Bryan Caplan and David Henderson  

The Economics of Wage Labor

PRINT
Russia’s Hope... Time to Dump "Dumping"?...
by Michael Munger
Guest Blogger
An amazing study was released August 2 by the UCal-Berkeley Labor Center. The conclusion? Wal-mart costs California $86 million a year. The nefarious company does this by cruelly (wait for it) employing 44,000 Californians as workers. Worse, the study points out ominously, Wal-mart actually has plans to hire even more Californians soon.

Here’s an excerpt from the report:

When workers do not earn enough to support themselves and their families through their own jobs, they rely on public safety net programs to make ends meet.

Sounds right. One could quibble with the idea of “make ends meet,” of course. It seems to be based on a Marxian idea of subsistence (to “make ends meet,” I need new $150 sneakers, a plasma TV, and a nice car), and has all the problems of a labor theory of value.

But let that go. The amazing part of the study is the conclusion drawn by the study’s authors from the sentence I first quoted: Employment policies at Wal-mart, the nation's largest employer, cost California taxpayers approximately $86 million a year in public assistance to company workers. Huh?

The study authors treat the entire amount of public assistance to Wal-mart workers as a cost to the state. But since Wal-mart workers are at the bottom of the economic ladder, why doesn’t it make more sense to add up all the wage payments by Wal-mart to the workers, and count those as a saving to the state?

The question is: what would these workers be doing without their Wal-Mart jobs? I would confidently assert a lot of them would be unemployed, and then the full cost of their subsistence would be borne by the state. The study assumes, bizarrely, that if Wal-Mart would just fire these workers they would be employed in high wage jobs paying full subsistence wages, and the state would pay them nothing. (To be fair to them, the authors say they don’t assume this. To be fair to logic, no other assumption generates the study’s supposed “results”).

Those study authors could be right. Maybe, since knowledge of basic economics is not required, all the Wal-Mart workers could get hired at Berkeley.


Comments and Sharing





TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/102
The author at Ashish's Niti in a related article titled Lower prices and lower wages: It's called efficien writes:
    Iif every segment of economy experiences the same effect of lower consumer prices and lower nominal wages, then there is no reason why welfare burden of Govt. will increase. [Tracked on August 9, 2004 3:47 PM]
COMMENTS (31 to date)
Donald Lacombe writes:

If one looks at the hyperlinked report, a response is available from the authors to the statements of the Wal-Mart representative (via publicly available quotes). The response of the authors to the very subject of this post is telling and worth quoting in full:

“Wal-Mart, the world's largest retailer, maintains that it … relieves public assistance burdens by giving jobs to many people who otherwise would not be employed.” (Los Angeles Times, August 3, 2004) The argument that Wal-Mart provides jobs and hence saves the public money through reduced unemployment insurance is fallacious. One can say with equal veracity that the store closures caused by Wal-Mart destroy many jobs and increases unemployment costs. The reality is that Wal-Mart jobs primarily substitute for other retail jobs – many that pay substantially higher. Studies evaluating the net impact of Wal-Mart on jobs in a region are inconclusive regarding whether it adds or subtracts from total employment – but the evidence is that any such net losses or gains are quite small. Given both the uncertainty in the direction of job gains or losses, and the small magnitudes involved, we abstracted from this issue in our study, which focuses on public costs. Allowing for such small net losses or gains in jobs would not meaningfully alter the estimates of public costs – which is driven primarily by the fact that Wal-Mart pays about 30% less in wages than large retailers overall, and 23% fewer Wal-Mart workers are covered by job-based health insurance.

It appears that the study authors are limiting their critique to unemplyment benefits, and not the broader public assistance argument. In fact, they seem to contradict themselves. Comments?

Boonton writes:

Actually they seem to be saying (I'm just going by the section you quoted) that Wal-Mart's effect on total local employment is either zero or pretty close to it. In that case, Wal-Mart's impact on low income workers is to cut their pay and increase those who are uninsured.

