Minimum Raise Increases: They Do Have an Impact- and Not Just on the People Who Get Paid More

I was reading Zumiez’s 10-Q and conference call and came across a question from an analyst (Sharon Zackfia from William Blair) on labor scarcity and wage pressures.  Here’s what she asked:

“I guess I’m curious from a labor standpoint kind of as labor gets scarcer and scarcer and wages are going up, how — what if anything that you’ve been able to do at a store level to kind of optimize that labor better, given the compression in your seasons?”

Zumiez CEO Rick Brooks’ got me thinking and detoured me from my usual review of their results- which I’ll get to after this article.  Let me quote Rick at some length.

“We’re — we actually have a whole team of people that is focused on this topic, about how we’re going to have to adjust our business. It’ll include many factors as we’ll think about this. I think to some extent we have to redefine roles of our team and how we think about even down to the role of temporary, part time workers and how they fit into our current business model we have, the omni-channel model, the localized model, how we really make sure our sales leaders are focusing only on sales, and the way that — it will include how we think about order routing algorithms over time. These are all the new complexities that we have now a chance to impact our business on, now that we’ve gone to this fully localized route. And as you know, we also don’t have the labor of a centralized fulfillment center, so we have been able to think differently there. And I think this is actually from a peak, non-peak perspective is probably I think in the long term an advantage for us. Not only are we faster but many stores at a non-peak are at minimum hours. So, I think that there is some opportunity there over time, that gets around to how we think about the sophistication of our order routing algorithms and why it’s certain time for route orders the different volume levels of store than we think about it other times of the year.”

“So, these are all options out there for us. Now, the opposite for us is around wage level is going up. I can tell you that, Chris has said this on previous calls as the worth possible scenarios of happening to us now which is that we get cities with different minimum wage laws, states with different minimum wage laws. We would much prefer a national solution because I think it would allow us to think and allow our brand partners to think about how we might price differently when we had a national solution to minimum wages because I think it’s pretty clear that those countries at higher minimum wages do have higher prices in their cost structures.”

I have no idea how Rick or anybody else at Zumiez feels about the minimum wage.  It really doesn’t matter.  From a business point of view I expect they are agnostic about it.  It’s just another factor to be managed.

The first thing you should notice from the quote above is that it’s way more complicated than just, “Oh, the minimum wage went up- we’ll pay some people more.”

Zumiez is trying to figure how changes in labor cost and availability ripple through the whole company and what adjustments they should make.

This isn’t about Zumiez.  Every other company is trying to figure out what adjustments they should make to their business model in response to changing business conditions all the time.  And like with all complex systems, there will be unintended consequences.  What might those be?

Economy wide, we’ll see the intended consequence of minimum wage increases.  Some people will earn more money and we’ll know who they are.  That’s a good thing for them and nobody is going to argue that minimum wage workers don’t need to earn more.

But what about the unintended consequences- the ones that are harder to spot or quantify?

Some people will lose their jobs.  I don’t know how many, where, or how quickly.  It may not be completely because the minimum wage went up, but that may be a factor.  Some will have their hours cut.  Some may get hired, as the kind of adjustments Rick Brooks talks about ripple through an organization, perhaps causing Zumiez (and any other company in touch with reality) to hire some people with different skill sets.  And higher labor costs may make automation more attractive to some businesses, both costing people jobs where automation increases and creating jobs in the places that make and repair the equipment required for the automation.

What’s the net, long term, bottom line impact of all this for the overall economy?  I have no idea.  Neither does anybody else.  But if any of you believe that wage increases will just be absorbed by the big, rich corporations and that’s the end of it, you’re wrong.  Actually, it’s not that your wrong or right.  It’s just more complicated than that.

To the extent a company can’t or chooses not to adjust its cost structure in response to higher costs, its shareholders make less money.  Or the people who are part of the unintended consequences make less, or in some cases more, money.  Or prices get raised and people who buy the product have less money to spend on other goods and services.

When we raise the minimum wage (or give oil company depletion allowances, or low income people food stamps, or homeowners a deduction for mortgage interest, or senior citizens Medicare) we do not grow our gross domestic product.  We merely make a decision as to how we should allocate it.

I’m not making a judgment as to whether any of these allocations are “good” or “bad.”  However, the only sustainable way to grow real wages (and pay for various benefits) is to grow real gross domestic product.

Growing gross domestic product requires some combination of more people making stuff or each person making more stuff.  There are no other choices.  Our population growth has fallen and would be close to zero if it wasn’t for immigration.  Productivity growth is still positive, but way down from ten or fifteen years ago.  So the economy is growing slowly.

Meanwhile, we financed all these things we want but don’t want to pay for with debt.  Debt is just consumption pulled forward that has to be paid for later.  Too much debt retards growth, and that’s pretty much where we are.

So by all means support minimum wage increases because they help people who need it.  But recognize that, like all other allocations of income we legislate, they aren’t free.