Offering a temporary pay increase to grocery workers, often referred to as “hero pay”, makes a lot of sense when grocers voluntarily provide this additional compensation to their employees. Grocery workers are taking on additional health risks, suffering additional stresses, and must work in more difficult environments, which all warrant additional compensation.
Reflecting these concerns, many grocery retailers in California provided “hero pay” to employees in March 2020. The hero pay added at least $2 per hour to workers’ paychecks, sometimes more, which was phased out during the summer of 2020.
In what many people view as an extension of this policy, the Long Beach and Los Angeles city councils are now considering mandating a $4 per hour grocery worker pay boost that would last for “at least” four months. Imposing a government-mandated wage increase on grocers is far different from grocers offering their workers’ hero pay.
First, a government-mandated pay increase is a blunt instrument that applies to all workers regardless of their actual increased risks and stress. Since the value would be equally shared, grocers will find it difficult, if not impossible, to scale the hero pay based on an employee’s actual increased risk.
Second, these locally mandated pay increases are based on political desires, not financial realities. Back-of-the-envelope calculations demonstrate that the policy is largely unaffordable.
According to zip recruiter, the average Los Angeles grocery store worker’s salary was $36,423 or roughly $18 per hour assuming a work year of 2,000 hours. The $4 per hour pay boost would increase the average salary from $18 per hour to $22 – a 22% increase.
According to workforce.com, labor costs for grocery stores equal 9.4% of total sales. To generate $100 in grocery sales, grocery stores must spend $9.40 paying their workers. Grocery stores must also purchase groceries, pay utilities, and purchase and maintain the necessary equipment to run the store. After covering all of these costs the average profit for a grocery store is around 2.2%. This means for every $100 in grocery sales, the stores earn $2.20.
The problem with government-mandated hero pay proposals is that a 22% increase in costs that account for 9.4% of expenses means that total expenses will increase by 2.1% – essentially equal to their entire profit.
Perhaps some grocers can sustain such a cost increase temporarily, but many cannot. Inevitably, grocers will adjust by raising prices to help defray the costs. Of course, increasing food costs will transfer some or all of the hero pay costs from the grocer to the broader community. Many leading voices contend that raising food costs at a time when food insecurity is on the rise is not the right policy.
Grocers may also respond by cutting back on the number of employees or reducing workers’ hours to keep total wage costs similar. In fact, a recent NBER study found that following Seattle’s 2016 minimum wage increase, the number of hours worked fell by more than the increase in hourly wages – lowering the “amount paid to workers in low-wage jobs by an average of $74 per month”. If this were to occur as a result of these proposals, the reduced hours worked would more than offset the benefits the hero pay is supposed to create.
These unintended consequences from this proposed government mandate demonstrate why a voluntary payment could make sense, but a broad government mandate does not.
The fact that government-mandated hero pay does not make sense does not mean that there is not an important role for the local governments. Paramount among the local government’s responsibility is ensuring expeditious distribution of Covid-19 vaccines to front line workers including grocery store workers. Implementing other local public health programs that include continued education campaigns on the importance of wearing masks will also help contain the pandemic.
The intentions for hero pay are undoubtedly in the right place. Too many have been harmed by the pandemic. But intentions are not outcomes. Establishing a government-mandated price floor – regardless of its name – increases the economic costs of the Covid-19 recession without achieving the goals of proponents.
Wayne is a Senior Fellow in Business and Economics at the Pacific Research Institute and the Director of PRI’s Center for Medical Economics and Innovation. His research explores the connection between macroeconomic policies and economic outcomes, with a focus on the health care and energy industries. Wayne has over 25 years of experience advising Fortune 500 companies, medium and small businesses, and trade associations and received a Ph.D. in economics from George Mason University.