January 16, 2018
An Alternative Explanation for Walmart’s Announced Employee Bonuses and Wage-Rate Increase
On January 11, Walmart announced that it was raising its starting wage rate to $11 an hour, giving a one-time bonus up to $1,000 to employees, expanding its parental/maternal leave policy and providing employees adopting a child up to $5,000 per child in fees associated with the adoption. In making these announcements, Doug McMillon, Walmart president and CEO said: “We are early in the stages of assessing the opportunities tax reform creates for us to invest in our customers and associates … Tax reform gives us the opportunity to be more competitive globally and to accelerate plans for the U.S.” Mr. McMillon is suggesting that Walmart’s employee compensation increases were motivated by the Tax Cuts and Jobs Act of 2017 (TCJA). I have an alternative explanation for Walmart’s recent beneficence – a growing shortage of qualified employees.
Walmart, along with all other corporations, has a fiduciary responsibility to maximize the return on equity for its stockholders. All else the same, TCJA increases Walmart’s after-tax profits. By increasing employee compensation by some portion of its reduced tax liability emanating from TCJA, Walmart would be reducing its after-tax profits (revenues minus expenses) from what they otherwise would have been. This would be breaking with its fiduciary responsibility to Walmart stockholders.
My alternative explanation for Walmart’s January 11 announcement of employee compensation increases is that it was compelled to raise compensation in order to retain and attract new qualified employees. And the reason Walmart needs to raise compensation to retain and attract new qualified employees is because there is now a shortage of qualified employees in the retail sector at the existing level of compensation. This can be seen in the chart below. Plotted in the chart are observations of the number of job openings in a given month as a percent of the number of employees hired in that month in the retail sector. The data are from the Job Openings and Labor Turnover Survey (JOLTS) published by the Bureau of Labor Statistics. The series begins in December 2000 and runs through November 2017. In November 2017, job openings in the retail sector were 105.0% of the number of hires. That is, there were 5 percentage points more job openings in the retail sector than there were new hires. This is the highest percentage of openings-to-hires in the history of the series.
The demand for retail employees exceeds the supply of employees at current compensation levels. When the demand for something exceeds its supply, the price of that something goes up. I believe that Walmart’s January 11 announcement of an increase in employment compensation was motivated by a need to retain and attract new qualified employees, not by the recently-passed cut in corporate tax rates.
Paul L. Kasriel
Founder, Econtrarian LLC
Senior Economic and Investment Advisor
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