With more than 15 million workers in the sector, and leverage over workplace standards across the supply chain, retail wields enormous influence on Americans’ standard of living and the nation’s economic outlook. It connects producers and consumers, workers and jobs, and local social and economic development to the larger US economy. And over the next decade, retail will be the second largest source of new jobs in the United States.
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Given the vital role retail plays in our economy, the question of whether employees in the sector are compensated at a level that promotes American prosperity is of national importance. According to the Bureau of Labor Statistics, the typical retail sales person earns just $21,000 per year. Cashiers earn even less, bringing home an annual income of just $18,500.
The continued dominance of low wages in this sector weakens our nation’s capacity to boost living standards and economic growth. Retail’s low-wage employment means that even Americans who work full-time fail to make ends meet, and growth slows because too few families have enough remaining in each paycheck to contribute to the broader economy.
This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies—those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families.
This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status. We model these effects based on the 2012 March Supplement to the Current Population Survey, using retail consumer data from the Neilson Company and macroeconomic multipliers derived by Moody’s Analytics. For a full description of the study methodology see the appendix.
Effect on Workers and Their Families
More than 700,000 Americans would be lifted out of poverty, and more than 1.5 million retail workers and their families would move up from in or near poverty. Retail jobs are a crucial source of income for the families of workers in the sector, yet currently more than 1 million retail workers and their family members live in or near poverty.3 More than 95 percent of year-round employees at large retail firms are ages 20 and above. More than half (54.2 percent) of workers in this group contribute at least 50 percent of their family’s total income. A large number of them
– almost 1 in 5 – are the sole earner for their family. Our study finds:
- A wage standard equivalent to $25,000 for a full-time, year-round employee would lift 734,075 people currently in poverty – including retail workers and the families they support – above the federal poverty line.
- An additional 769,191 people hovering just above poverty would see their incomes rise to above 150 percent of the poverty line.
The Effect on Economic Growth and Job Creation
The economy would grow and 100,000 or more new jobs would be created. Families living in or near poverty spend close to 100 percent of their income just to meet their basic needs, so when they receive an extra dollar in pay, they spend it on goods or services that were out of reach before. This ongoing unmet need makes low-income households more likely to spend new earnings immediately – channeling any addition to their income right back into the economy, creating growth and jobs. This “multiplier effect” means that a higher wage standard for retail workers will also generate new jobs. Our estimates of the job creation effect are derived from widely accepted multipliers on consumer spending. It includes the benefits of a raise on disposable income and accounts for the impact of any additional costs to the firm and the potential for businesses to pass-through the cost of decent wages onto their customers through higher prices. In order to account for uncertainty regarding the firm’s willingness to pay for the raise out of profits, we offer both low and high measures of the total impact of the raise. Estimating both low- and high-end estimates, our study finds that:
- A wage standard at large retailers equivalent to $25,000 per year for full-time, year-round workers would increase GDP between $11.8 and $15.2 billion over the next year.
- As a result of the economic growth from a wage increase, employers would create 100,000 to 132,000 additional jobs.
Effects on Retail Sales
Increased purchasing power of low-wage workers would generate $4 to $5 billion in additional annual sales for the sector. Much of the increased consumer spending by low-wage workers after the raise will return to the very firms that offered the raise. The average American household allocates 20 percent of their total expenditures toward retail goods, but for low-income households that proportion is higher. A raise for workers at large stores would bring billions of dollars in added retail spending back to the sector. Our study finds that:
- Assuming that workers do not save money out of their wage income, the additional retail spending by employees and their families generated by the higher wage would result in $4 to $5 billion in additional sales across the retail sector in the year following the wage increase.
Effects on Companies
The additional payroll costs would represent a small fraction of total sales. Our study measures the total cost of the higher wage standard with generous assumptions by accounting for the likely effects of wages on those workers currently earning just above the wage floor. We assume that every worker earning less than $17.25 will receive additional compensation as firms adjust pay scales in order to preserve their internal wage structures or to reward workers with long tenures or supervisory positions. That assumption probably overstates the indirect cost of raising wages at the bottom, since it extends to workers earning well above the cutoff for spillover effects that have been observed in empirical research. Yet the cost of the increase under these assumptions is just a small percentage of payroll or sales. Our study finds that:
- The cost of the wage increase amounts to $20.8 billion, or just 1 percent of the $2.17 trillion in total annual sales by large retailers. Alternatively, it represents 6 percent of payroll for the retail sector overall, or 10 percent for those firms with more than 1000 employees.
Using profits to pay for the wage increase would be a more productive use than the current trend towards stock repurchases. In the first half of 2012, large retailers earned over $35 billion in profits and paid out $12.8 million in dividends. Though unlikely, companies could choose to pay the full cost of a higher wage standard out of profits alone. Our study suggests that this use of profits would be more economically productive than the increasingly common practice of “stock buybacks”: retailers repurchasing public shares of company stock in order to boost earnings per share. Buybacks allow the firm to consolidate earnings; shareholders benefit by receiving higher earnings without paying taxes on dividends, and where compensation is tied to performance, executives get a hike in their paychecks. But share repurchases do not contribute to the productivity of the industry or add to economic growth, in contrast to a raise that benefits over 5 million workers and the firms where they are employed. In 2011, the top 10 largest retailers alone spent $24.8 billion on stock repurchases,10 billions more than the $20.8 billion all large retailers could have productively invested in their workers.
Effects on Prices
The potential cost to consumers would be just cents more per shopping trip on average. If retail firms were to pass the entire cost on to consumers instead of paying for it by redirecting unproductive profits, shoppers would see prices increase by only 1 percent. But productivity gains and new consumer spending associated with the raise make it unlikely that stores will need to generate 100 percent of the cost. More plausibly, prices will increase by less than the total amount of the wage bill, spreading smaller costs across the entire population of consumers. The impact of rising prices on household budgets will be negligible, while the economic benefits of higher wages for low paid retail workers will be significant. Our study finds that:
- If retailers pass half of the costs of a wage raise onto their customers, the average household would pay just 15 cents more per shopping trip—or $17.73 per year.
- If firms pass on 25 percent of the wage costs onto their customers, shoppers would spend just 7 cents more per shopping trip, or $8.87 per year.
Higher-income households, who spend more, would absorb a larger share of the cost. Per shopping trip, high-income households would spend 18 cents more, for a total of $36.80 per year. Low-income households would spend just 12 additional cents on their shopping list, or $24.87 per year.
Executive Summary Conclusion
America’s largest retailers play an important role in our nation’s economy and in the well-being of millions of their workers’ lives. It has become conventional wisdom that retail workers must be paid low wages. Yet our study, adding to a growing body of research, demonstrates that retailers could provide the nation a needed economic boost by paying higher wages, while remaining profitable and continuing to offer low prices. After years of slow economic growth and income stagnation or decline, retail can help put America back on track, creating meaningful gains for household budgets, GDP, employment, and their own outlook for growth.
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