News

Why Pay More?

BY Richard Berman

If you give someone five dollars for a magazine that cost $3.98, how much change should you receive? And if someone was unable to count out that amount, would you want him manning the cash register?

What if he was unable to fill out a job application? Or couldn’t properly count store inventory? Would you consider hiring anyone like this?

This is one of the most serious— and unmentioned—issues facing retail employers looking to fill entry-level positions in today’s market. While activists and legislators abstractly discuss wage and price controls, business managers on the ground have to contend with practical matters of hiring and firing.

The question facing any employer is whether a prospective employee is worth the hire. Does the person in question possess the necessary skills and potential to contribute to the success of the business?

This question grows even more complicated for employers in the service and retail industries, which supply the majority of entry-level positions. These positions provide many people with their first jobs, offering them the opportunity to develop the skills and experience needed to advance in their career.

Entry-level positions like those offered in chain stores, restaurants and groceries often represent the only employment opportunity for those with limited education or who are high-school dropouts—at least initially. But to even get a foot in the door, basic skills such as reading, writing and simple arithmetic are crucial.

But more than half of all high-school dropouts are functionally illiterate, unable to read basic instructions or fill out an application. And more than 63% of those lacking a high-school diploma are functionally innumerate, which is to say they can’t make change if serving a patron or working a register.

Now, in response to the problem of helping low-skilled employees provide for themselves and their families, Congress is debating a 40% hike in the minimum wage to $7.25 an hour. But will it work?

Contrary to the opinion of proponents of minimum-wage hikes, a rising tide doesn’t necessarily lift all boats, and an extremely healthy skilled job market often masks an ailing low-skilled job market.

The increased costs associated with a wage hike saddles employers with a dilemma. Wage hikes frequently force employers to cut jobs and scale back hours in order to maintain profits— and thus stay in business. So who are they most likely to consider a liability: a part-time college or high-school student, or an illiterate employee who may in fact need the job more than anyone else?

A study by economists at the Federal Reserve found that every 10% increase in the minimum wage leads to a 2% to 3% decrease in employment overall. However, when you focus on the job loss suffered by low-skilled individuals such as high-school dropouts or minority teens, the increase in unemployment is as high as 8.5% for every 10% increase in the minimum wage, according to research from Cornell University and the University of Connecticut.

The making of public policy is a strange enterprise. Where else are means and ends so poorly harmonized? If a woman’s foot were broken, the response would not be to buy her a better brand of tennis shoe, but to see that she receives medical care.

If a man does not know how to drive, this does not mean that he needs a better car. It means he needs to take driver’s education classes.

So when confronted with the problem of functionally illiterate and unskilled employees seeking to enter the job market, why do we assume that raising the minimum wage is a solution?

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FINANCE

Home Depot Projects Lower Profit in 2007

BY CSA STAFF

Atlanta, The Home Depot Inc. said Wednesday it will pump $2.2 billion into improving its business this year even as it expects lower earnings and slim sales growth. Home Depot said that for fiscal 2007 it expects sales growth in the range of flat to an increase of 2%, a decline in comp-store sales in the middle single digit percentages and an earnings per share decline of 4% to 9%.

Including the effect of a 53rd week in its fiscal year, consolidated sales are expected to increase by 1% to 2%, and earnings per share are expected to decline by 3% to 8%, Home Depot said.

CEO Frank Blake told investors at Wednesday’s conference that like last year, “2007 also will be a difficult year.” But he said it will be a year of focus on Home Depot’s priorities and a year with “hopefully less noise.”

The “noise” was apparently a reference to the investor furor over former CEO Bob Nardelli’s hefty compensation in light of the company’s lagging stock price. Nardelli resigned in early January after six years at the helm of the company. He took with him a severance package valued at $210 million.

To improve its business, Home Depot said it will invest $2.2 billion this fiscal year in key priorities, including the opening of 115 stores. The investment includes $1.6 billion in capital spending and $600 million in expense.

Home Depot said it will recruit master trade specialists, simplify its staffing model, use more technology to aid customer service, and redesign employee compensation and reward plans. It also will invest in new merchandise and review its pricing strategies. Additionally, the chain will spend money on customer loyalty programs, direct-ship programs, credit programs and other specialty sales initiatives.

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FINANCE

Federated Plans Name Change

BY CSA STAFF

New York City, Federated Department Stores on Tuesday said it would ask shareholders to approve changing the company’s corporate name to Macy’s Group Inc. A vote to amend the corporation’s charter to accommodate the new name will be held in conjunction with Federated’s annual meeting on May 18. If approved, the company will be known as Macy’s Group Inc., effective June 1. The move comes on the heels of the company changing most of its store nameplates to Macy’s.

“Macy’s Group is the appropriate name for our company, given that about 90% of our sales involve the Macy’s brand. That said, Bloomingdale’s is—and will remain—a very important part of our company,” said Terry J. Lundgren, Federated’s chief executive. Federated Department Stores also said stronger sales at established stores and lower costs drove a 5% rise in fourth-quarter earnings. For the quarter ended Feb. 3, net income rose to $733 million from $699 million the prior-year period. Sales fell 4% to $9.16 billion from $9.57 billion, as the company shuttered 80 “duplicative” store locations. Comp-store sales rose 6.1% in the quarter.

During the quarter, Federated lowered its selling, general and administrative costs 11% to $2.31 billion.

The company also announced a $4 billion increase to its stock buyback program and said it will immediately repurchase 45 million shares for $2 billion under the plan.

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