Retail Workers Can’t Lose as Pay Rises and Colleagues Quit

(Bloomberg Opinion) -- One of the brightest spots in Friday’s strong jobs report was the acceleration in wage growth for workers in the retail industry. Assuming the economic expansion continues at a robust pace in 2019, conditions should get even better for retail workers next year. It’s just that we’ll probably end up with fewer of them.

Wage growth for retail workers was 4.6 percent in October, which was the fastest pace in nearly 20 years. This robust pace of growth doesn’t appear to be a fluke, either. In five of the last eight months, the annualized pace of wage growth for retail workers has exceeded 5 percent. Just like for workers in the economy overall, a tightening labor market for retail workers continues to produce an uneven but upward trend for worker pay.

The question is whether the pace of wage growth in the industry is sustainable. For the workers in the industry the answer might be yes, but for the industry as a whole the answer is probably no. A way to think about the level of sustainable wage growth is the inflation rate plus the rate of productivity growth. If you’re a company then you can pass on the level of inflation and your productivity growth to workers and maintain your profit margins. If wages are rising faster than that then your profit margins are probably getting squeezed.

There are some ways to deal with this for a while. Perhaps you can increase financial leverage, but there are limits to that, especially when interest rates are rising. Firms can also accept lower profit margins for a while. But eventually wage growth in excess of inflation and productivity growth will break a business, particularly a notoriously low-margin one like retail.

We can see how this dynamic poses a problem should retail worker pay continue to increase in 2019. Say retail industry wage growth exceeds 5 percent. Assuming an inflation rate around 2 percent — and every action and statement made by the Federal Reserve suggests officials will act aggressively to keep things that way — it would take productivity growth in the retail industry exceeding 3 percent for companies to be able to afford that level of wage growth without profit margins suffering. That’s a lot higher than we’ve seen for the economy at large, where productivity growth has been averaging slightly north of 1 percent for several years running.

There are a few possibilities here. Maybe cashier-less stores take off much sooner than expected, enabling a rapid productivity acceleration in the industry. Maybe retailers just take the margin hit involved if wage growth is in excess of 5 percent. But more likely, it means closing underperforming stores, like Lowe’s announced this week.

This need not be bad news for workers. The impetus for those store closures would be high labor costs that are a function of a strong labor market. Retail workers being hired into better-paying non-retail jobs is one way to fuel an economy looking for workers to continue growing.

So here’s how it could work: Retail workers get pulled by the strong economy into better-paying, more productive non-retail jobs. This creates even more of a scarcity for retail workers, driving wage growth higher for those who remain. Unable or unwilling to pay the higher wages demanded by retail workers, companies close some stores. The end result in the retail industry is fewer workers in a shrinking number of stores with wage growth at the highest level of the expansion.

For an economy flirting with capacity constraints, this may be the emerging story of 2019. Rather than broad-based growth, the growth we’ll get will be more uneven, with companies and industries bidding for resources, with some able to pay the higher prices and some not. The hope is this new phase of the expansion can last for a while longer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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