Ease up on shareholder payouts, pay your workers more instead

With Alberta and Ontario raising their minimum wage to $15 per hour, and BC possibly following suit soon, the usual suspects have begun their predictable howling about how this is a bad time, or it’s happening too fast, or how it will simply hurt those we are trying to help. It is true that increasing the minimum wage may result in slightly fewer jobs for teenagers, and slightly fewer hours for other workers – but the evidence shows that overall the effect is positive, especially for low income households.

Thank goodness progressive economists have been on the case, with this great analysis of corporate fear mongering from Zohra Jamasi and Michal Rozworski, and Shelia Block’s article explaining how a higher minimum wage will reduce inequality in Ontario.

Cole Eisen has added another dimension to this analysis for Canada – specifically linking short term corporate strategies such as share buybacks to decreased investment in wages & training, which has a negative effect on worker’s share of income as well as long term economic growth. In the UK, Corbyn has made a similar argument (subscribers only), that there should be a link between dividends and fair pay.

I appeared on the Business News Network to make the case that Cole and I outline below. It first appeared in the Hamilton Spectator, titled: Yes Mr. Weston, You Can Afford to Pay Your Employees a Living Wage

Loblaw Companies Ltd. chairman and CEO Galen G. Weston recently joined the chorus of business leaders to come out against the Liberal’s proposal to increase Ontario’s minimum wage to $15 per hour by 2019. Weston – whose family’s sprawling business empire includes Loblaw stores, No Frills, Shoppers Drug Mart and high-end fashion retailer Holt Renfrew – fretted about the proposal’s effect on his bottom line in a call with analysts last week.

This comes on the heels of Queen’s Park’s plan to increase the minimum wage to $14 per hour on January 1, 2018, and then to $15 the following January. A similar policy in Alberta will see the minimum wage raised to $13.60 this October, and increase to $15 in October 2018. Approximately 1 in 5 Albertan workers and 30% of Ontario workers currently earn less than $15 per hour.

Referring to the reforms as “a significant set of financial headwinds,” Weston said “the organization is mobilizing all of its resources to see whether or not it can close that gap,” warning, “at this point, we don’t know the answer.”

He went on to outline possible steps the company would take to mitigate the $190 million dollar increase in labour costs he forecasted would arise from the new minimum wage laws and Quebec’s recent efforts to reduce the price of prescription drugs. These steps included efforts to automate tasks currently done by employees, presumably to make paid workers redundant.

Even if Weston’s $190 million estimate is correct, his suggestion that a company like Loblaw lacks the resources to comply with the policy is misguided.

Canadian research shows that increasing the minimum wage is not just good for workers, but also for individual businesses and the wider economy.

First, and most importantly, it’s pretty tough to get by on minimum wage wherever you live in Canada. So when minimum wage workers get a raise, they usually spend it in their local economy. Economists call this “a higher marginal propensity to consume.” The good news is that with more income, workers can better meet their basic needs, and local businesses benefit from having customers with more money to spend.

But higher minimum wages are also a good strategy for transforming precarious work into decent work. Raising the minimum wage encourages employers to abandon low-wage, high turnover strategies. Instead, employers are more likely to invest in their current workforce, lowering turnover and increasing productivity.

UBC economist David Green suggests that increasing the minimum wage is one of the few mechanisms that encourages employers to abandon an inefficient low-wage, high turnover strategy. This is an important long term impact of increasing wages.

Weston’s claims are also in conflict with Loblaw’s financial statements which clearly show the company can absorb the impact of a policy that will help more than 1.6 million workers in Ontario make ends meet. Last year alone, the company paid shareholders over $1.1 billion dollars with $708 million delivered through share buybacks. Ostensibly finding no productive use for these resources within the firm, Loblaw executives elected to hand this money over those holding company stock – a significant portion of which belongs to Weston and his family.

These numbers are up from a combined total payout of $695 million in 2015 and $675 million in 2014. For a company with 2016 net earnings of $990 million, disbursing that kind of money to shareholders either indicates a lot of excess cash or a broken incentive structure.

For someone who praised family firms’ ability to create value for all stakeholders when freed from the pressures of meeting quarterly targets in a book called Re-imagining Capitalism, Weston’s recent posturing reeks of the myopic outlook that has taken over the provinces’ boardrooms and helped solidify a slow growth equilibrium. Employees are a key piece of any retailer’s success and investment in them is an essential component of realizing long-term value creation.

Over the past several decades, a pivot in corporate strategy that privileges short-term value extraction over growth has seen inequality balloon and economic mobility stagnate.

These trends are by no means natural but are the direct result of policies that eroded both the position of workers within the economy and the conditions necessary for equitable and sustained economic growth. Egged on by tax loopholes, executives face powerful financial incentives to neglect important investment in workers and technology. Directing cash flow towards shareholder payouts, they can pump up share values and trigger large bonus payouts. This leaves little to invest in employees’ capacity.

Breaking this cycle requires more than tinkering with corporate governance requirements or the tax code. Policies that mandate firms recognize the contribution that employees make to their success are necessary to overturn a status quo that has produced a paltry 0.7% increase in real wages over the past 15 years.

Implementing the new policy will require some adjustment on the part of companies as they switch from a model of low wages and high turnover to one based on sustained productivity growth and investment in their employees. However, not only is raising the minimum wage the right thing to do, it also makes good economic sense.