a cornerstone of the brand. But the firm now says higher wages come before price cuts: "You clean up your house before you invite people over," McMillon says.

Wage rises are certainly denting profits. Wal-Mart's share price barely moved when they were first announced last February, suggesting that investors thought them immaterial at first. But in October the firm warned that it expected profits to fall by 6 to 12 percent in 2017, with higher wages responsible for three-quarters of the shortfall. After that announcement, the share price fell by 10 percent — its biggest one-day drop since 1988.

A transfer from capital to labor, though, is precisely what campaigners want to achieve. A more potent criticism of higher wages is that they cause job losses. And on Jan. 15, Wal-Mart announced that it would close 154 U.S. stores, with the possible loss of 10,000 jobs.

The firm says that wage costs are not to blame. The closures mostly reflect Wal-Mart's wholesale abandonment of its small "Wal-Mart Express" stores. Elsewhere, Wal-Mart hired 8,000 new department managers at the same time as raising pay. Adding middle-management is hardly the hallmark of a firm set on trimming its labor force (though some say hours have been cut instead).

Not every firm would find it easy to copy Wal-Mart. Wages only cost retailers 9.5 percent of their revenue. In the food-and-drink industry — a prime target of the "Fight for $15" campaign to raise the minimum wage — wages amount to 31 percent of revenue. A much higher fraction of workers in the food, drink and hotel industries make the minimum wage, so any rise would have a greater effect on those industries. Even within retailing, there are nearly 600,000 small firms with fewer than 20 workers. In Mississippi, half of all cashiers make less than $8.79 an hour; a big increase there would have unpredictable effects.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.