Arnold Kling  

Wal-Mart controversy

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Wal-Mart is controversial. On the issue of labor costs, Steve Pearlstein writes,

I'm talking about a minimum wage that would put a family with two full-time workers above the poverty line in high-cost metropolitan areas -- and no doubt put upward pressure on wages at places like Wal-Mart.

Or how about requiring employers like Wal-Mart to provide all workers with affordable health insurance, including part-timers and recent hires.

Kevin Broncato counters,

by working 8 hour days 7 days a week, both Mr. Zavala and his wife earned $400*52=$20,800, for a total family income of $41,600. In New Jersey, this doesn't go very far, but it's a far cry from what Mr. and Mrs. Zavala could have earned as a janitor in Mexico, and far exceeds the official poverty line in the United States.

For Discussion. What would be the consequences of enacting the reforms prosposed by Pearlstein?

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COMMENTS (8 to date)
mcwop writes:

I hope Steven Perlstein is not on the "Bush is Dumb" bandwagon, because this article is dumb. It is not logical, and very narrow in scope.

1) How can he compare Wal Mart to grocery stores? They are different. Wal Mart has more than groceries. One could shop for hardware (paint, hammers), electronics, music and groceries in one location. Wal Mart competes with Home Depot, and Best Buy (which are non-union.), in addition to grocery stores. Apples and oranges.

2) Wal Mart employs far more than blue collar workers. They have a lot of “white collar” employees that are paid solid wages. In fact I would like to see how many white collar jobs Wal Mart provides compared to some grocery chains.

3) Further, the grocery unions have bigger problems than Wal Mart. Grocery stores simply need less workers. Checkout? At my local union grocery there are about 8 self checkout lanes. These lanes are faster than a union cashier, because more are open thus the lines are short. The Deli? Machines can pre-slice cold cuts too.

So his proposals are moot, because he needs to do more detialed analysis.

Eric Krieg writes:

I haven't shopped in a union grocery store in years. I simply can't afford it. The prices are obscene.

And I don't even shop at Walmart. I go to Aldi and Sam's Club. And when I lived in New York, I shopped at non-union Wegman's, the best grocery store on earth.

Dave Sheridan writes:

I'll try to take his main points in order

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Wal-Mart's relentless drive to deliver low prices now directly saves American consumers $20 billion a year by one estimate -- and probably several times that sum once the indirect effect on competitors is factored in.
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Correct so far.

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To win Wal-Mart's business, suppliers have been forced to close U.S. factories and source overseas...
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Only correct in terms of the visibility of the effect. Business in aggregate had been shifting to overseas manufacturing and procurement for a long time. Any business faced with competition and high differential costs will eventually confront the same decision. Wal-Mart may have hastened the process for many, and certainly has done so visibly, but it isn't the villain here.

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The ruthless efficiency of Wal-Mart's supply chain accounts for as much as a quarter of the economy's recent productivity gains...
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Correct (although Pearlstein gives Wal-Mart a bit more credit than it deserves,) with all sorts of benefits throughout the economy. Many of these have saved thousands of jobs. We just don't see them all in one place. Without productivity gains, no high-cost business can remain competitive. And remember, productivity costs some jobs, but creates more in the long run. Score a big one for Wal-Mart.

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…federal agents arrested several hundred illegal aliens cleaning floors and emptying trash baskets at Wal-Mart stores.
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Yes, and whoever is responsible for knowingly violating immigration law, or abetting the violations, should be prosecuted and punished.

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I'm talking about a minimum wage that would put a family with two full-time workers above the poverty line in high-cost metropolitan areas -- and no doubt put upward pressure on wages at places like Wal-Mart.

Or how about requiring employers like Wal-Mart to provide all workers with affordable health insurance, including part-timers and recent hires.
- - - - -

Minimum wages that exceed wages that clear the labor market ultimately cost jobs. Some employees will benefit in the short run, but it will still be a net loss. In the longer run, businesses have a lot of flexibility to substitute capital for labor. Automation and offshore production hasn't happened everywhere, and the places they haven't are primarily where they aren't cost-effective. Raising unit labor costs will make more of those substitutions happen. There's another cruel irony to minimum wage laws. They hurt the least skilled the most. Employers, forced to pay wages in excess of the value of services, will seek to keep their most trainable employees, with newer and less skilled being the first to go.

On health care benefits: Providing them to part-time workers probably would be too expensive for the workers involved. Assuming Mr. Pearlstein is talking about the same benefits as full time workers enjoy, the cost per hour for a less-than full time worker equals the fixed monthly benefit cost spread over their fewer hours per month, which doesn't make economic sense unless the additional cost per hour were passed on to the worker via a higher monthly charge. The reason for a benefit waiting period is to control costs through minimizing adverse selection.

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And what about labor laws effective enough to prevent companies such as Wal-Mart that instruct managers never to hire anyone who once belonged to a union, that routinely fire any employee seen talking to a union organizer and that fly in special teams whenever a store's employees score too high on a "union probability index."
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Given the Wal-Mart’s size, and the fact that it has become public enemy #1 of the labor movement, Wal-Mart’s behavior is closely scrutinized. Are there things that employers are allowed to do that are unethical? Likely. On balance, we have labor laws that are generally pro-worker and certainly tilted toward accommodation of collective bargaining. If Wal-Mart is violating labor laws, the appropriate sanctions should apply. Ultimately if Wal-Mart’s workers are dissatisfied enough, there will be union representation.

