Wal-Mart’s (WMT) recent announcement that it will voluntarily increase its minimum wage to $9 an hour has union backed groups such as OUR Walmart claiming victory in its efforts to force employers to increase wages. But, that’s not what’s really happening.
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To the contrary, Wal-Mart’s announcement demonstrates that economic growth is the most effective way to increase wages for American workers. Thanks, in great part, to the private sector’s innovative energy production techniques, the free enterprise system is beginning to once again function as it should. The retail sector in particular is seeing the potential for real and sustainable growth. Companies ranging from Starbucks (SBUX) to the Gap (GPS) have announced starting pay increases similar to Wal-Mart’s. Economic growth creates an increase in the demand for labor. When the demand for something increases, so does the price; labor is no exception.
The precipitous drop in oil prices since the end of June has acted like a tax cut putting much needed cash in consumers’ pockets and driving economic activity like no government stimulus ever could. The impact is easy to understand. For example, if one of our company’s “young hungry guy” consumers is at the gas pump with $60 in his pocket and it takes $60 to fill the tank, he’s eating at home. If it takes $30 to fill the tank, he’s going to Carl’s Jr. or Hardee’s for a Thickburger. This chart comparing oil prices with our 52 week moving average for domestic restaurant sales makes the point.
Not every business has benefited from this increase in consumer spending. Even when people have money in their pockets, businesses still need products people want. But, if you have such products, when people have cash, your sales will improve and you will need more employees. The more demand the economy creates for employees; the more businesses have to pay for their time. This isn’t rocket science.
The price of oil is clearly driving this surge in consumer demand. Even the Obama Administration boasts that in 2013, “[f]or the first time in nearly two decades, the U.S. produced more oil domestically than it imported from foreign sources. And the U.S. is now the number-one natural gas producer in the world.” With private sector fracking and the boom in American energy production driving down prices at the pump, more of our energy dollars are staying home and nurturing American businesses. All indications are that this is a sustainable benefit absent government interference. Again, to quote the Obama Administration, “America’s dependence on foreign oil is at a 20-year low — and declining.” It should come as no surprise that the economy has created over 1 million jobs in the last three months, the best performance in that same 20 year period.
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A meaningful reduction in taxes and regulatory costs could well have had the same impact six years ago. In addition to putting cash in consumers’ pockets, such reductions increase returns for startups and businesses seeking to expand driving economic growth and increasing the demand for labor and wages. By additionally putting cash in consumers’ pockets and allowing them to make the millions (if not billions) of decisions required each day on how best to allocate our economic resources, the free market, by its very nature, directs those resources towards the businesses with the greatest opportunities for success. Business success drives economic growth and the demand for labor.
Centralized planning by a small group of government bureaucrats, on the other hand, does not produce the same result. So called “stimulus spending”, for example, puts money in the hands of businesses the government selects, something government often does poorly or for the wrong reasons, Solyndra and Fisker Automotive being two prominent examples. Government spending projects intended to infuse cash into the economy (like cash for clunkers) create nothing real and businesses correctly perceive the benefits as temporary.
While investment in infrastructure projects is both a proper function of government and necessary, at best it’s a temporary driver of job growth. Public projects such as roads and bridges are certainly beneficial. Businesses need to get goods to market and people need to get to their jobs. Politicians hoping to show at least some short term job growth often find such projects particularly appealing. But, it’s American workers and businesses that create the need for roads and bridges, as well as the tax dollars to fund such projects or repay the associated borrowing. It isn’t the roads and bridges that create sustainable jobs. You create sustainable jobs by building a business, not a bridge.
American workers could have experienced meaningful job and wage growth six years ago had the Obama Administration pursued a free market path dependent on American consumers and businesses, what Adam Smith called the economy’s “invisible hand.” But, by choosing to increase both regulation and taxes while using government bureaucrats to allocate resources, the Administration caused American workers to suffer through the feeblest economic recovery since the Great Depression.
The economy is still a long way from fully recovered. A reduction in regulatory compliance costs and taxes would encourage existing businesses to expand and start-ups to multiply, creating the growth we need. However, in spite of poor economic policy choices emphasizing redistribution and regulation rather than growth, private sector innovation appears to have job creation and wages heading in a positive direction. This trend faces at least one major threat: More big government.
Andrew Puzder is the chief executive officer of CKE Restaurants