No, Wal-Mart coming to town is not good news to workers at the bottom of the ladder. It also isn't good news for local shop owners.

That doesn't mean Wal-Mart is all bad, though. Lower cost goods benefit all the consumers in the area. This includes those on welfare or food stamps. Does the study address the fact that Wal-Mart lets low income consumers get more out of their dollar? This benefit should be compared to the loss of wages.

Arnold, I fear, has become a bit arrogant in his criticism of this study. I suspect its real flaw is much more subtle.

Boonton writes:

Skimming thru the actual study (it's only 16 pages long), it's rather grating to read Arnold post. Especially the childish taunt of Marxism. Of course those who 'fail to make ends meet' will apply for public programs. While some Wal-Mart workers may wear $150 sneakers, I doubt many of them drive nice cars and have plasma TV's unless they are being indirectly subsidized by a non-Wal-Mart spouse or parents.

If you really think this study merits a post you should at least make an effort to read it a little bit and address the issues it raises.

When such workers or their family members get sick, they might visit emergency rooms—a particularly expensive form of care delivery. Moreover, oftentimes such care is not paid for by the Wal-Mart workers’ reliance on public assistance due to substandard wages and ben-efits has become a form of indirect public subsidy to the company. In effect, Wal-Mart is shifting part of its labor costs onto the public. We estimate the cost of the subsidy to Wal-Mart in California for state taxpayers to be $86 million a year. Other retail firms that carry their own weight by providing self-sufficiency wages and employer-sponsored health insur-ance are placed at a competitive disadvantage, which can result in a downward cycle for wages and benefits across the industry. As we have shown, Wal-Mart’s long term impact on compensation in the retail industry has the potential to place a significant strain on the state’s already heavily burdened social safety net. We estimate the cost if large retailers throughout the state adopted Wal-Mart’s wage and benefits standards to be an additional $410 million a year in public assistance expenses. The public cost of low-wage jobs should be taken into account by policy makers at all levels as they make decisions about the kinds of economic development we should encourage in California and in our communi-ties.

Now this is certainly true but I, for one, do not think it is necessarily a bad thing. Wal-Mart probably generates additional tax revenue thru increased sales. That should be compared to the 'hidden' cost of increase welfare costs due to driving down wages at the bottom.

Even if that doesn't redeem Wal-Mart, I would note an argument that has been used to defend the Earned Income Tax Credit by Michael Kinsley. The EITC was advanced as a replacement or substitute for the min. wage. Instead of forcing employers to bear the burden of providing a 'living wage' to low skilled work it allowed employers to open up jobs to low skilled labor. Low skilled labor was encouraged by the credit to take low paying jobs rather than remaining on welfare.

I think its better that the economy move towards more efficient means of production. That includes 'retailing' which is often overlooked as an essential aspect of providing us with goods and services. While the cost to taxpayers may rise, the benefit to consumers increases and we should keep in mind that prices are regressive; The less income you have, the price of any particular item will represent a larger portion of it.

Or, to put it more simply, if Wal-Mart reduces prices by 3% then it is still a good deal for California if they have to raise the sales tax by 1% to compensate for increased use of public services.

DSpears writes:

That's hilarious.

Boonton writes:

My apologies to Arnold, I didn't realize that Michael Munger was filling in for him this week!

DSpears, could you please be a bit more specific?

Tom writes:

The report should have said "California's welfare policies cost taxpayers billions of dollars a year." That would have been correct.

Walker writes:

The study is interesting in that it discusses and attempts to quantify a public cost associated with low wage labor that does not get a lot of recognition in the public debate. It doesn't look like an all-around indictment of Wal-Mart -- the effect under study is evaluated in isolation, though it certainly provides fuel for Wal-Mart's critics.

Economists could probably argue about Wal-Mart's net effect on employment till doomsday and probably not come close to consensus -- the analysis is tough to begin with, but the issue is so politically charged any science that might emerge would be effectively drowned out.

