A paper submitted to Professor Cort by Aaron   Goldblatt, Gene Engholm, Jody Finch, Alex Chotin, and   Donald Eaton in partial fulfillment of the requirements   for Microeconomics. (ECON 250)     

Retail and Minimum Wage  This paper provides an in depth analysis of the effect of the minimum 

wage increase on the retail market.            

Wentworth Institute of Technology Fall 2009 

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On October 24, 1938 Congress enacted a change that would eventually

shape the entire way business operates in the United States. At twenty-five cents

per hour, and only covering those employees engaged in interstate commerce

first minimum wage laws came into effect. Since its inception minimum wage has

come a long way rising almost annually except for a 9-year gap from 1981-1990

(Department). Now at $7.25 per hour covering all hourly workers, minimum

wage’s effect on industry is coming into question.

Until 1961 the federal minimum wage was restricted to its original

demographic. An amendment was then made to expand to those who work in

large retail and services enterprises, local transit, construction and other service

industry (Department). It was at this point that minimum wage laws began

affecting entire United States Workforce. As in the case with retail, not only did

employee cost increase, but also the supply chain as a whole.

To understand how minimum wage effects retail one must understand

how retail works. The retail industry as we know it today originated in 1850 when

several American retailing institutions opened for business. Before this period,

most Americans lived on farms and were considered to be self-sufficient. The

only retailers known to occupy the country were itinerant peddlers and general

stores. However, from the year 1850 department stores took a force of their own

and became important in the distribution of goods. It was clear that department

stores would soon dominate cities as the retail experience trumped all other

buying experiences. Retailers soon expanded to rural citizens using catalogs to

sell goods across the country (Byrd). This had a double effect enabled rural

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citizens to receive the products they wanted without having to travel long

distances and enable retailers to expand beyond their locale. As catalog orders

increased and retailers quickly expanded, chain stores came into existence.

To sell their product retailers must first buy or produce it. In the case of

Clothing Retailers, many are unaware of the tedious process that is involved

when cotton trade takes place. This year long, 24/7 process includes the

participation of hundreds of merchants and cooperatives that buy the fabrication

of millions of farmers. After classifying the cotton into many of its categories

farmers must find possible markets and then ship the cotton to thousands of

textile mills that weave the fabric. From here the fabric is sent to factories that cut

and sew the fabric to send it to the retail stores. Buyers work with factory owners

to understand every detail of production, from materials, quantity, and price to

packaging and delivery (Gap).

The factory makes product samples using mannequins and models to

display product so the retailers can confirm the fit. Once approved, the factory

begins production. Before the merchandise is shipped to the distribution centers

the samples, plans, fixtures, and in store displays are packed and readied. As

soon as the products get to the distribution centers all boxes get checked in.

Once inventory takes place the merchandise is delivered to the appropriate

stores. At the end of this process it is up to the employees in the retail store to

sell the merchandise to the customers. They must have the capability of making

the customer interested in the merchandise and answering any questions they

might have (Gap).

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In a case where a product is not sold because of manufactured errors or

canceled orders the off price consumers benefit. The retail goods are sold

directly from the supplier at an opportunistic discount. Products that are not sold

at the end of the season are also passed down to the off price retailers that can

sell it at a discount price for the next appropriate season. The off-price retail

sector as a whole is growing faster than most other retail segments, with a

compounded annual growth rate greater than 10% over the past five years, well

above the 4% average annual growth rate for apparel retail.

Throughout this entire process workers are paid based on the Federal

Minimum wage. From the farmhands assisting in loading, to the sewers in the

mills, to the dockworkers unloading the freight and finally the retail employees

selling product, much of the process depends on the Federal Minimum wage.

Any change in this affects the process as a whole and the bottom line for retailers

(Wal-Mart).

Federal minimum wage, while a threat to industry, was created with good

intent protecting exempt workers from profit-focused management of

corporations. Minimum wage is often the base from which most salaries are

based. As seen in the following pie chart, from Political Calculations, the majority

of people earning minimum wage in the U.S are either in the 16-19, or in the 20-

24-age bracket. These teenage workers are typically the workers found doing the

labor-intensive tasks, which drive the labor market.

