Walmart, the world’s largest retailer, will raise its base hourly wage to $9 beginning in April. By the following February, all employees will make at least $10 an hour. That’s $2.75 above the federal minimum wage of $7.25, which hasn’t budged since 2009, and it’s close to the $10.10 minimum wage proposed by President Obama. About 500,000 Walmart workers will get a raise as a result of the change.
Not surprisingly, Walmart’s stock immediately fell about 3 percent to $84 a share, as investors digested the news of higher costs. Executives at the retail giant warned that spending more money on wages would result in a hit to earnings, which would also be hurt by e-commerce improvements and training programs for its workers.
So why did the company do it, knowing a short-term hit was coming?
The simple reason is that the improving job market left it with little choice.
Related: Americans Are About to Get a Nice Fat Pay Raise
Walmart’s pay hike “is testimony to the fact that the job market is strengthening,” says Gary Burtless, a labor economist at the Brookings Institution. “The competition Walmart is facing for filling its positions is intensifying in most parts of the U.S. and its base wage rate was low enough that they are probably not getting as good an employee as they would wish to have.”
That’s pretty much what Walmart CEO Doug McMillon said announcing the move in a letter to employees on Thursday. “When we take a step back, it’s clear to me that one of our highest priorities must be to invest more in our people this year,” he said.
By raising wages and providing more opportunities for advancement and better schedules, the company can improve employee morale and attract higher caliber workers. Walmart says it has tested different programs in its stores and believes it has landed on the right mix of better pay and training.
Related: 5 Million Job Openings, So Why Can’t You Get Hired?
The retailer is also counting on the changes to quickly improve the shopping experience at its stores, which most surveys show is getting worse. One released Wednesday by the American Customer Satisfaction Index gave Walmart its lowest rating since 2007. The retailer scored the worst of any department or discount chain and much lower than 10 to 15 years ago, when it ranked well in the survey.
Walmart has always strived for the lowest prices and best deals, but that’s not enough when shopping is a bad experience. In a research note, analyst David Schick of Stifel, Nicolaus & Co. called the pay hike, “a meaningful change in strategy.”
Walmart execs believe the hit to profitability will be short-term and the improved customer service will lead to long-term growth. While it may lower earnings per share, it should improve operations, wrote Schick.
Indeed, unionized supermarkets and some stores like Costco, which pay higher wages, typically have better customer service, points out Burtless. “It’s more enjoyable to shop in stores that pay their employees better wages,” he says.
Related: American Express Takes a Beating over Costco Split
And there are other benefits to Walmart’s move. First, there is all the favorable publicity. Schick believes it could “create leverageable buzz.”
Then there is the potential for a direct increase in sales from all those Walmart associates earning more. Walmart is the largest employer in many of the regions where it operates stores. Burtless points out that the pay hike “will have a tangible effect on those local economies and most of those benefits will accrue to Walmart.”
Top Reads from The Fiscal Times: