clock menu more-arrow no yes

The simple reason Walmart & TJ Maxx are handing out raises — people are quitting

  1. TJX, the owner of TJ Maxx, Marshalls, Home Goods, and Sierra Trading Post, announced plans to increase the wages of its lowest paid workers to $9 an hour.
  2. By 2016, employees who successfully hold down a job for 6 months will earn at least $10 an hour.
  3. Walmart announced a similar move on February 19.
  4. This is not just good news for the people getting a raise, but sheds important light on some key disagreements in economic policy.

The recovery is real

The dynamics here are not difficult to understand. Bureau of Labor Statistics data shows that workers in the retail sector are quitting their jobs at a much faster rate than they were a year or two earlier.

Retail jobs are great jobs to quit because in addition to the low pay, they offer little in the way of status or intangible rewards (see "What I learned from seven years in retail hell"). But for years, quitting was depressed by the bleak national economy. Now that the unemployment rate is only slightly high, people are eager to quit crappy jobs. Turnover and churn are bad for business, so major retailers are responding with higher pay to get people to stay on. And survey data from the National Federation of Independent Businesses suggests that small companies are ready to do the same thing:

Your pet theory is wrong

The past five years of sluggish job creation and weak wage growth have spawned a cottage industry of big-think about what ails the American economy. Maybe Obamacare crushed job creation? Maybe it's a "skills gap?" Maybe the Chinese stole our jobs? Or immigrants? Or robots?

It turns out that all of this is wrong. Back in the winter of 2008–2009, the country suffered a large collapse in aggregate demand related to the collapse of the housing bubble. From 2009 to 2014, political disagreements prevented the government from plugging the gap with gigantic fiscal stimulus, and timidity about "unconventional" measures prevented the Federal Reserve from doing so either. But all that time, the economy was slowly healing. And now it shows real signs of operating like normal. People try to quit the worst jobs around, and companies respond by trying to make the jobs better.

A virtuous circle toward utopia

(Jeff Shear/Getty)

Of course, that doesn't mean that the American economy is out of the woods. Inflation is currently below the Federal Reserve's 2 percent target. Forward-looking expectations of inflation are also below the Federal Reserve's 2 percent target. And both things have been true for years. Nonetheless, the Fed is seriously considering raising interest rates to slow economic growth and job creation as soon as June in order to head off hypothetical possible future inflation. Needless to say, if the Fed deliberately decides to slow the pace of job creation, then people's ability to quit jobs and score raises will vanish.

But if the Fed does the sensible thing and lets well-enough be, we could be poised for a virtuous circle. Even at $10 an hour, a gig at TJ Maxx is not a great job.

But increased pay for the very lowest-paid workers in America is an especially potent form of economic stimulus. These are people whose marginal dollar is likely to be spent on meeting critical household needs. That means that even as companies find themselves pressed to raise pay, they'll also have more customers and more revenue. That kind of bottom-up growth may not be as good for the stock market as the past five years have been, but it is a sustainable path to years and years of additional, consistent economic growth and job creation.

A long-term problem

One reason the policy conversation has been dominated by speculation about education and artificial intelligence rather than business-cycle management is that it feels more prestigious to worry about profound long-term problems than superficial short-term ones. But the long-term is, in a sense, just an endless series of short-term spells. And for about a generation, business cycle management in the United States has been dominated by NAIRU paranoia in a way that's led directly to sluggish income growth (NAIRU is sometimes called the "natural rate of unemployment" and refers to the jobless rate below which economists think inflation will start to take off).

The way this works is that the Fed worries that if unemployment gets "too low," workers will have excessive ability to extract wage increases and we'll get inflation. This isn't a totally absurd worry. But the Fed has been so worried about it that unemployment has been too high much more often than it's been too low. Naturally enough, during this period wages have stagnated and corporate profits have grown as a share of national income.

In this sense, the Walmart and TJ Maxx wage hikes tell us something important about the long-term future of the economy. Higher pay at rival companies will only encourage the employees of other retail firms to quit, increasing the pressure on others to raise pay.

Some retailers will respond to the new era of increased expectations by investing in technology to improve their workers' productivity. Others will be sufficiently wedded to a low-wage business model that they need to begin reaching out to people — ex-convicts, recovering drug addicts, the long-term unemployed — who are socially marginalized right now. Higher incomes for working class Americans will also create markets for new products, increasing innovation.

In other words, managing the business cycle better to keep the unemployment rate lower for longer isn't a distraction from the real sources of long-term prosperity. It's a vital piece of the puzzle, leading to higher wages and more rapid productivity growth. Higher pay at a couple of large retailers is just one small step, but it's an important one for policymakers to build on.

Sign up for the newsletter Sign up for The Weeds

Get our essential policy newsletter delivered Fridays.