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While the Federal minimum wage is effective in protecting non-skilled

labor, some state feel that the Federal minimum is not high enough. The

following chart from the New York Times shows the minimum wage rates by

state in comparison to the Federal minimum wage. As illustrated, states such as

California, Nevada, Massachusetts, and Rhode Island have a minimum wage

that is greater than the federal minimum wage. Some states that have a lower

minimum wage rate include Minnesota, Kansas, and Wyoming. There are a few

states that have no minimum wage laws at all - Louisiana, Alabama, and South

Carolina - allowing Federal law to dictate such. The majority of U.S. states have

labor laws that match the Federal law.

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The president of the United States, Barack Obama, is currently working on

ways to index minimum wage in the future. He hopes to raise the federal

minimum wage to $9.50 by 2011 and hopes to start indexing the minimum wage

by 2012. By raising minimum wage annually or indexing the minimum wage

starting in 2012, President Obama hopes to put a system in place that can

continually rise with inflation.

While theoretically good for working individuals, indexing minimum wages

could mean that employers will look to hire more specialized employees or hire

fewer employees to maintain healthy margins. This could lead to increased

unemployment at entry-level jobs. An example of unemployment from indexing

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would be Washington. Washington’s teen unemployment in 1999 was 19.7% and

as indexing was applied its teen unemployment increased to 29.7% in 2008.

The following graph illustrates the growth in teen unemployment rates in

Washington. It draws a comparison to the teen unemployment rates in the rest of

the United States.

This chart shows that as prices rise companies hire fewer employees to

work. For retailers this means fewer employees on the floor selling maintaining

inventory and helping customers find product. Although the retailers will save

money by hiring fewer employees they will have face challenges with the upkeep

of the store and assistance to customers shopping in the store.

Stores that emphasize customer service will not be able to make such

sweeping employee cutbacks. Market Basket, a grocery store food chain based

out of Massachusetts is an example of a store focusing on customer satisfaction,

which faces issue on raising minimum wages. Market Basket hires many young

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teens to keep the floor full of employees to help the customers as much as

possible. They also try to keep the store as clean and presentable as possible.

Many of the employees at Market Basket work in the aisles to keep the shelves

stocked with food and to answer any questions customers may have. For Market

Basket and other service focuses retailers – minimum wage will force these

stores to make cut backs in other areas.

When retailers look to cut costs their logistical decisions are often first to

be examined. While the shipping industry has very few jobs that pay minimum

wage, its margins depend heavily on the spending activity of the economy as a

whole.

Shift is the term used within the shipping industry to describe a shipper’s

decision to transition from one mode of transport to another. The two primary

forms of transport within the US are Air and Ground. Air is time definite aircraft

movement while Ground is day definite truck or train transport. Air transport

generally carries larger margins then ground, as it requires more skill to execute.

In our want-it-now economy of customization and just in time

manufacturing, air transport has long been the choice of retailers to ensure fast

and on-time delivery, however, with decreasing margins retailers have begun

looking at Shift as a cost cutting miens.

From a logistical point of view – planning inventory movements a week

ahead is a headache for retailers, however the savings of ground verses air often

motivates retailers to change their ways. Often hiring an employee strictly for

management of slower shipment is cheaper then relying on express movement.

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While this means an overall growth in the volume of packages, it means a

decrease in revenue as mentioned in FedEx’s first quarter 2009 report. While

Ground maintains a year over year “Operating margin of 11.9%” Express suffers

at margins decreased to “2.8%” (Home).

Unfortunately for retailers attempting to curb costs, shift is often not

enough to offset cost. After examining labor cuts and logistical cuts, product cost

are next to be examined.

The wholesale sector of the economy is the sector that deals with the

distribution of goods to retailers. Because these industries are so closely related,

there are obvious effects of a change in one on the other (Fein).

The wholesale industry adjusts to the changes in minimum wage by

improving upon their technology. In improving technology, they reduce the need

for low skill workers by using technology as a substitute. This is illustrated in the

fact that the wholesale industry continues to employ fewer people than most

industries, yet are somehow more productive. According to the National

Association of Wholesale distributors, the wholesale industry employs 1 out of 20

private sector U.S. workers. The wholesale industry however, contributes to

approximately 25% of the economy’s overall production. Their production has an

immense effect on the production of the retail market because the retail market is

the consumer of merchandise from wholesalers. Generally, when the wholesale

market is productive, the retail sector is as well.

