It's the Minimum We Should Do

For many years, I have been an advocate of increasing the minimum wage. I find it terrible that our nation’s poorest employees have to wait for legislative action to obtain a raise. A person supporting a family cannot work full time, year round earning the minimum wage and rise above the poverty level. It is disgraceful that we allow this to happen.

It has also been my argument that increasing the minimum wage is good for the economy. Business lobbyists claim incorrectly that increasing the minimum wage hurts the companies they represent. These arguments are wrong. A person paid the minimum wage with little hope of a pay raise until legislative action occurs is probably not a happy, productive employee. Yet, minimum wage employees often are placed in key jobs essential to a business’s profitability, such as jobs they decide public perception of that enterprise. Minimum wage earners include cashiers, cooks, and hotel personnel. Subminimum wage earnings are waiters and waitresses. These low paid workers project the business image to the public. It is helpful to that business that a positive image from enthusiastic employees be projected.

While nay-sayers argue that increasing the minimum wage causes fewer minimum wage jobs to be hired, many businesses find the opposite is true. A study in New Jersey found that, when the minimum wage was increased, the total number of minimum wage jobs increased. This has always made sense to me, as increasing the minimum wage makes companies more productive, more profitable, and then able to hire more employees. Further, placing more money in the hands of minimum wage workers, who spend a large portion of their incomes, increases consumer spending which has a ripple effect of stimulating spending and increasing business profitability.

Business Week in its April 12, 2004 issue has published another striking example of this. Wal-Mart’s Sam Club and Costco have two strikingly different philosophies on how they treat their employees. Wal-Mart’s Sam’s Club keeps their wages lower and their employee benefits scarcer. Business lobbyists would have us believe that a company with lower labor costs would be more profitable. Yet, to their surprise (but not mine), they are wrong. Costco not only is more profitable, yet the fact that their employees earn more is a leading reason why they earn more money.

Wal-Mart’s Sam’s Club pays its employees an average of $11.52 an hour compared to Costco’s average of $15.97 per hour. Wal-Mart’s Sam’s Club provides 47% of its employees with health coverage compared to 82% for Costco. Wal-Mart’s Sam’s Club pays an average of $3,500 per employee in health care compared to $5,735 per employee for Costco. Wal-Mart’s Sam’s Club offers retirement benefits to 64% of its employees compared to 91% for Costco’s full time employees.

The result is Costco is more profitable earning $13,647 profits per employee (despite the higher wages) versus $11,039 profits per employee for Wal-Mart’s Sam Club. Costco’s annual operating income growth is 10.1% compared to 9.8% for Wal-Mart.

How these companies treat their employees is a major factor in these differences in profitability. Wal-Mart’s Sam’s Club loses 21% of its employees over a year’s time compared to Costco losing 6% of its employees. Higher turnover requires more retraining while retaining employees improve operational efficiency. Wal’Mart’s Sam’s Club overhead costs, including labor, is 17% of sales compared to 9.8% of sales for Costco, again, even though Wal-Mart has lower labor costs.

Increasing wages to low income wages improves businesses. Business lobbyists should get over their fear of increasing the minimum wage. They should even find they’ll like what it does to their business constituency.