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Biden's push for a minimum wage hike could prompt bidding war at retail

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Biden's push for a minimum wage hike could prompt bidding war at retail

President-elect Joe Biden is pushing for a minimum wage hike that could ignite a bidding war over retail workers as major companies like Inc. have already bolstered their compensation and wield wage-setting power, according to policy and labor experts.

Biden has proposed to more than double the federal minimum wage to $15, although he would need to secure a Democratic majority in the Senate through the Georgia runoff elections in January to succeed in doing so as Republicans have largely opposed any wage increases.

Many leading retailers are already paying their workers that amount. Both Amazon and Costco Wholesale Corp. have already raised their minimum wages to $15, in 2018 and 2019, respectively. This year, Target Corp. and Best Buy Co. Inc. increased their minimum wage to $15 per hour amid the coronavirus pandemic that has fueled profitsmany large retailers' profits. Walmart Inc. has taken a less aggressive approach. Its starting wage is still $11 per hour, but the Arkansas-based retailer said in September it would raise pay to various levels of at least $15 per hour for about 165,000 of its hourly associates, or about 11% of its U.S. workforce.

Even though many leading retailers have already raised their wages, a higher minimum wage at the federal level would put some pressure on the companies' selling, general and administrative expense line, said Brandon Fletcher, an analyst with AB Bernstein, in an interview. Larger companies like Amazon and Walmart are likely to have an easier time absorbing the higher wage costs due to their sheer scale. They can also offset higher payroll costs by implementing automation, cutting hours or adding more part-time workers, Fletcher said.

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Meanwhile, a higher federal minimum wage could prompt big retail players like Amazon and Walmart to boost their wages even more to lure workers and recruit the best talent, experts said.

"If Biden moves that needle, it will come forward," Fletcher said of potential wage inflation.

At the same time, smaller independent businesses could find it harder to digest an escalating bidding war over wages.

"That's going to leave some workers for Amazon to potentially absorb," said Ellora Derenoncourt, a labor economist and assistant professor at the University of California, Berkeley, in an interview.

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Wage inflation

Amazon did not respond to inquiries about whether it would raise wages beyond Biden's $15 per hour proposal. Still, Derenoncourt said the company experimented with the higher wages this year when it temporarily raised pay to $17 per hour as part of efforts to attract and hire 100,000 new employees. "You have a target and you set wages to align with that target," she said.

Walmart has been more modest with wage hikes. That could be for a variety of reasons, including the time and money it takes for employees to move and switch jobs and high unemployment levels, especially in rural low-cost areas where Walmart has stores, Derenoncourt said.

"That's what gives employers some leverage and ability to set a wage that is not necessarily what they could be paying," she said. "My guess is they probably have some bandwidth in moving their wage, and if they were subject to a federal minimum wage policy, that might be the push that finally gets them to do it."

Power imbalance

Biden's plan to more than double the minimum wage is part of an ambitious effort to lift a wage that has remained at $7.25 since 2009, up from $5.15 as of 2000, according to the U.S. Department of Labor data compiled by S&P Global Market Intelligence. However, 29 states and Washington, D.C., already have minimum wages that exceed the federal minimum, according to the Economic Policy Institute.

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Biden is considering the wage increase at a time when the U.S. unemployment rate as of November reached 6.7%, and companies like Amazon are experiencing "huge windfalls" during the pandemic, Derenoncourt said. "There's a huge imbalance of power," she said. "The ball still is in their court in terms of conditions for workers."

Policy experts caution that Biden faces hurdles to raise the wage without a Democratic majority in the Senate, whose control will be decided after two Georgia runoff races in January. The Raise the Wage Act passed by the House of Representatives in 2019 faced opposition from the Senate, and similar legislation could fail again, said Ed Mills, Washington policy analyst with Raymond James, in an interview. The Biden-Harris transition team did not return inquiries for this story.