Michael Munger writes:

In Arnold's defense, I'm sure he would have been more temperate, and may not have commented on the study at all.

But this is guest blogger Mike Munger's week, so blame him.

mike

Boonton writes:

Well I suppose that would have been a correct title but a more accurate one would have been, "California's welfare policies cost more as Wal-Mart expands."

Iif every segment of economy, including health care, experiences the same effect of lower consumer prices and lower nominal wages, then there is no reason why welfare burden of Govt. will increase.

Boonton writes:
Iif every segment of economy, including health care, experiences the same effect of lower consumer prices and lower nominal wages, then there is no reason why welfare burden of Govt. will increase.

Imagine there is a very powerful Union in town that makes it so that baggers at the grocery market make $55K per year. Of course there is a lot of people on the waiting list to be baggers but unemployment isn't especially higher (those people will take other jobs while waiting for their shot to get in the Union). Now all in the sudden the Union is broken and baggers make $7K per year!

Clearly gov't welfare rolls will increase somewhat since there are some people who were living pretty well as baggers that can no longer pay for their living expenses. Yet the economy as a whole will benefit from this because *everyone* will see lower prices at the grocery.

Walker writes:

Boonton, on what basis do you say...

Yet the economy as a whole will benefit from this because *everyone* will see lower prices at the grocery.

Given the negative effects you cite, how can we be sure that the positive of lower consumer prices outweighs them? The benefits are sprinkled lightly among the many, while the costs would fall heavily on a few. Unless these costs and benefits are weighed in a thorough anaylsis there is no basis for the conclusion that the economy as a whole would benefit.

Boonton writes:
Given the negative effects you cite, how can we be sure that the positive of lower consumer prices outweighs them? The benefits are sprinkled lightly among the many, while the costs would fall heavily on a few. Unless these costs and benefits are weighed in a thorough anaylsis there is no basis for the conclusion that the economy as a whole would benefit.

I agree, but before we start doing more studies I'd like to point out some observations:

1. Every dollar lost by a low wage worker must end up somewhere else. So money saved on wages are either going to end up in the hands of consumers (thru lower prices), suppliers or owners (stockholders).

2. I don't think Wal-Mart's only advantage is lower wages. They have a system that works better. Hence that savings too must end up in the hands of consuemrs, suppliers or owners.

3. Wal-Mart generates other advantages that are real but not as easily quantified at first glance. One stop shopping, for example, is very big. For someone on a tight budget, having to make multiple trips to different stores adds up in terms of time, gas, repairs and so on. The fact that they replace many smaller 'mom & pop' shops has the advantage of probably cutting back on tax cheating & 'off the books' wages.

So we have the benefit of the low income workers loss (partially born by the taxpayer) offset by gains in excess of that loss.

Lawrance George Lux writes:

Most miss the major element of Walmart business policy, which allows them to succeed: this is the combination of labor skill alongside low Wages. Walmart effectively uses Labor recruitment from experienced workers, who are currently unemployed. The fault lies not with Walmart, but with the stagnant local economies it enters. It does not worry about the drift of Employees to more lucrative employment, as in the meantime, the experienced labor has trained the unexperienced labor. It is a good business policy. lgl

Walker writes:

Boonton,

The economy of scale, bargaining power, and "one-stop shopping" advantages of Wal-Mart over "Mom and Pop" are granted. Yet these advantages seem somewhat independent of its wage structure. Wal-Mart could pay higher wages, and it would seem that all of these advantages would remain intact. CostCo is more of a direct rival to Sam's Club than Wal-Mart, but it demonstrates an alternative model in roughly the same space.

Of course if the choice is limited to Wal-Mart as is vs. "Mom and Pop" the comparison is still difficult to make from an economists perspective. From a policy-makers perspective it can be even more complex, as in addition to the straightforward economic factors cited, fuzzier but no less real issues (or "externalities") concerning the effects on the cultural life of the community must be accounted for.

