Warm Southern Breeze

"… there is no such thing as nothing."

Who Pays Unskilled Labor US $80,000/year?!

Posted by Warm Southern Breeze on Sunday, June 22, 2014

“For Scripture says, “Do not muzzle an ox while it is treading out the grain,” and “The worker deserves his wages.”

Lately, much has been made of raising the Minimum Wage, which does nothing more than establish a minimum standard.

But who cares about minimums?

We should strive to exceed!

Some well-known, publicly-traded, highly profitable firms, however, revel in greed, and wallow in the slop, when they can do far better for the employees who operate their businesses.

The question is often asked “why pay unskilled workers $10 or even more per hour?”

It’s a valid question, and deserves a genuinely thoughtful response.

So, let’s pose that question to BIG OIL COMPANIES in Williston, North Dakota, where…

“oilfield companies pay unskilled 19 year-olds $80,000 a year.”



by Dan Weissmann
Monday, June 16, 2014 – 15:21

Williston, North Dakota, has the nation’s highest rents. Thanks to the fracking boom, a basic apartment in Williston costs more than something similar in New York or San Francisco. And it comes with a lot fewer amenities.

For instance, shopping. If Walmart doesn’t have it, the nearest outlet is at least two hours away. Now, a Swiss investment firm has announced plans to build a $500 million development that will include a major shopping center.

There are good reasons retail has taken so long to catch up with the town’s exploding population.

About three years ago, California real-estate developer Jeff Lunnen and his partners went to Williston to check out the fracking boom’s business prospects.

It wasn’t an easy trip. “It was hard to get accommodations,” he says. “Hard to get something to eat, and trucks going in every direction.” At the time, many of the workers crowding into Williston camped out in RVs—some in the Walmart parking lot, others on the street.

All of which, to Lunnen, signaled unlimited opportunity. “We went back in two weeks, and started buying real estate,” he says, “and it’s been very good for us.”

The town’s population has more than doubled, and the RVs have been replaced by “man camps”—basically company barracks—after a city crackdown.

Lunnen has focused on industrial projects, but some developers have started to create more-permanent housing, at those sky-high rents.

Retail, says Lunnen, presents special challenges. “It’s a little like building your retail project on the moon,” he says. “There’s some logistical issues.”

For instance: Who would work in the shops? Are they supposed to live in the man-camps? How could retail stores pay competitive wages, when oilfield companies pay unskilled 19 year-olds $80,000 a year?

Traditional lenders haven’t been quick to get involved in retail development. “We are looking to avoid what I would refer to as over-capacity,” says John Giese, who oversees business banking for Wells Fargo in North Dakota. In other words, when things level off, will there be more malls than even a built-up Williston needs?

No one knows for sure how many people live and work in Williston now. A study commissioned by the city planning department puts the range between 39,000 and 44,500.

Meanwhile, like Jeff Lunnen, Wells Fargo has plenty to do in a line that’s more of a sure thing: working with energy producers. “Supporting that industry—making equipment and construction loans and such—will have quicker payback,” he says.

A Swiss investment firm called Stropiq is behind the newly announced $500 million project, to include housing, hotels and 1.2 million square feet of retail.

Donn Fuller, a Jones Lang LaSalle executive who is managing the build-out and soliciting tenants, says the first phase will focus on what he calls commodities: “Grocery, pharmacy, theaters,” he says. “In that area we consider theaters a commodity. Which is a little different, but there’s not a lot of entertainment.”

Fuller hopes to have that phase—which may include department stores and women’s fashion—up and running in about three years. The project as a whole may take seven to ten.

“We’ve got a lot of work to do,” he says. “On the site plan, the financial model. All I can say is, we think it’s going to be profitable. How profitable remains to be seen.”

Fuller admits: He’s never done a project in a location like this before.




Why Wal-Mart Can Afford to Give its Workers a 50% Raise

by Stephen Gandel
Twitter: @stephengandel
NOVEMBER 12, 2013, 3:27 PM EDT

The world’s largest retailer is under fire for its low wages.
But the numbers show it can easily pay more without tanking its stock.

FORTUNE — When a Wal-Mart executive boasted at a Goldman Sachs investor conference in September that 475,000 of the company’s U.S. store associates make more than $25,000 — meaning that a large portion of its 1.4 million workers in the U.S. make less — a long-simmering debate about the company’s wages boiled over. Last week, a large protest outside a California Wal-Mart store led to 50 arrests.

Fueling the anger, Payscale, a salary information site, estimates that Wal-Mart CEO

So how much should Wal-Mart WMT -0.25% pay its employees? To tackle that tricky question, I crunched a bunch of numbers and concluded this: Wal-Mart’s workers should get a 50% raise.

And get this: The company wouldn’t even have to disappoint Wall Street to pull it off. I’ll explain the math in detail below.

There are a number of ways to answer the question of what Wal-Mart should pay its employees. One possibility is this: The lowest wage that Wal-Mart can get away with paying. That is probably the way many employers do it, but it’s far from the best economic answer. Better-paid employees are likely to work harder and stick around longer. If employees made more, they would have more to spend at Wal-Mart.

Many critics argue that because Wal-Mart made $17 billion in profits last year, it can afford to pay more and even has an obligation to do so. That’s silly, too. Public companies have to make enough money to satisfy shareholders, or else their stocks tank and executives end up getting canned.

I came up with what I feel is a better, more scientific way to determine the answer. Then I called a couple of really smart economists to get it “peer”-reviewed. Sendhil Mullainathan, who teaches at MIT and received a MacArthur genius grant for his work in behavioral economics a few years ago, said he basically came to a similar conclusion as mine a few years ago. He says companies have more discretion in setting wages then they let on. “Really the question is not whether this is possible but why some companies don’t do it [this way],” says Mullainathan.

Wal-Mart didn’t respond to requests for comment.

So without further ado, here’s my methodology: Start with Wal-Mart’s sales, and then subtract what it has to pay the suppliers that make all the stuff on its shelves. Last quarter that number was $28.7 billion.

What remains is Wal-Mart’s gross profit. Wal-Mart, like all companies, has to split that between three groups — bondholders, stockholders, and employees. How much should go to each? Bondholders are easy. They’ve agreed in advance to an interest rate. Last quarter, Wal-Mart’s interest payments were $553 million. That leaves us with $28.2 billion, based on last quarter, or $112.8 billion a year.

How much to pay stockholders is a little bit trickier. But you can figure it out by looking at the market. Here’s where my math comes in. Stock market valuations and return on equity (ROE) tend to go hand in hand. ROE is the measure of how much income a company makes compared to a company’s net worth, which is also sometimes called shareholder’s equity. Charles Lee, a finance professor at Stanford — my second peer reviewer — has done a lot of research that shows investors are willing to pay more for companies that can produce higher returns on shareholders’ equity.

But you can also use Lee’s research to figure out just what returns Wal-Mart’s investors are looking for. The average ROE of retailers in the S&P 500 spx 0.17% is 16.95%. Their shares trade at price-to-book ratio of 2.9. Wal-Mart’s price-to-book ratio of 3.5 is 20% higher than the group, which means that investors, based on Wal-Mart’s current $79 share price, are expecting it to produce a higher-than-average ROE. How much higher? Lee says the relationship is not linear, or one for one. Let’s call it 18%. That means, based on Wal-Mart’s current stock price, investors are signaling that they are looking for a return of 20%.

Remember, that’s not money that Wal-Mart actually pays out to investors. Most of that money is reinvested in its business. But it does pay out some in the form of dividends. And Wal-Mart has a higher dividend yield than the average retailer in the S&P 500 — 2.4% vs. 1.3%. Adjust that for Wal-Mart’s valuation vs. other retailers, and that means 4.6% of the return shareholders are looking for comes from the giant retailer’s outsized dividend. That means the ROE it has to satisfy investors after dividends is 15.4%. Wal-Mart’s actual current ROE is 21%. “What that suggests is that even Wal-Mart’s investors think the company should pay its employees more, or at least expects it will,” says Lee.

