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Why Walmart and Big Retailers Should Pay Their Workers More

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Henry Ford famously decided in 1914 to pay many of his workers the then incredible sum of five dollars a day, which was substantially higher than the prevailing wage at the time.

While that wasn't done specifically to enable Ford's workers to buy his cars (his primary objective was to reduce employee turnover), it did at times have that effect. More important, Ford's innovation, which shocked the industrialists of that era, helped kickstart America's high-wage, high-consumption economy and the creation of its vast middle class.

Nearly a century later, in the midst of a weak economy and rising poverty, my colleagues at Demos, a New York-based think tank, have made a compelling case that Ford's revolutionary approach to industrial wages should now be applied to America's retail sector.

Retail is an enormously powerful force in the U.S. economy. It hauls in more than $4 trillion in annual revenue and employs more than 15 million people. The problem, and it's a huge one, is that many of the sector's dedicated and hard-working employees are badly underpaid. The typical retail sales person earns just $21,000 a year, with cashiers earning even less -- just $18,500, according to the Bureau of Labor Statistics. That's not much of a gateway to the middle class.

In a rigorous new study, Retail's Hidden Potential: How Raising Wages Would Benefit Workers, the Industry and the Overall Economy, Demos describes the broad benefits that would be gained if the nation's largest retailers established a voluntary wage floor of $25,000 for full-time, year-round employees.

Such a move would lift millions of people out of poverty, bolster the American economy and strengthen the retailers' own bottom line.

This would not be a heavy lift for the industry. Retail is booming and profitability reached a ten-year high in the first half of 2012. The largest retail firm, Walmart, earned nearly $16 billion in the last year alone. While the U.S. economy and millions of American families have been struggling, Walmart has seen its net sales grow by more than $70 billion since the start of the Great Recession in December 2007.

Retail employees, on the other hand, have been sinking in the quicksand of increased workloads and declining compensation. Productivity among retail workers rose by an average of 0.8 percent per year since 2008 while wages, on average, went down. America's largest retailers, those employing 1,000 employees or more, can well afford to pay their employees a minimum of $12.25 an hour, which is the base that the proposed $25,000 floor would establish.

According to the Demos study, the cost of the wage increases to major retailers would be $20.8 billion, which amounts to about one percent of the sector's $2.17 trillion in total annual sales. But the study also estimates that the increased purchasing power accruing to low-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional annual retail sales.

If the entire cost of the pay raises were passed on to consumers, shoppers would see an increase in retail prices of approximately one percent. What is more likely, however, is that just a portion of the increased cost would be passed on.

"If retailers pass half the costs of a wage raise onto their customers, the average household would pay just 15 cents more per shopping trip -- or $17.73 per year," the study found. "If firms pass 25 percent of the wage costs onto their customers, shoppers would spend just seven cents more per shopping trip, or $8.87 per year."

That's a tiny price to pay for an initiative that would have a potentially revolutionary impact on the standards of living of millions of Americans and the economic prospects of the nation at large. The $25,000-a-year wage floor would lift more than 700,000 people out of the harrowing precincts of poverty. And it would boost the pay of hundreds of thousands more who currently are struggling just a notch or two above the official poverty line.

The increased spending anticipated from the pay hikes would give a badly needed boost to an economy that has been advancing only in fits and starts since the recession ended in June 2009. As the study explains: "U.S. corporations are cash-flush, but hesitant to make investments on products they are not sure will sell. As a result, their gloomy outlook becomes a self-fulfilling prophesy: firms do not expand production, keeping the job market slack, pocketbooks closed, and investments unappealing."

Low-wage workers who get a raise spend virtually all of it. A raise given to the lowest-paid workers in retail would result in a burst of consumer demand that, according to the study, could spur the creation of more than 100,000 new jobs.

This is not a pie-in-the sky proposal. It is a sensible private-sector initiative that would transform the work experience of an industry that is projected to be the largest source of new jobs over the next decade.

We should not buy into the idea that retail work has to be low-wage work. As Demos points out, "Low-wage jobs are not a business necessity but a choice." Employers like Costco and Safeway already pay decent wages and they're doing just fine.

There is a tendency as we look back through the comforting mists of memory to forget that the manufacturing jobs that lifted so many millions of Americans into the middle class in the 20th century started out as lousy jobs. They paid little and the working conditions were often atrocious, even life-threatening. The transformation of those jobs into well-paying, secure employment -- with benefits -- helped drive the American economy to heights that made it the envy of the world.

What's happening in the United States now is the opposite. Standards of living are declining as jobs that pay well become more and more difficult to find. The Census Bureau officially classifies nearly 50 million Americans as poor. One in every five American children is poor -- the highest child poverty rate in the industrialized world. One in every three African-American children is poor.

If you add in the 50 million Americans who are trying to make it on pay that puts them just a whisper above the poverty line, you end up with the disturbing fact that nearly a third of the entire U.S. population is poor or near-poor.

The time to begin raising the compensation of workers in the vast retail sector is right now.