The Real Reason Walmart Raised Its Minimum Wage

Another reason that you should be interested in this is what it suggests about Walmart’s business model. For years, there has been a left-wing cottage industry in comparing Walmart to Costco, which pays its worker much more for what superficially seems like similar work. And for years, I’ve had a related business in pointing out that Costco and Walmart actually have dramatically different business models, for all that they may look the same from the vantage point of a coastal professional. Costco sells a small number of bulk goods to an affluent demographic. Their stripped-down number of stock-keeping units, and habit of leaving the goods stacked on their shipping pallets, means that they need to employ fewer workers, and that those workers enjoy much greater productivity. Those workers are also catering to a wealthier consumer who is willing and able to pay a premium for excellent service.

Walmart, on the other hand, sells about 20 times as many different goods to a customer base that is on average much poorer, and shops primarily on price. More SKUs means more labor unpacking, shelving and straightening up the stuff. Which in turn means that it’s harder for your labor to be exceptionally productive, or your service to be exceptionally great. For example, it is probably beyond the limits of any human’s cognition to be familiar with 100,000 different products, and their location within the store. That’s why the checkout clerks at Trader Joe’s (which also follows a minimal-SKU model) can wax knowledgeable about almost anything you buy, and the folks at Safeway can’t.

As I have pointed out more than once, shifting to a higher-wage labor model wouldn’t just mean Walmart paying its workers more; it would mean major operational shifts to make those workers profitable. The more Walmart executives raise wages, the more we should be looking to see what else they’re doing to complement this dramatic shift in their business model. Because one thing we can be fairly certain of is that the wage increase will not be coming out of profit, at least over the long term. The company’s profit margins have always been razor thin, and they’ve been looking particularly slender recently. If Walmart is pouring the benefits of the tax cut into worker pockets rather than investment or placating shareholders, that’s because the company thinks it needs to to survive.

And the last reason it’s interesting is because of what it (potentially) tells us about the tax cut. To the extent that this boost really was a windfall from the tax cut, that actually suggests something quite odd.

Of course, Republicans did promise that the tax cut would put more money in worker pockets. But the mechanism of that enrichment was not really supposed to be a one-for-one transfer of money from the government to workers, using corporations as an intermediary. Rather, corporations are supposed to grow their businesses, making workers more productive, and increasing demand for labor, which will eventually translate into higher wages.

Obviously, there hasn’t been any time for any of that to happen yet. So if the money is going out this soon, and this obviously, the mechanism is very different from what I’d have expected. And instead of heralding this as great news, the Trump administration should be quite alarmed.

For if companies really have nothing better to do with the money than give an unnecessary bonus to current workers, that means that companies don’t see great opportunities to use it to expand their current operations, or invest in exciting new inventions and markets. Instead they’re just going to split it with workers and shareholders.

And hey, as both a worker and a shareholder, that makes me happy. But not as happy as I’d be to know that companies were finding great new businesses to build that would make us all a whole lot richer 10 or 20 years down the road.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.