What Gap Raising Its Minimum Wage Means For The Economy

Gap announced on Feb. 19th that it would raise its minimum wage for American employees to $9 per hour this year and $10 per hour in 2015—an announcement that has caused a stir among workers, consumers, businesses and legislators alike. Gap reports that this move will boost earnings for about 65,000 of its 90,000 workers employed in stores, including Banana Republic, Old Navy and other stores that the company owns, at call centers and in distribution hubs across the country.

This announcement came just 24 hours after Senate Republican Leader Mitch McConnell (Rep-KY) warned that President Obama’s suggested move to raise the minimum wage to $10.10 per hour would be a “devastating blow to the very people that need help most.” Obviously, Gap didn’t feel the same way.

Instead, Gap CEO Glenn Murphy emphasized the benefits for the retail store’s lowest-paid employees. He referred to it as a “strategic investment to do more for our employees” that will “attract and retain a skilled, enthusiastic and engaged workforce.”

President Obama has endorsed Gap’s decision, in part because it supports his mission to raise the federal minimum wage to $10.10 by 2016. Gap, however, did not take an official position on the president’s proposal.

Raising the minimum wage has incited a heated debate in Congress, and Gap’s decision has likely only fueled the flames a bit. As with anything else, there are benefits and drawbacks associated with such a decision, but businesses are starting to feel the pressure now that other businesses are jumping to raise their own starting pays before any federal decision has been made.

Why It’s Good to Raise the Minimum Wage

Gap’s increase in its minimum wage for employees fits within and sheds light on the federal debate Obama has waged about raising the federal minimum wage as well as its proposed benefits.

According to President Obama, “There’s no solid evidence that a higher minimum wage costs jobs, and research shows it raises income for low-wage workers and boosts short-term economic growth.”

The Congressional Budget Office (CBO) issued a report that showed that following Obama’s plan for raising the federal minimum wage would result in 900,000 people rising out of poverty and 16.5 million people benefiting from the wage hike.

One significant benefit, as President Obama suggested, would be a boost for the economy, at the very least in the short term. Higher minimum wages means more money in consumers’ wallets. This could then boosts sales for more businesses across the nation and can in turn offset the higher labor costs incurred by these businesses.

Learning important employable skills on the job is another crucial way that minimum-wage jobs are fruitful for the economy. Raising the minimum wage would then not only provide this job experience, but it would also allow more of these workers to pull themselves out of poverty and into a more stable financial environment, particularly for parents who are trying to make ends meet with child care expenses.

Increased job morale and satisfaction is still another benefit from raising the minimum wage. By making more money, employees are able to save and spend more and be relieved of some of the high financial costs they incur, between bills, childcare costs, debt and the like. This means that people feel better about what they’re getting paid for the amount of work they do, and this in turn can boost morale and improve worker productivity as a result.

In the same light, this move could reduce employee turnover which inevitably saves employers money as well. For example, Whole Foods reports that paying its employees at least $10 an hour has allowed them to keep employee turnover as low as less than 10 percent.

The Drawbacks of Raising the Minimum Wage

Raising the minimum wage is not without its drawbacks either. One drawback that is particularly fearful for Americans and an arguing point for Republicans and other conservatives who are opposed to raising the minimum wage is potential job loss.

Job loss could occur when businesses and companies are no longer able to pay as many workers because the minimum amount they could pay them would be higher, and therefore their budget for payroll would be exceeded by having to pay an increased amount. This means laying off workers they can no longer afford.

The elimination of jobs could also come from businesses seeking automation for the jobs that these minimum-wage or low-skilled workers had. This has already happened in the retail business, where online sales have begun replacing brick-and-mortar sales.

In the same report cited earlier from the CBO, it projected that the move for raising the federal minimum wage would cost the U.S. economy between 500,000 and one million jobs. This is the most cited argument against raising the minimum wage and is particularly strong amidst a still less than stable economy where job growth is quite the contention.

However, with these drawbacks in mind, many still believe that the benefits of raising the minimum wage outweigh the costs and should be pursued anyway.

Per the CBO report’s findings, Larry Haas, spokesman for the Office of Management and Budget during the Clinton administration said, “What’s really startling about this report is that while it acknowledges some job loss, the corresponding benefits so greatly outweigh the costs that it almost looks like it’s hard not to do it.”

Feeling the Pressure

Companies are beginning to feel the pressure when others like Gap are raising their own minimum wages. But many are embracing the concept as well. In fact, one national poll of small business owners conducted last year reported that 67 percent support raising and indexing the federal minimum wage. Cited was the improvement of revenue based on the increased consumer spending that stems from higher minimum wages.

Bluefield Daily Telegraph reports that for a major employer like Wal-Mart, a boost in minimum wage to the federally suggested $10.10 would add $200 million—or less than 1 percent—to Wal-Mart’s annual labor bill, according to the University of California Berkeley Center for Labor Research and Education estimates. This comes out to be about a penny for each $16 spent. Plus, raising the minimum wage, whether mandated by the federal government or not, could increase purchases made by the chain’s core shoppers, many of whom would be enjoying an income boost which could increase consumer spending.

Also, some major companies have already jumped on board ahead of any federal regulation. Costco starts its entry-level employees at $11.50 per hour, which is significantly higher than its closest competitor Sam’s Club, which is owned by Wal-Mart. Trader Joe’s as well has increased its starting wage for full-time employees between $40,000 and $60,000, which is more than twice what many of its competitors pay. This is also three times higher than the average U.S. supermarket starting salary.

According to President Obama’s recent address, since the first year he suggested that Congress raise the minimum wage, six states have already passed laws to raise their own, and more states are in the process of doing so too. But to finish the job, according to the president, Congress must be on board as well to make the matter an act of federal legislation.

There has been a tug-of-war as of late concerning the minimum wage debate, but Gap has obviously firmly established its position in that debate. Will other companies follow suit? Will this affect the opinions of congressmen originally opposed to the idea? Only time will tell where this debate will end up, but certainly minimum-wage workers will be keeping close attention to where their future pay is heading.

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