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Retailers to Cope with Hiking Wages Amid Slow Growth?

Driven by factors that include competition and lawmakers, for the first time in a while, retailers must cope with rising wages this year and beyond, a factor that will affect how many companies manage their bottom lines.

“Retailers, shaking off lackluster holiday sales and battling online competition, have a new problem to deal with. Many are facing wage pressure on their store payrolls as the labor market tightens and states and municipalities raise the minimum wage,” noted the Wall Street Journal CFO Report Blog.

The article reported that retailers such as Kohl’s Corp., Lowe’s Cos. Inc., and TJX Cos. Inc. highlighted the impact of rising wages on their earnings.

In the piece, Lowe’s finance chief said that above-average wage inflation in 2016 will cost the company 3 cents per share. Likewise, TJX reported that it expects its plans to raise wages would lower earnings by 3% in the first quarter.

A UBS research report cited by the WSJ forecasts per share earnings will be hit by about 2% for retailers of electronic goods and appliances and 3% for chains selling clothing and other soft goods as a result of rising wages.

One reason for the wage hikes: Competition. Wal-Mart Stores Inc., the nation’s largest retailer, raised its minimum wage to $10 beginning in January, and also gave most of its store employees a 2% rise in February, according to the Journal.

In December, Bloomberg News said Wal-Mart’s move to raise minimum wage to $10 would force Target Corp. and other competitors to either “follow along and jeopardize profits or risk losing their best workers.”

Bloomberg said that Wal-Mart, which previously raised its minimum to $9 an hour in April 2015, already had forced its competitors to raise their wages accordingly: “Matching Wal-Mart’s $10 wage would cost some of the retail industry’s largest companies an extra $4 billion over what they paid workers in 2014.”

Wal-Mart acknowledged that its decision to pay higher wages would be expensive. According to Bloomberg, Wal-Mart warned in October that its profits would shrink as the wage hikes would cost it $1.5 billion – which in turn drove Wal-Mart shares down 10%, its worst single-day decline since 1988.

Scott Mushkin, an analyst with Wolfe Research LLC, told Bloomberg that Wal-Mart’s plan to spend $2.7 billion on increased wages and training over the next two years is unlikely to yield return on investment. According to Mushkin, if the increased wages and spending to train employees boosts sales by 1%, that would only translate into about $350 million in profit.

The pressure is likely to continue even as margins remain thin and online retailers continue to steal shoppers, because the government is weighing into the matter.

While the Republican Congress has held the Federal minimum wage at $7.25 per hour, many states are increasing it. According to the Journal, minimum wage incased in 14 states beginning in January. More are following suit.

In March, Oregon adopted a law that will give the state the nation’s highest minimum wage and the first tiered system. The law mandates that by 2022 the minimum wage will be $14.75 per hour in urban areas, $13.50 in midsize counties, and $12.50 in rural areas.

States are not alone in hiking minimum wage. According to Fortune, several cities such as Seattle, San Francisco, Los Angeles, and SeaTac (WA) have increased the minimum pay rates to $15 per hour.

The competition, government mandates and demand for employees have convinced retailers that increased wages are a reality, reports the Journal. Some strategies that retailers may use in response: Lowering inventory levels. “If we’re putting a lot less inventory in the store, there’s a lot less work to do,” Kohl’s CEO said in the WSJ.

In “Oregon’s New Minimum Wage Will Cause Unemployment,” Tim Worstall, a contributor to Forbes, argued that the government’s move establishing higher minimum wages retards job creation.

However, for labor advocates, including those who propose higher wages with a macroeconomic angle, the move to raise workers’ salaries is overdue.

Catherine Reutschlin, a visiting professor of economics at at the University of Missouri-Kansas City and a fellow at Demos, argues in a study posted on Demos that increasing wages in the retail would not only lift close to a million people out of poverty, but also would lead a multiplier effect and creation of 1000,00 jobs. That’s because all their extra income would go back into the economy.

“Families living in or near poverty spend close to 100 percent of their income just to meet their basic needs, so when they receive an extra dollar in pay, they spend it on goods or services that were out of reach before. This ongoing unmet need makes low-income households more likely to spend new earnings immediately – channeling any addition to their income right back into the economy, creating growth and jobs.”

She also argues that the retailers would benefit from raising their employees wages.

“Increased purchasing power of low-wage workers would generate $4 (billion) to $5 billion in additional annual sales for the sector. Much of the increased consumer spending by low-wage workers after the raise will return to the very firms that offered the raise. The average American household allocates 20 percent of their total expenditures toward retail goods, but for low-income households that proportion is higher.5 A raise for workers at large stores would bring billions of dollars in added retail spending back to the sector.”