Higher minimum wage in California feels like a win for retail workers, and maybe for the state in general, but the picture isn't so clear when you take a closer look.
Earlier this week, California Governor Jerry Brown signed a law raising the state's minimum wage to $15 by 2022. Specifically, the statewide minimum wage will increase from $10 an hour to $10.50 an hour on Jan. 1, 2017, then up to $11 an hour on Jan. 1, 2018. From there it will increase by $1 annually until reaching $15 an hour on Jan. 1, 2022. At the signing ceremony, Brown explained that while the minimum wage increase might not make sense economically, it is necessary from a moral and political standpoint, as it "binds the community together and makes sure that parents can take care of their kids in a much more satisfactory way."
The retail industry relies heavily on hourly workers, and as such it will certainly be impacted by the wage increase. For retail employees in California this likely feels like a win, but if you dig a little deeper and consider the potential impact on the California retail industry as a whole, you'll find that it's not so cut and dry.
Fighting to provide all Californians with livable wages is a noble concept. This increase could very well mean that a single parent can work one job instead of two and have more time to spend with his or her children -- and that's an undeniably good thing. It's also possible that higher wages will drive spending and put more money back into the economy, which would also be a positive outcome. Finally, the wage increase could lead to a happier workforce, less turnover, better efficiency and lower onboarding costs for employers.
On the other hand, we can't ignore the fact that this change presents a serious increase in operational costs for business owners. The first annual increase -- going from $10 to $10.50 starting Jan. 1, 2017 -- will tack on an extra $1,040 per year to maintain an hourly worker putting in 40 hours per week. Let's say a small apparel contractor in Los Angeles has a shop with 15 hourly workers. If that business owner wants to keep the existing staff at full capacity for the year, he or she needs to commit an additional $15,600 to labor. By 2020 that number will jump to $156,000.
There are a few ways in which business owners can work to absorb these costs.
One way is to cut jobs and require increased output from the remaining workforce. While an employer could opt to decrease the number of hours for each worker, the more logical approach would be to keep the most experienced and productive workers at their current schedules. This creates increased competition for fewer jobs, albeit higher-skilled jobs.
Another likely option is that prices will rise. Let's go back to that hypothetical apparel contractor -- in this instance, the business owner would charge its retail partners more for its services, and in turn that retailer would likely pass the increase down to the consumer, in some cases negating their higher income. And of course, there's always the option for California apparel manufacturers to increase production overseas, something that's already increasingly appealing because of the looming Trans Pacific Partnership.
One potentially neutral result that often accompanies increases in labor costs is innovation to improve efficiency and reduce headcount. For example, with more consumers using smartphones as a research tool while shopping in stores, retailers can leverage mobile technology to optimize in-store experiences while reducing the number of sales associates. Eventually we may soon see customers make in-store purchases by scanning a QR code on their smartphones, having been assisted by a virtual sales associate.
Additionally, with more customers buying online, we'll see increased adoption of technologies that expedite the supply chain and improve margins. For example, Hudson's Bay Co. recently announced plans to implement a new robot system in its Toronto distribution center called Perfect Pick, which CEO Jerry Storch says will operate six-to-10 times faster than human stock pickers.
The truth is, nobody knows exactly how everything will unfold for California's retail industry. It is possible that the increased minimum wage will result in less employee turnover and increased consumer spending, which could help to offset the higher operational costs. It is also possible that a significant number of retail jobs will be cut, and some entire companies will have to close because they can't keep up with overhead. It's too soon to tell exactly what impact the wage increase will have, but companies that are agile and effectively balance fewer but higher-skilled labor costs are most likely to prevail long-term.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.