Wal-Mart and Wages: YCharts Calculates That a 10% Raise Would be No Biggie

Wal-Mart Stores (WMT), the world’s largest retailer, also has the biggest target on its back these days, as it’s in the crosshairs of everyone from anticorruption investigators to factory inspectors to union organizers. Complaints that Wal-Mart pays its hourly employees too little to get a toehold on the middle class flared over the holidays, briefly faded, and are bubbling up again.

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In China, activists are pushing for better pay and working conditions in Wal-Mart stores, according to a recent Fast Company story. In the U.S., a California judge ruled last week that Wal-Mart can be named a defendant in a class-action lawsuit by temporary warehouse workers over alleged stolen wages, as the Los Angeles Times reported.

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Wal-Mart argues it has to keep a stranglehold on employee wages to maintain its low-price advantage over its rivals. But the company’s reams of bad press have spooked some investors, and its shares have backed off 11% in the past three months after a long run-up, as this stock chart shows:

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WMT Chart

With annual sales of $443 billion, could Wal-Mart afford to toss a little spare change in its workers’ pockets? Though the question has been overshadowed lately by the company’s other woes, labor organizers won’t stop pushing Wal-Mart to pad those paychecks.

There’s controversy over exactly how much Wal-Mart pays its store workers. A widely cited study by market-research firm IBISWorld says the average Wal-Mart worker earns $8.81 an hour. Wal-Mart, meanwhile, says its national average hourly wage is $12.40, but that figure includes managers and other higher-paid employees. Assume the truth is somewhere in the middle, and Wal-Mart pays its U.S. store employees an average $10 an hour. At last count, the retailer had 1.4 million U.S. employees. For simplicity’s sake, assume they all work in the stores. Say the average employee works 20 hours a week, 50 weeks a year, for a total of 1,000 hours.

If Wal-Mart gave everyone a 10% raise—or $1 an hour—its costs would increase $1,000 per worker per year, or $1.4 billion in the U.S. That could put a squeeze on operating margins, which Wal-Mart manages with slavish devotion, as this chart shows:

WMT Operating Margin TTM Chart

But with operating income of $26.5 billion last year, Wal-Mart could make room for a pay bump—and it probably would recoup some of its costs. First, higher wages would attract more productive workers and reduce employee turnover, a big expense for retailers. Second, a boost in paychecks would help its own sales—with one in every 10 U.S. retail employees working at Wal-Mart, its workers also represent a huge customer base.

The left-leaning think tank Demos, in a November study, estimated that if all American retailers set a wage floor of $25,000 a year for full-time workers, customers would pay about 15 cents more per shopping trip.

A 10% raise wouldn’t begin to put Wal-Mart in the company of Costco (COST), where after four years, a store employee can earn twice as much as a Wal-Mart worker doing the same job.

WMT Gross Profit Margin Quarterly Chart

Nor would investors be happy if Wal-Mart’s gross profit margin started to mirror Costco’s. Barring a widespread revolt by its shoppers—and investors—Wal-Mart will try to hold the line on wages. But if employee pay remains a hot-button issue, the retailer has room to maneuver.

Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at editor@ycharts.com.

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