Wages Rise at Major Retailers

February 25, 2015

Only a week after Wal-Mart Stores Inc. announced plans to raise their starting wages to $9 per hour this year and $10 per hour next year, the retail conglomerate that includes T.J. Maxx, Marshalls, and HomeGoods announced similar plans.

This is excellent news. This sort of business move is the most natural, and best, vector by which wages rise. In an improving labor market, corporations need to increase their compensation packages in order to attract workers.

This reveals an important point about how wages can rise. The fundamental characteristics of the workers at these establishments have probably not changed much in the past few months. What has changed is the underlying economic conditions surrounding them.

The stock market rallied strongly last year. Equity is readily available for companies that have good business ideas. These are important indicators, even though nothing about them directly gives money to workers. Their importance derives from the simple truth that wages rose as a result of that stronger climate for business.

Our view at Tax Foundation (a view embedded in the assumptions in our Taxes and Growth Model, and in mainstream economics more generally) is that labor and capital are two complements that together create economic output. Good years for business (like 2014 and 2015 so far) end up being good years for workers, too. Bad years for business (like 2008 and 2009) end up being awful for workers, too.

This is the critical insight of how labor economics actually works in the end. If profits come easily, more people try to earn them, more people expand their businesses, more businesses compete for workers, wages go up, and then profits suddenly stop coming as easily anymore, because the labor costs are higher. Over even a medium time horizon, benefits are shared.

Economics has some deeply powerful equilibrating forces in it, and in some ways our economy is a lot more stable than it is given credit for.

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