How much more? Wal-Mart has a book value of $76.7 billion. Take 15.4% of that, and that means investors are looking to get paid $11.8 billion a year. That leaves $101 billion to pay employees.

Wal-Mart paid its top executives and board members $66.7 million last year. The rest of the money has to be split among Wal-Mart’s remaining roughly 2.2 million employees. Of those, about 1.4 million work in the U.S. Assume that Wal-Mart spends about 2/3 of that on the salaries of its U.S. employees, because salaries are generally higher here. That leaves $66.6 billion for the U.S. workers, or $47,593. The Bureau of Labor Statistics estimates that 30% of the average U.S. workers’ total compensation is spent on benefits.

That means the average Wal-Mart employee’s take home pay should be $33,315. Wal-Mart doesn’t say what its actual average salary is. But Payscale estimated it to be just over $22,000 at the end of last year.

The conventional wisdom, of course, is that if Wal-Mart were to hand out raises, its stock would tank. That may not be true. When Google GOOG 0.26% announced a 10% raise for its employees three years ago, the stock dropped a bit but mostly recovered within a year. And Google’s stock is 60% higher now than it was before the raise.

As Lee points out, investors are basically giving Wal-Mart’s executives a green light to raise wages. So why not?




Economic Thought Question

What if we doubled the minimum wage?

by Marshall Brain

Today’s thought question is a simple one: What would happen if we doubled the minimum wage?

Trillions of dollars flow through large American corporations, and executives are making remarkable amounts of money. Executive pay has risen by a factor of 10 in the last 20 years and shows no signs of slowing down [ref, ref, ref]. Meanwhile, the wages of rank and file employees are stagnant. Given all the money available, why is it that companies like Wal-Mart, Home Depot and McDonald’s pay their employees so little and give them so few benefits?

A Hypothetical Company

Imagine a hypothetical company with 20,100 employees. At the top are 100 executives who pay themselves an average of $4 million per year. The other 20,000 employees make minimum wage — $5.15 per hour — for 2,000 hours per year of work.

Those executive numbers sound top-heavy, but today they are not. Executive pay truly has been rising at a spectacular rate. For example, when Enron collapsed it had about 20,000 employees. According to the book Pipe Dreams by Robert Bryce:

•    “Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million.”
That’s more than $4 million per executive across 144 executives.

So in our hypothetical company, we have 100 executives making $400 million per year. We have 20,000 employees making about $200 million per year. If we simply cut the average executive pay from $4 million per year to $2 million per year, we can double the pay of rank and file employees in this company.

Could the executives manage to survive on $2 million rather than $4 million? Yes, they could. They could also survive on $1 million a year, or $500,000. Their pay is completely arbitrary. It has risen by a factor on 10 in the last 20 years — In 1980, these same executives would have been making $400,000 instead of $4 million.

A common complaint about doubling the minimum wage is that it is “inflationary.” The point of this example is to show that employee wages can be doubled without raising prices at all. Executives are now redistributing wealth from employees to themselves at such a remarkable rate that employee wages have fallen considerably. Simply by reversing this concentration of wealth, employee wages can rise to reasonable levels without changing consumer prices.

A Real Company

Wal-Mart is the largest employer in the United States and provides a real-world example of the situation. Wal-Mart has 1.3 million “associates”. A large portion of these associates are paid hourly, at close to minimum wage. [ref]

The next time you go to a Wal-Mart store, talk to the associates. When I go to the Wal-Mart store closest to me in Cary, NC, I am greeted at the door by a friendly person who is at least 50 years old. The associates who work at Wal-Mart are not kids — they are adults. They have families. They are good, hard-working people from all backgrounds.

For the sake of this discussion, assume that Wal-Mart pays one million of its rank and file associates $7.50 an hour right now. These are the employees who work in the stores, stock the shelves, man the cash registers, sweep the floors and so on.

Let’s say that we changed the following:
•    Wal-Mart pays the associates $12 per hour instead of $7.50 per hour.
•    Wal-Mart provides associates with health benefits. Wal-Mart will allocate $400 per month per employee for that.
•    Wal-Mart provides associates with two weeks of paid vacation per year.

