The Idea That Raising Wages Destroys Value Is A Fallacy

Its predictability doesn’t make it any less perplexing. Time and again Wall Street analysts will criticize a company for raising wages at the alleged expense of shareholders, and the stock will take a hit. Shortly thereafter, as the benefits of the wage increase begin to pay off – in the form of more engaged and productive employees, happier customers, better retention, etc. – the stock recovers and goes on a tear. Fears of margin compression subside. The returns on that investment in human capital become clear. Shareholders are satisfied.

The myth that lifting wages, especially of the lowest paid and most financially vulnerable employees, is somehow harmful to the interests of a company’s shareholders, is one that we at JUST Capital are pushing back against with the Worker Financial Wellness Initiative.

Take Costco, for instance. The day after last month’s earnings call, in which it announced it had beaten both revenue and earnings growth expectations, the stock fell 1.27%. Analysts expressed concern over the $281 million invested in worker pay and safety measures during the Covid-19 pandemic, and some traders were spooked. CNBC’s Jim Cramer called the sell-off “absurd” and another example of a recurring cycle, where the company is briefly punished for smart management before being rewarded for it.

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As Cramer noted, Costco has been there before. Back in 2004, a Deutsche Bank analyst derisively said the warehouse retailer’s exceptional investments in worker wages and benefits (and low prices) meant “it’s better to be an employee or a customer than a shareholder.” Not quite. From 2005 to 2020, Costco’s stock price increased 724%, to the S&P 500’s 174%; and over the past decade, that price increased 492% to the index’s 195%. I’m not sure what that analyst is doing now.

Consider also the country’s largest private employer, Walmart WMT , which took a hit in February 2015 after it announced pay raises. The stock began to rebound that fall, and from the announcement through last month, has performed in line with industry peers and outperformed the S&P 500 by 295 basis points. Walmart has remained steadfast in its internal investments, and recently announced another salary increase.

It isn’t difficult to understand why the market reacts this way. Finance 101 teaches us that rising wages are a sign the economy is heating up, which makes it more likely the Fed will follow through on interest rate hikes, and that employers will eventually have to raise prices to keep up with the cost of labor. As interest rates go up, stocks tend to deflate.

But there is also a more insidious and wrong-headed assumption baked into the equation which holds that raising wages will destroy shareholder value – that it is a zero sum game between investing in workers and returning capital to investors, and that paying workers a fair, living wage is somehow bad for business and anathema to smart, disciplined financial management.

It is a narrative that makes a mockery of the American Dream. It puts upwards economic mobility out of reach for millions and undermines faith in our economic system of free enterprise and a fair day’s pay for a fair day’s work.

Part of the problem is a mismatch in time horizons. Costco cofounder Jim Sinegal captured it perfectly back in 2005, shortly after that analyst pushback to an investment in workers, when he told the New York Times NYT , “This is not altruistic. This is good business. … On Wall Street, they’re in the business of making money between now and next Thursday. I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.”

Another key element is awareness. I would wager that most CEOs and board members of Fortune 500 corporations believe that they have few if any full time workers earning below a local living wage threshold. Certainly, PayPal PYPL CEO Dan Schulman and former Aetna AET CEO Mark Bertolini assumed that – until they actually did the work internally to find out that, in fact, there were many workers experiencing acute financial hardship every month.

This is one of the reasons we launched the Worker Financial Wellness Initiative alongside PayPal and in collaboration with the Good Jobs Institute and the Financial Health Network. The goal is simple – to encourage companies to evaluate the financial health of their workforce, determining whether employees are earning enough to not only get by each month but also plan and save for the future. The Initiative is rooted in the belief that if CEOs know this information, they can make better decisions about their business and workforce.

Of course, in a global pandemic and a concomitant recession, these economic pressures are intensified, both from the perspective of the company itself, and the worker. The survival of both has been at stake, literally in some cases. Yet even today, some analysts would still consider any investments in workers’ health, benefits or compensation to be unnecessary and indicative of poor leadership at the expense of shareholders.

Our own research supports the business case for proactive worker investment. Companies scoring in the top 20% on JUST Capital’s Workers stakeholder category, across all 33 industries we cover, outperformed the Russell 1000 over the year ending August 30 by 4.7%, while those in the bottom 20% underperformed by 4.3%. Companies that score highest on the Workers stakeholder prioritize a range of metrics such as implementing fair pay, paying a living wage, and creating a diverse and inclusive workplace.

At its root, this disconnect is a systemic problem. We’ve created a race to the bottom – and it’s worked so well that real earnings for the bottom 90% have been effectively stagnant for the past 40 years, with no clear path to upwards mobility, and millions of full-time workers at Fortune 500 corporations (companies returning billions to investors) rely on government assistance to put food on the table. Wage increases are greeted with skepticism and hostility by the Street. CEOs wishing to lift wages for their workers are met with resistance from activist investors.

We need to change the narrative on wages in America. Our polling shows it’s the single most important issue for Americans right now when it comes to what they want corporate America to do. The first step on that journey is for CEOs and corporate boards to simply ask the question, how many of our workers are financially vulnerable, so they can develop the right strategies and plans to take action.

Visit JUST Capital’s Worker Financial Wellness Initiative resource page for more information. Good Jobs Institute executive director Sarah Kalloch contributed to this article.

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