With the increases in the minimum wage laws, wholesalers are forced to

cut costs in other ways. One way that they do this is through secondary

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wholesale trading. Secondary wholesale trading is when wholesalers sell their

excess inventory to other wholesalers at deep discounts to avoid the loss of

holding onto the merchandise.

Another way that they cut costs is by selling directly to the customer,

skipping the retail process altogether. This factor obviously hurts the retail market

because they lose out on potential business. Selling directly to the customer for

wholesalers is more common in the online market than the physical market. In

the online market, wholesalers give the retailers more opportunities to save

money by a process called drop shipping. Drop shipping occurs when the online

wholesaler holds onto merchandise until the retailer sells the product to a

customer. The wholesaler then proceeds to ship the product directly to the

customer, saving the retailer of the shipping costs, and allows the retailer the

convenience of not having to keep any merchandise in stock. With rises in

minimum wage laws, wholesalers are constantly cutting back costs. Whether it is

by working directly with the customer or selling their excessive inventory to other

wholesalers, wholesalers understand the importance of saving money.

While a raise minimum wage is good for the low-level employee, for

business it’s often burdensome, as it not only affects the low-skill workers but

also the entire supply chain. This heavily effects the logistical decisions to be

made by the higher-ups in every field of industry, sending a rippling effect of cost

cutting and price raising. This cost cutting is often done by cutting employees, so

despite the increased amount of expendable funds per employed individual,

there are less people being employed overall, whether by directly being fired or

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wholesale companies cutting out the retail market and selling direct. The costs

are also cut by using cheaper shipping methods, decreasing the revenue for

shipping companies and putting them in a position where they too need to cut

employees. In a looming recession and rising wages retail is fighting to stay on

top, as described the minimum wage is pulling an industry which is already

hurting.

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Works Cited

"As consumers slow down, FedEx and UPS adapt - Quincy, MA - The Patriot Ledger." Home Quincy, MA - The Patriot Ledger. Web. 111 Oct. 2009. <http://www.patriotledger.com/business/x1486100971/As-consumers-slow-down-FedEx-and-UPS-adapt>.

This article discusses the trend of retailers to shift volume to ground based miens as a way to cut costs.

Byrd, Rodney. A Brief History of Retailing. April 10, 2001.

<http://www.suite101.com/article.cfm/retailing_shopping/65949/2>. One theory suggests that trade was an instinctive invention based on the need for food, water, and bodily comforts. Another is based on human aggressiveness. Another one asserts that trade was an outgrowth of friendly gift giving. Yet another very plausible explanation suggests that people who had more goods than they could consume traded the excess away. Whatever the reason, it became a staple of civilization.

Dolbeck, Andrew "Valuation of the Wholesale Distribution Industry". Weekly Corporate Growth Report. FindArticles.com. 09 Oct. 2009. <http://findarticles.com/p/articles/mi_qa3755/is_200505/ai_n13641730/>.

This article provides a general look at the wholesale sector of the economy. It discusses the challenges for wholesale distributors, such as the growth in the number of online retailers. This article also provides an outlook for the near future of wholesaling.

Camargo Barros, Geraldo. Center for Advanced Studies on Applied Economics.

<http://www.cepea.esalq.usp.br/pdf/Cepea_artigo_macro2.pdf>. The internationalization of the economy brought in external capital to agro-industries and supermarkets which later made more efficient use of the market power and substituted the industry in the price formation process. By fiercely competing among themselves, however, retail companies ended up with low margins. Finally the effects of opening the economy created the farm price support that the domestic market plus the government programs could not provide. As a result farmers and consumers benefited from the economic integration.

Fein, Adam J. "State Of The Wholesale Distribution Industry." National

Association of Wholesale Distributors. Web. 10 Oct. 2009. <http://www.naw.org/about/industry.php>.

This article talks about the wholesale industry in terms of growth, employment, and productivity. It also examines how important success in the wholesale sector of the economy is for the United States to remain globally competitive.

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Gap Inc. - About Gap Inc. - How Our Clothes Are Made." Gap Inc., Portal Web Server Index. Web. 10 Oct. 2009. <http://www.gapinc.com/public/About/abt_howourclothesaremade.shtml>

Company overview of GAP Corporation discussing product creation. Gutierrez, Carl. "Wholesale Inflation Falters." Forbes. 18 Aug. 2009. Web. 9 Oct.

2009. <http://www.forbes.com/2009/08/18/producer-price-inflation-markets-economy-dollar.html>.

This article talks about a current situation in which inflation in wholesale is suffering due to the government’s input of money supply. This article compares different products to show statistically how each of them are affected in terms of inflation.

"History of Changes to the Minimum Wage Law." The U.S. Department of Labor

Home Page. Web. 11 Oct. 2009. <http://www.dol.gov/esa/minwage/coverage.htm>. A history of changes to the minimum wage law published by the

Department of Labor. Provides great detail to the critical changes made to minimum wage since its inception.

Lee, Yang-Im. Retailing Strategy and the Importance of Clearly Defined

Partnership Arrangements. <www.rhul.ac.uk/Management/Research/papers/0602.pdf>.

This article explains the way retailers operate in a complex and competitive environment, and that because of this retail managers need to be aware of the need to seek market opportunities and develop long-term sustainable relationships with partner organizations

McCann, Philip. "Journal of Regional Science." Academic Search Premier. Web.

12 Oct. 2009. <http://ezproxywit.flo.org/login?url=http://search.ebscohost.com.ezproxywit.flo.org/login.aspx?direct=true&db=aph&AN=9406220458&site=ehost-live>.

Discusses the location-production decision with emphasis on the discrete nature of delivery flows of inputs and outputs to and from the firm. Investigation on how the discrete nature of these flows affect the firm's location-production decision; Formulation of the Weber-Moses problem; Dependency of the optimum location to transportation cost, firm's production function and value of materials being shipped.

"Minimum wage hike could affect retail employment." The Wholesaler UK trade

directory of wholesalers and trade suppliers. Web. 12 Oct. 2009. <http://www.thewholesaler.co.uk/html/minimum_wage_hike_could_affect.html>. An increase in minimum wage could cause employment in retail to decline. This could affect unemployment in retail drastically. The minimum

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wage is supposed to rise at equilibrium with the employment rate. If the minimum wage rises to quickly it will cause the employment rate to drop. This could have a negative affect on the economy.

"Minimum wage increases affect everyone - Business News & Issues - Helium."

Helium - Where Knowledge Rules. Web. 12 Oct. 2009. <http://www.helium.com/knowledge/178136-us-minimum-wage-increase>. Raising minimum wage could have a negative affect on employment in the U.S.. If minimum wage rises then the company’s prices will rise to make up for the loss they have paying for the increase in minimum wages. The person who is working for minimum wage will have to pay more for products do to the increase in minimum wage.

"Raising the Minimum Wage: Effects on Family Poverty." Questia Online Library. Web. 12 Oct. 2009. <http://www.questia.com/googleScholar.qst;jsessionid=KTWK8XxrLLX82QMR4Knhh0vQgF3STQjvH7W2mvtC0gvKJfPG2VjP!-2016257069!-82436048?docId=5000127012>. Minimum wage has proven a good tool to help poverty stricken families. If used incorrectly minimum wage can also hurt poverty stricken families. To help poverty stricken families excel by raising minimum wage you need to study the characteristics of employees working at minimum wage.

"The Effect of Minimum Wage Increases on Retail and Small Business Employment | EPI Study." Employment Policies Institute. Web. 12 Oct. 2009. <http://www.epionline.org/study_detail.cfm?sid=98>.

This article explores the different facets of minimum wages effects on retail employment.

"Wal-Mart (WMT)." Investing Wiki with Research about Companies, Investment

Concepts, and more... Web. 10 Oct. 2009. <http://www.wikinvest.com/stock/Wal-Mart_(WMT)>.

Market information regarding Walmart Corporation and how market forces affect America’s largest retailer.