Four hundred dollars per month, spread out over 160 hours per month, represents about $2.50 per hour. Two weeks (10 days) of paid vacation represents about 50 cents an hour. So, in monetary terms, Wal-Mart would be paying its associates $15.00 per hour rather than $7.50 per hour. In other words, by doubling the amount of money paid per hour to employees, Wal-Mart can give its associates jobs that pay $12/hour, provide health benefits and offer 2 weeks of vacation time every year.

Would this cripple the company?

To answer that question, you can look at Wal-Mart’s financial statements on a site like http://finance.yahoo.com. Here are the quarterly numbers reported by Wal-Mart for 2002:

Quarterly financial figures reported by Wal-Mart for 2002

Quarterly financial figures reported by Wal-Mart for 2002

Quarterly financial results for Wal-Mart [ref]

•    Total Revenue is all of the money Wal-Mart makes in a quarter. You can see that Wal-Mart is currently averaging about $60 billion per quarter, or $240 billion per year (that equals roughly $2,400 per American household).

•    Cost of Revenue is the money that Wal-Mart has to spend to make that $240 billion per year. It represents the wholesale cost of everything Wal-Mart sells plus other expenses that vary with sales. It is averaging $47 billion a quarter, or $187 billion a year.

•    Gross Profit is Total Revenue minus Cost of Revenue — about $53 billion a year (equaling about $530 per American household).

•    Selling, General and Administrative includes the CEO’s salary and benefits, the “senior management team” salaries and benefits, executive salaries and benefits, the corporate headquarters, the ad budget and so on — about $40 billion a year.

•    Operating Income is the profit before taxes — about $3 billion per quarter or $13 billion per year (equaling about $130 per American household).

We are assuming that Wal-Mart has one million hourly associates making $7.50 an hour for 40 hours a week, 50 weeks a year. We want to move the associates to $15.00 per hour. That extra $7.50 cents per hour, over the course of a year, represents $15 billion. Quarterly it represents $3.75 billion. Let’s round it up to $4 billion per quarter to take FICA and other odds and ends into account.

There are two ways to look at that $4 billion quarterly increase in associate pay:

•    The first way is to compare it with the $10 billion that Wal-Mart is currently spending on Selling, General and Administrative plus the $3 billion per quarter in Operating Income. Spending $4 billion per quarter to double the wages of one million associates is a small amount of money compared to the $13 billion the company is already spending on things like ads, executive salaries, corporate jets (Wal-Mart has 20 jets) and dividends.

•    The second way is to compare it to the $60 billion in Total Revenue that Wal-Mart makes every quarter. Four billion dollars is about 7% of the total revenue. If Wal-Mart raised its prices by 7%, it could give one million hourly employees $15/hour.

Wal-Mart could cut $4 billion out of Selling, General and Administrative and Operating Income. Wal-Mart could eliminate its 20 jets, cut the CEO salary by a factor of 20, cut thousands of executive salaries in the same way, cut back on the $1.3 billion/year in dividends and so on. Prices would not have to go up at all, and Wal-Mart could double the pay of one million associates. Or Wal-Mart could increase its prices by 7% and double their pay in that way.

Let’s split the difference. Wal-Mart raises its prices by 3.5 percent, and executive pay and perks are reduced by $2 billion. That means that the price of a can of Chunky Soup at Wal-Mart goes from $1.49 per can to $1.54 per can. Would anyone really care? Several major grocery store chains routinely charge $1.99 or more for a can of Chunky Soup and no one appears to care at all. [a survey of the four major grocery chains in Raleigh, North Carolina found the price of a can of Chunky soup ranging from $1.99 to $2.50 per can. At Target the price was $1.69 per can. At Wal-Mart the price was $1.49 per can.]

Now imagine that we did the same thing across the board, doubling the wages at McDonald’s, Target, Home Depot, Toys “R” s, etc., etc.

If a $500 tax rebate stimulates the economy, imagine what an extra $700 per month plus health benefits plus paid vacation for millions of employees would do for the economy, and for the spirit of our nation.


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