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Pay rises in America

2015-03-31 04:28:10

Serfs up

American firms are having to get back into the habit of granting pay rises

Mar 28th 2015 | NEW YORK

THIS week the rank and file of the United Auto Workers union (UAW) met in Detroit under a logo of a clenched fist and the slogan, It s our time . When they last collectively negotiated a big pay deal, it was in 2011 and General Motors, Ford and Chrysler were still crawling out of the worst recession in memory. What the workers got then reflected the firms feeble condition: for Ford s hourly-paid UAW members that was an annual rise of just 1%.

That deal expires this year, just as the motor industry is booming again. The big-three car firms complain that their wage bills are still higher than those of foreign rivals, and say they will resist pay rises. But together they made underlying pre-tax profits of $19 billion in 2014. Workers want their slice of the cake. The gathering in Detroit was to plan tactics ahead of talks with the car bosses in July.

Carmaking is not the only industry where there is upward pressure on pay. In February Walmart, known for its stingy wages and lack of unions, said it would pay junior staff at least $9 per hour, which is above the federal minimum wage of $7.25. That will affect 500,000 staff and cost $1 billion, equivalent to 6% of net profits. This week Target, another retailer, was reported to have raised its minimum pay to $9 an hour. It so far refuses to confirm this.

The Federal Reserve and many economists may be perplexed as to why hourly wage rises across the economy remain subdued, at just 2% year-on-year in February, even as the unemployment rate has reached a low of 5.5%. But to many bosses it is clear which way the wind is blowing.

For a start there is political and popular pressure to raise pay, and not just from the White House. Seattle s mayor, Ed Murray, plans to force big firms in the city to pay at least $15 an hour by 2017. At the bottom of the pay scale the actions of giants such as Walmart will have a knock-on effect among the 3m-odd Americans who get paid the federal minimum wage or less. McDonald s recent annual report warns of the trend towards higher wages .

The bosses of smaller companies, which account for a large chunk of employment, already face a tight labour market. In February the share of small firms that said they had job openings that they were unable to fill, and were raising pay, rose to levels last seen before the 2008 financial crisis, according to the National Federation of Independent Business.

If many bosses fret about rising pay, investors do not. Most listed firms do not disclose their labour costs and few analysts ask about them. That seems complacent. The companies that form the S&P 500 index of America s biggest firms employ 24m people worldwide. And their profits are still quite sensitive to wage costs. A 10% rise in pay would cut profits by 8%, based on official statistics for big American multinationals. Walmart s shares dropped by 3% on the day that it announced its pay rise.

Rising paybills need not be bad news for shareholders, however. In labour-intensive industries the American way of low pay, low staff retention and low motivation may be a false economy. Perhaps a third of Walmart s staff are reckoned to quit in any given year, which could be one reason why it often scores poorly for customer service. In 2014 it said inept shelf-stocking cost it $3 billion a year more than its planned pay rise. As the economy improves, many retailers are busy hiring new staff only to see others walk out of the door (see chart). Zeynep Ton of the MIT Sloan School of Management notes that some retailers, including Costco, pay more and have happier staff who quit less and build up skills. Margins are higher as a result.

But if a trend of rising wages does set in, it will require a change of mindset among American firms. Managing labour is an art form in economies beset by pay inflation. In India, outsourcing firms such as TCS, which employs 318,000 people, put intense effort into reducing staff-churn rates TCS s is just 13% per year. Corporate America has almost forgotten what it is like when people are a scarce resource. It is time to remember.

From the print edition: Business