READ MORE: US restaurants face higher costs under Biden plan to boost federal minimum wage

Wage pressures

Many retailers have been increasing compensation due to a combination of factors, including pressure from employees fighting for better working conditions and a push to attract and retain the best workers, experts say.

Pre-pandemic, the U.S. unemployment rate was about 3%, leading to a scarcity of good workers, said Michael Baker, managing director with D.A. Davidson, in an interview.

He also noted that retail jobs have become more complex over time, incorporating both customer service as well as fulfillment of buy online pickup in store services. "Store workers are now picking baskets of product for customers, so I think that retail jobs became a little more complicated," he said. "They needed to raise the wages, especially in a tight labor market."

Amazon was among the first major retailers to raise the minimum wage to $15 per hour for all workers in the U.S., a move effective in November 2018 that created a "big spillover effect" and pushed other companies to increase wages, said Derenoncourt, the labor economist. "In response to Amazon going to $15, there are a lot more jobs at $15 at non-Amazon employers," she said.

An Amazon spokesperson did not comment on Biden's policy ambitions specifically but said in a statement that the company believes all American workers should earn at least $15 an hour. "For the last two years, we have been advocating for raising the federal minimum wage to $15 an hour and will continue to do so," the spokesperson said.

Consumer benefits

Experts say companies like Walmart that cater to a low- to middle-income consumer could ultimately benefit as employees spend more in stores and the economy at large.

"What actually ends up happening is it ends up being a boost to the top-line," Baker said. "Walmart's employees mirror the demographics of their customer."

Fletcher, of AB Bernstein, agreed. Walmart will see "more benefit from their customers getting raises than the cost of their associates getting raises," he said.

But the wages cannot keep creeping up indefinitely, especially given that middle-class wages are not rising as fast, he said. Walmart's most profitable customer makes about $70,000 per year, he said.

"If all you do is continually bring up the lower-end and there is no improvement in the middle class, that can ultimately destroy the profitability of a lot of retailers," he said.

Minimal impact

Amazon's and Walmart's move to increase minimum wages in 2018 have increased expenses for the companies, but the two major retailers have more easily absorbed higher payroll costs, experts say.

Amazon's general and administrative expense that includes payroll increased to $1.12 billion in the fourth quarter of 2018, the first set of quarterly results the company issued after raising its minimum wage to $15 an hour. They came in at $1.04 billion in the third quarter of 2018. The company's general and administrative expenses rose throughout 2019 and amounted to $1.41 billion by the fourth quarter of 2019. After adding in selling expenses, Amazon's total SG&A costs in 2019 totaled 22.9% of Amazon's total revenue of $280.52 billion that year.

And as the company added thousands of additional workers to help fulfill orders during the pandemic, Amazon saw general and administrative expenses rise to $1.67 billion in the third quarter of 2020.

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Walmart did not return inquiries for this story. Still, the company's SG&A expense totaled roughly $25.83 billion for its first fiscal quarter ended April 30, 2018, the first quarterly results it released after raising its minimum wage to $11 per hour. That represents a drop from the SG&A expenses the company registered in the previous quarter that totaled $27.50 billion. But it is worth noting that Walmart's expenses are highly seasonal, and fourth-quarter SG&A is typically higher due to factors like holiday hiring, said Zain Akbari, a Morningstar analyst.

Walmart's first-quarter 2018 SG&A represents a year-over-year increase of 4.9% compared to the first quarter of 2017, according to Market Intelligence. Walmart's SG&A expenses accounted for 20.6% of the company's total revenue of $523.96 billion in 2019.

Walmart's SG&A expense has slowly increased over recent years, reaching roughly $27.99 billion for its most recent quarter ended Oct. 31, a 3.4% increase year over year.

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Overall, Walmart has been able to absorb the increases. While some of that was masked by the corporate tax cuts championed by President Donald Trump, the company's margins have "hung in there reasonably well," Akbari said.