Alex writes:

The comments and discusssion on this topic aptly describe your obtuseness and your ivory tower out of touch with reality circular theoretical esoterica to ad nauseum better than I could ever state on my own.

Boonton writes:
Of course if the choice is limited to Wal-Mart as is vs. "Mom and Pop" the comparison is still difficult to make from an economists perspective. From a policy-makers perspective it can be even more complex, as in addition to the straightforward economic factors cited, fuzzier but no less real issues (or "externalities") concerning the effects on the cultural life of the community must be accounted for.

The beauty of it is that we have a 'problem solving machine' that seeks to crunch such numbers. That machine is the market. If Costco does better by paying higher wages, then they will 'win' against Wal-Mart & the policy maker will see all the benefits PLUS higher wages for low income workers. The policy maker, though, shouldn't have to decide between Costco, Wal-Mart or Mom&Pop.

Mcwop writes:

This study, if you can call it that, leaves out some important information.

1. It leaves out a comparison of taxes paid by Wal-Mart versus other retailers. That is combined property, payroll, income taxes etc. Wal Mart may pay more in taxes than employees extract from public assitance. Furthermore, if the latter is the case then other retailers are benefitting from Wal Mart's higher tax payments.

2. The study compares Wal-Mart wages and benefits for non-managerial workers with those of unionized grocery workers. Do the unionized grocery workers include managers, which might push wages up?

3.Where are age variables? Wal Mart hires a lot of older folks. In fact my in-laws work there. They are immigrants with few skills, and their Wal Mart jobs help them supplement their social - thus allowing them to earn a decent overall retirement income. So in this case Wal Mart is keeping them off the dole.

Walker writes:

The beauty of it is that we have a 'problem solving machine' that seeks to crunch such numbers. That machine is the market. If Costco does better by paying higher wages, then they will 'win' against Wal-Mart & the policy maker will see all the benefits PLUS higher wages for low income workers. The policy maker, though, shouldn't have to decide between Costco, Wal-Mart or Mom&Pop.

That short circuits the issue at hand. What if Wal-Mart were to beat CostCo in the marketplace, but in doing so cause a greater drain on the state's finances. Is this the most desirable outcome for your state? Perhaps, perhaps not -- unfortunately the market provides no answer.

Also, in practice, the policy-maker doesn't typically "decide" between CostCo, Wal-Mart, and Mom&Pop, but the policy-maker does decide whether to give a tax holiday to X, configure zoning ordinances to accomodate Y, etc. A policy-maker should consider the desirability of the possible outcomes before tilting the rules in favor of one party or another.

pragmatist writes:

Does anyone in California own WalMart stock?
Have the authors of the study factored in the
increase in net worth of those stockholders?
And the additional payments to the California
State Treasury on the income tax revenue the
dividends or capital gains on that stock net?

mcwop writes:
This study, if you can call it that, leaves out some important information.

1. It leaves out a comparison of taxes paid by Wal-Mart versus other retailers. That is combined property, payroll, income taxes etc. Wal Mart may pay more in taxes than employees extract from public assitance. Furthermore, if the latter is the case then other retailers are benefitting from Wal Mart's higher tax payments.

2. The study compares Wal-Mart wages and benefits for non-managerial workers with those of unionized grocery workers. Do the unionized grocery workers include managers, which might push wages up?

3.Where are age variables? Wal Mart hires a lot of older folks. In fact my in-laws work there. They are immigrants with few skills, and their Wal Mart jobs help them supplement their social - thus allowing them to earn a decent overall retirement income. So in this case Wal Mart is keeping them off the dole.

Edit - In my post quoted above #3 should read "...their social security - ...

