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How Walmart Benefits From Hiking Worker Pay In A Tight Job Market

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Mar. 17 2015, Updated 10:06 a.m. ET

Wages, hiring, and the quits rate

The graph below shows that since the end of the recession in 2Q09, the level of workers leaving jobs for other options, or quits, has shown an upward trend. This trend is more pronounced in the retail (XRT) (RTH) sector, compared to the overall picture for US non-farm payrolls.

The quits rate for retail trade was over a full percentage point above the rate for non-farm payrolls, at 3% compared to 1.9%, in December 2014. The difference also appears to be widening. It has also been relatively wider since the Great Recession of 2008–2009.

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Higher hiring

The hiring rate for the retail trade is also on an upward trajectory, as discussed in the previous article. The unemployment rate dropped to 5.5% in February 2015, almost half of what it was in October 2009. The economy added 319,000 jobs in the retail trade over the past year and 32,000 jobs in February, including motor vehicle and parts dealers.

Wage gains

Average hourly wages rose 2.8% for the retail sector year-over-year, compared to 1.9% for all private payrolls in February 2015. This is indicative of a tighter labor market for retail. As higher employment creates higher demand for consumer goods, the job market for retail sector workers is likely to tighten further, increasing the competition among employers for retaining skilled workers.

As mentioned earlier, Walmart’s competitors Costco (COST) and Kroger (KR) already pay higher wages. Another major retailer, The TJX Companies (TJX), also announced it was hiking its workers’ pay. This trend may pressure other retailers to follow suit.

Walmart’s focus on associate training and growth prospects gives it a few more carrots to entice workers to stay, as well as saving considerably on training costs. High attrition rates generally lead to higher recruiting and training costs, which impact the bottom line.

Implications of higher pay

At first glance, the raise for ~500,000 employees will surely increase Walmart’s operating costs and will pressurize its margins. The company projects an impact of least $1 billion on the bottom line in fiscal 2016. On the other hand, a broad pay hike for retail sector workers will increase discretionary income among consumers by a considerable extent.

Because these increases come at the lower end of the wage spectrum, they are likely to result in higher spending by workers. Lower-priced retailers like Walmart (WMT), Dollar General (DG), Dollar Tree (DLTR), and Family Dollar Stores (FDO) are most likely to benefit from this trend.

Investors can gain exposure to WMT by investing in the SPDR Consumer Staples Select Sector ETF (XLP), with a ~7.5% weight. WMT is the third largest holding in XLP.

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