Can a Minimum Wage Hike Help Walmart?

Many on the left have been making the argument, based on a report from the liberal think tank Demos, that a minimum-wage hike could benefit Walmart -- the retail giant's shoppers are disproportionately low-income, and when low-income people get more money, they typically spend it.

But the Demos report doesn't say that Walmart would benefit on net; it just notes that some of the money from a $12.25 minimum wage would come back to the companies paying it, and that retailers wouldn't have to become unprofitable or dramatically raise prices. In fact, for the retail sector as a whole, the report pegs the price of the increase at $21 billion and the additional sales (not profit, but sales) at $4-5 billion.

We can see why this is the case with some very crude math. Walmart employs about 1 percent of U.S. workers. According to another report from Demos, 64 percent of Walmart workers make less than $12 an hour, compared with one-third of all workers. And according to Megan McArdle, Walmart's profit margins are 3.5 percent. To simplify things, I'm going to assume that, on a per employee basis, it will cost Walmart about the same as other employers to bring its low-wage workers up to a new minimum wage of $12.

So, Walmart will bear the cost of raising wages for 0.64 percent of the workforce, and 33 percent of the workforce will have its wages raised. Even if every single low-wage worker turns around and spends his entire raise at Walmart, Walmart will reap profits equivalent to wage hikes for just 1.2 percent of the workforce (33 times 3.5 percent). This is less than double the amount it spent -- so low-wage workers would have to spend more than half of their newfound cash at Walmart for Walmart to break even.

This is not plausible. Walmart's market share is around 13 percent.  Demos notes that Americans as a whole spend only 20 percent of their money on retail in general, though this number is higher for the poor.

And as the economist Jared Bernstein told the Huffington Post, it's not even clear how much more money people spend on consumer goods when their wages rise. While there is a study showing that minimum-wage hikes increase spending dramatically -- by much more than they increase wages, in fact -- this is mainly because a small number of households borrow money to buy vehicles, which Walmart doesn't sell. Interestingly, the study also finds that the median household that receives a wage hike doesn't measurably increase its spending at all. 

Of course, there are plenty of factors I haven't considered. Rising wages reduce government benefits -- liberals have been pointing out for years how much public money Walmart employees receive -- so workers wouldn't actually see all of their higher pay. If Walmart pays less than other low-wage employers, as is often alleged, it will lose more money per employee from a minimum-wage hike. Walmart might make more profit on a marginal sale than it does overall. Complicated processes will unfold involving things like prices, profit margins, investment, hiring, turnover, and so on.

One last thing: In hunting down numbers for this post, I came across this study from Berkeley. It reports that if Walmart faced a minimum-wage hike, 41 percent of the workers who got raises would belong to families under 200 percent of the federal poverty level. And if Walmart passed the higher costs on to its customers, 28 percent of those costs would fall on families in that income range.

The researchers point out that each shopper would lose a small amount of money, while each employee would get a nice income boost. But we shouldn't forget that there's only a 13-point difference in poverty between the people who are paying more and the people who are getting raises. Or that 41 percent isn't a very high number to begin with when we're talking about targeting poverty-relief efforts where they're needed most.

Robert VerBruggen is editor of RealClearPolicy. Twitter: @RAVerBruggen

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