When Wal-Mart starts handing out raises it may be time to worry about equity market valuations. The US’s largest retailer and biggest private employer said on Thursday it would spend more than $1 billion (Dh3.67 billion) to hike pay for half a million workers this year.
Wal-Mart will be spending some of the money to help pay for an effort to give employees more control over when and how much they work. Wal-Mart shares, you will note, duly fell 3.2 per cent.
I am heartily glad that Wal-Mart has raised wages and hope that wage growth is so strong that it eats into corporate margins, now at all time-highs. What I am not is convinced that all constituencies, including share owners, will benefit.
There is a temptation to engage in have-your-cake-and-eat-it-too thinking here. Many good things will happen as a result of Wal-Mart hiking wages; even more if the trend gets wider traction. None of these good things will include higher stock market valuations.
Wal-Mart, and other employers, have had it pretty much all their own way for decades, as wages fell in real terms despite productivity growth. Wages as a share of GDP are close to their post Secodn World War lows while corporate profits as a share of GDP are at all-time highs. Wal-Mart specifically has been able to increase its per-employee profits by 18 per cent since its 2007 reporting year.
This situation, terrible for workers but great for owners, has not been missed by investors, who have bid stocks up. Even using measures which take account of cyclical changes in profits the S&P 500 is now in very rich territory, trading on an adjusted P/E multiple only surpassed twice: just before the dotcom and 1929 crashes.
It is reasonable to expect this state of play won’t last forever. It is also reasonable to think that as it reverses, the value of owning a given dollar of future earnings will fall.
To be sure, many of the factors which have undermined bargaining power are durable and so we shouldn’t be too quick to see globalisation in outright reverse and the wage share of national income rocketing higher. It is also true that Wal-Mart has been under considerable political and legal pressure, which if it is the cause of the wage increase implies less of a read-across perhaps to other companies and sectors.
There are good reasons to think that Wal-Mart is responding to market pressures. Hourly wages have been rising nicely. Last month’s US payrolls report showed an increase of 12 cents per hour, the biggest such in close to eight years. Job openings in the US are at their highest since 2001 and voluntary separations are looking reasonably healthy.
And Wal-Mart is not alone. Health insurer Aetna said it would impose a $16 per hour minimum wage floor which would affect 12 per cent of its workforce, a move it said it took to reduce turnover and attract better talent.
The overall picture is that labour conditions are tightening and wage growth may well continue. Whether we get back to anywhere near historical norms, both in profit margins and wage share, is impossible to say. It is certainly a long journey.
Yet even if travel in this direction is slow, expect the stock market to rapidly take notice. Not only may higher wages eat into profits they may also help to make the overall valuation backdrop much less equity-market-friendly.
That’s because the Fed is doubtless watching. If wages rise strongly not only will one of their evident preconditions for a rate hike, a strong labour market, be at hand but we might also see a bit of inflation.
Part of the point of ultra-low interest rate policy, and maintaining a huge Federal Reserve balance-sheet, has been to raise valuations in asset markets. Generally the riskier the market, and equities are generally riskier than debt, the greater the impact.
Of course Wal-Mart’s rising tide of wages may help to lift Wal-Mart’s revenue boat, not to mention that of every other business. Still Wal-Mart is only predicting a 1 per cent rise in revenue in the coming year.
The classic comparison, to Henry Ford’s decision to pay workers enough so that they could afford cars, is perhaps not apt. Manufacturing companies as they expand have a bigger magnifying effect on their host economies than do retailers.
That’s why states and localities fall over each other to give inducements to get auto plants rather than big-box retailers. Wal-Mart’s wage move is good news, just not for equities.