In all of this discussion, Mr. Pearlstein fails to ask or answer the basic labor market question: How is it that so many thousands of workers willingly apply for jobs at Wal-Mart? It would appear that enough of them find it a better deal than the competition. The company experiences high turnover for its entry-level jobs. That’s to be expected as people move off the entry-level rung of the income ladder as their skills, education and experience warrant.

I’ll insert my own provocative statement here. I worked as a retail clerk (unionized) during my college years. Many in that industry chose it as a career. Some moved on to management, but most did not. They stopped investing in their own futures, and because of the nature of the work, spent years where they acquired few new marketable skills.

There are other effects. The overall rise in prices will ultimately hit every consumer, costing additional jobs. Additional labor costs will raise the cost of what we export, making us even less competitive in global markets. Sadly, minimum wages are not the free lunch progressives wish they were. France and Germany have high minimum wages, generous benefits and pro-labor work rules. They are also economically stagnant, with double-digit unemployment.

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Yes, such measures would likely force Wal-Mart to raise the price of jeans and chicken wings by a nickel or two, slow its growth, and maybe even shave a fraction of a point off real GDP.
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Not just Wal-Mart, more than a nickel or two, and more than a fraction of a point. These kinds of policies sound reasonable when we talk about individual families, but we're not. "Living wage" policies are anti-growth and ultimately hurt those least skilled and least able to be excluded from the workforce.

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The issue we ought to be debating is what is an acceptable price to pay to restore a measure of fairness, equality and economic security to Wal-Mart nation. That is fundamentally a political issue, not an economic one.
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Yes, it's a political issue, because the economics don't work. The tradeoff is this: how much economic growth and income should we forego in order to achieve the kind of redistribution Pearlstein prefers. A recent article by Bruce Bartlett in National Review Online describes several studies suggesting huge costs in average living standards due to these kinds of labor policies. It is not a choice of nickels and chicken wings.

Ray Gardner writes:

I spent a couple of semesters at a graphic arts college where I met a former typesetter. These guys used to make a lot of money. They were generally journeymen, union members and of a very closed shop.

Then came the personal computer and all of its wonderful, time saving graphics capabilities.

So this guy was living in the past, horribly so, and every mention of a computer would evoke a twisted look of bitterness on his face as if he had just bitten into a lemon.

Following the populist economic model, the government would have stepped in to save this man’s job (and typesetters everywhere) by restricting the sale and use of personal computers.

So we have the immediate welfare of the typesetters weighed against the theoretical impact of personal computers on our overall economy for generations to come.

Discussing economics with an idiot (Pearlstein) is much like being a passenger in a car piloted by a very bad driver. You know the sort, their field of vision stops at the hood of the car so every fluctuation in traffic, even on a long straight road, comes as a total surprise.

Lawrance George Lux writes:

Americans must learn a hard lesson in the future. The rest of the World is beginning to reach levels of Capitalization equivalent to the American economy. This brings about an equalization of Wage levels around the Globe. Americans are going to lose their preferred position in Wage scales. It is inevitable.

The Issue of protecting Standards of Living are an entirely different matter. Mandatory health care provision would insure basic medical care for Labor, at far cheaper cost than current transferance to Government expenditure. A higher Minimum Wage provides greater incentive to American labor to seek such Employment, providing some restriction to Immigration. Elimination of Tax Credits and Tax Preference to Business under conditions of foreign outsourcing or importation, would incite higher domestic capitalization of Production.

It must be understood that the Walmart business format is important for efficient Production conditions, but Social demand and Tax can limit the advantage of foreign production has over domestic production; something which requires an active economic policy to eradicate. Trade advocates suggests it should not be eliminated, but cold logic suggests Americans will lose their Domestic Productivity with a continued foreign advantage. This will impact American Standard of Living much higher over the long-run, than will the average 15% increase in Consumer Costs which such legislation will likely entail. lgl

Tawny writes:

I need more information about the current WalMart controversy.

Robert Baker writes:

I have been researching information about Wal-Mart, and I have found interesting results. Although Wal-mart may provide perhaps a 100 or so jobs, its takes with it 3 jobs from society for every person hired at Wal-Mart due to overwhelming competition from the worlds largest corporation.
Ive moved to a small town, and Wal-Mart if questioning if they can find enough support in this area. My question is, how will this effect the community? A positive impact, or negative?

Steven Votaw writes:

First - Wal-Mart is now and will continue to be the largest retailer company. They came in last in the retailer business and benefited most for the computer revolution. They have the only true market driven control of their suppliers’ inventories through contracts and ERP/MRP. They are driving the edge in terms of application development on market driven inventories and project all needs. These are facts. All other retailers are not market driven through technology and have ERP/MRPs that reflect their cultural history, superimposed profit margins, and therefore are inefficient. Wal-Mart has driven and will continue to drive for only mass-market appeal.

Second – The jobs that have left the US were bound to leave the US Wal-Mart speeded their leaving. Survival is an expected status quo in the US and some of Europe, for the rest of the world it is a hope. Jobs are not important in the US, for the rest of the world they are a necessity. The standard of living is important in the US and some of Europe, for the majority of the world they are hoping to work, eat, and survive. The American Dream is gone for 99% of the people in the US. We have an ignorant/dependent society based on an expected/inflated standard of living that does not want to work.

Third – Governments can only control through large organized entities, since those large entities require bureaucracies to function they can be tracked. If you add up all the government bureaucracies including city, county, state and federal you will find out that is the largest single segment of the US population. Therefore Wal-Mart need only satisfy that segment and they have assured their place. Everything is within the law. Thus Wal-Mart and the US will jointly achieve their market driven goals.

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