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How Gap could win by raising its minimum wage

Gap Inc. (GPS) is raising its minimum hourly pay for workers to $9 this year and $10 next year, winning praise Thursday from President Obama and others who have pushed corporate America to increase wages. 

This is no small potatoes for Gap. Even though it sells $165 tote bags and $60 worker shirts, some 65,000 of its employees earn less than $10 an hour. Raising the minimum wage for all of them is a serious payroll commitment, though Gap didn't estimate how the higher costs would affect its bottom line. 

CEO Glenn Murphy says the company will receive plenty of benefits from the move, however. "To us, this is not a political issue," Murphy said in a statement. "Our decision to invest in front-line employees will directly support our business, and is one that we expect to deliver a return many times over."

What kind of return will Gap get? There seem to be four main areas where a wage increase will help the company: 

Lowering turnover. It's harder for employees to leave for better-paying jobs. 

Higher-quality workers. By paying more, Gap presumably will attract more qualified employees. 

Happier, more committed employees. This is something Costco (COST) says it has experienced by paying a minimum of $11.50 an hour. "Instead of minimizing wages, we know it's a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty," said Costco CEO Craig Jelinek last year, according to CNN

Happier customers. "You treat people well, they'll treat your customer well," Topeka Capital Markets analyst Dorothy Lakner told Bloomberg

Of course, as Lakner notes, it's easier for Gap to do this after seven straight quarters of sales and profit growth. It can afford to make the leap and see where the higher payroll takes it. Gap had global sales of $16.2 billion in its last fiscal year, and it made about $1 billion in profit in the first nine months (full-year profits aren't in yet).

Raising wages would be a bit harder to do at Wal-Mart (WMT), for example, a company that already operates on thin margins and has struggled to grow even as the economy recovered from the Great Recession. Still, Wal-Mart says it's looking into supporting an increase in the federal minimum wage, Bloomberg reports

Obama and Senate Democrats have pushed for a minimum-wage increase to $10.10 an hour from $7.25 an hour. Opponents say doing so will kill jobs, and a recent report from the Congressional Budget Office did estimate that 500,000 jobs could be lost as a result, while millions of other workers could see more take-home pay. 

Gap won mostly praise on Twitter for its decision. "It's always great to see big biz do the right thing," wrote one user. Other users wondered if the move would lead to a price increase for the company's clothes. And a few said they were looking forward to working at the company in the future. 
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