As Ikea Raises Minimum Wage, Pressure Grows for McDonald's and Walmart

Retail

Published: June 26, 2014 6:39 am

Ikea is one of the world’s largest retailers, with revenue of $38 billion and 130,000 employees. It also is one of the retailers and fast-food companies that recently decided to raise its minimum wage. The increase in the United States will be 17% on average to $10.76. However, Ikea has 38 stores in America, and the increase will depend on the cost of living in the cities where these outlets are located. The Ikea decision will put pressure on the retailers and fast-food companies that have not raised wages, particularly the largest holdouts, which are McDonald’s Corp. (NYSE: MCD) and Wal-Mart Stores Inc. (NYSE: WMT).

The reason that McDonald’s and Walmart have not raised their wages, many of their executives would argue, is that the companies cannot afford it. The decision would raise costs by as much as hundreds of millions of dollars, depending on the magnitude of the increases. The logic continues that only layoffs could return margins to traditional efforts. Economists can sort out whether higher paid workers do more for the economy than smaller workforces hurt it. It may be too complicated a puzzle to solve entirely.

Ikea’s management could make exactly the same argument. Margins are probably just as precious to it as to McDonald’s and Walmart. However, Ikea presented the decision as good for worker well-being. At the same time, management said it would not raise prices to offset the new costs. Margins will be sacrificed in the name of quality of life.

The more retailers reject the minimum wage for something higher, the better the case labor movements and employees have to press some of America’s largest companies to alter their practices. However, managements at these companies may gamble that the negative perception the wage issue brings them will not affect the number of customers they have, and thus their revenue. The interests of shareholders, they will continue to argue, offset decisions about worker pay levels. Ikea’s decision will bring the executives at Walmart and McDonald’s back into the spotlight, but that does not mean they will change their minds.

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