Target Corp. (NYSE: TGT) announced this week that it would raise the minimum wage for its workers to $10 an hour. Investors are speculating whether this is a public relations move, a move to satisfy the lowest rung of its 341,000 employees, or a preempting of future minimum wage legislation. The answer though appears to be a combination of a tightening of the labor market in general. Demand for labor is on the rise, and therefore the price of labor rises. To give an idea of how tight, initial claims for unemployment are lower now than they were in 1973, when the total U.S. population was 36% lower than it is now.
A look at Target’s operating expenses shows that standard, general and administrative (SG&A) payments have been trending down over the past three years to 19.6% of revenues in 2015, down from 20.0% in 2014 and 20.2% in 2013. Target already hinted that it was ready to push the rate back up in its latest annual report, in which the company disclosed that it does not expect the SG&A rate to continue to decline at the pace realized during 2014 and 2015. In fact the most recent quarter was especially efficient for the retailer, with SG&A at only 18% of revenues, significantly below the average, though this is somewhat expected due to the holiday season.
There is another reason Target can afford to raise its minimum wage specifically now, and it has to do with health care benefits. As of April 1, Target has discontinued the postretirement health care benefits offered to its employees upon early retirement prior to Medicare. It was able to do this without too much negative press, and the decision is projected to save the retailer over $100 million a year. Up against a tighter labor market, Target simply decided to shift its resources to its youngest workers and pay them a little bit more. We don’t know exactly how many workers the company will be paying its minimum wage to, but expect the difference to be close to or even less than the savings figure on the health care benefits cut.
Like Wal-Mart Stores Inc. (NYSE: WMT), Target is no fan of collective bargaining agreements being imposed on it. It currently is not subject to any unionization of its workforce, but is quite clear that it does not want this and that it could significantly hurt its bottom line. Raising the minimum now may help Target preempt the danger from that side.
So the simple answer as to why Target is raising its minimum wage now? It can afford to, and it needs to in order to compete in the tight low-end labor market.