January 11, 2018 / 8:40 PM / 6 months ago

Breakingviews - Walmart pay hike is less than largesse

NEW YORK (Reuters Breakingviews) - Walmart’s new pay hike, purportedly inspired by the recent cut in the U.S. corporate tax rate, is a little less than real largesse. The U.S. supermarket chain’s extra spending on hourly wages is just a sliver of what it could save in tax, though – and a tight labor market is likely to have been a more potent driver.

People talk outside a Wal-Mart Pickup-Grocery test store in Bentonville, Arkansas, June 4, 2015. REUTERS/Rick Wilking

The $300 billion retailer will raise its hourly rate for starting-out staff to $11 in the United States, the third upward move in three years. Assuming a 40-hour work week, the $300 million increase the company expects in its wage bill would suggest fewer than one in 10 U.S. staff will benefit directly. Put another way, the new increment is equivalent to just 0.3 percent of the company’s sales and administration costs.

Moreover, the reduction in the corporate tax rate to 21 percent from 35 percent means Chief Executive Doug McMillon in theory had room to give away much more. The company is forecast to make $20.3 billion of pre-tax profit in 2018. Around three-quarters of that comes from the United States, which suggests a tax saving of $2.1 billion. Factor in the one-off bonuses the company is paying to some staff, at a total cost of $400 million, and the Beast of Bentonville is giving back only around one-third of what it could save in tax.

In fairness, there are other demands on Walmart’s tax windfall. Competition from rivals and online behemoth Amazon are going to call for investment in stores and lower prices. On the same day the company trumpeted its pay rise, it revealed the closure of some members-only Sam’s Club stores. So competitive is the market that Morgan Stanley reckons in most cases only 50 percent of what retailers save in tax will make it back to investors.

The wonder, even so, is that Walmart didn’t do more. It said in 2016 it was investing $2.7 billion in staff over two years. At the time neither a tax cut nor such a low jobless rate were in prospect. Now that unemployment is at its lowest since 2000, the company would probably have needed to raise wages anyway. Neither tax nor benevolence has much to do with this minor act of redistribution.

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