Lawrance George Lux writes:

Most here miss the essential conditions of the situation. The Study is probably a call for a State Minimum Wage, which has all sorts of complications. Walmart is not going to give up its position in California, or any other State. It would decrease California's GDP as greatly as any exit by Business. Essential points:
1) Could 'Mom and Pop' retail provide the degree of product and service as does Walmart? No.
2) Does Walmart have Competitors? Yes.
3) Why can't those Competitors compete more successfully against Walmart? They do not use the tight Business formula used by Walmart, as consequence, Walmart provides cheaper Product with (unestablished?) lower Wages than other chain Retailers. lgl

dsquared writes:

Sounds right. One could quibble with the idea of “make ends meet,” of course. It seems to be based on a Marxian idea of subsistence (to “make ends meet,” I need new $150 sneakers, a plasma TV, and a nice car), and has all the problems of a labor theory of value.

I'm guessing that the person who wrote this paragraph has never worked for minimum wage.

Alex writes:

Agree with concise designation of "hilarious" by D. Spears and agree with dsquared concise remark and will add most of commenters are discussing their religion of econ. and are out of touch with reality.
Just one more reason, univ staffs should be part-time while foreced to operate in the real world for 40 hrs. a week.

Mace writes:

To borrow a Leftist phrase, let's look at the root causes of this study. You have: (1) a UC Berkeley (no one calls it UCal Berkeley) think tank devoted to supporting the left wing unionist line, (2) grocery stores in this state that are in a precarious competitive position due to the entry of Walmart SuperStores, and (3) unions that need some political firepower to protect their unskilled jobs. The unions already tried to get legislation passed here in California that disallows stores with more than 100,000 sq ft from selling groceries. This is simply another attempt from an apparently shameless bunch. The real problem is that the California government has too many looney left legislators (who call themselves Democrats) who are willing to engage in such idiot measures. I think it's called rent-seeking.

dbetts writes:

Walmart must be paying a market-clearing wage as they have employed thousands at these "low wages." If they were unable to staff the stores at this wage, the wage would consequently rise until the staffing levels necessary are achieved. If the thousands employed by Walmart at this wage could obtain higher wages elsewhere they would force Walmart to pay more. Should Walmart pay higher than market wages and shift the burden of social welfare to a publicly-traded entity? I'm sure that I've opened a pandora's box here with my first post, but I agree that the machine of the market is the best mechanism for resolving such difficulties.

Boonton writes:
That short circuits the issue at hand. What if Wal-Mart were to beat CostCo in the marketplace, but in doing so cause a greater drain on the state's finances. Is this the most desirable outcome for your state? Perhaps, perhaps not -- unfortunately the market provides no answer. Also, in practice, the policy-maker doesn't typically "decide" between CostCo, Wal-Mart, and Mom&Pop, but the policy-maker does decide whether to give a tax holiday to X, configure zoning ordinances to accomodate Y, etc. A policy-maker should consider the desirability of the possible outcomes before tilting the rules in favor of one party or another.

Again one person's drain is another person's gain. What workers at Wal-Mart lose in lower wages (partially offset by the taxpayer) must be a gain for the stockholders or consumers (depending upon the degree the lower wages go into profits vs lower prices). Assuming Wal-Mart is able to have other advantages than just lower wages (in other words, a Wal-Mart is more than 30 Mom&Pop stores with 20% less in payroll costs), the net benefits are greater than the net losses.

In theory, the gainers could be taxed to compensate the losers with benefits left over. Hence my quip about prices for consumer goods falling 3% while the state raises the sales tax 1% to make up for increased welfare costs.

I agree the policy maker is faced with those various choices but they really should be made by as neutral policies as possible. For example, individual businesses shouldn't get 'tax holidays'. Instead overall tax rates should be lowered if the policy is to reduce the tax burden.

Alex writes:

"hilarious" "clueless"
"esoterica" "out of touch with real world"
Wal-Mart imports $13B a year.
Costco is just one big distribution chain and don't know amts. it imports.
Am not a believer in non-skilled unions, but a living wage is a living wage, so the rest of society doesn't have to pick up the tab. All the yuppies and bobos must pay regular price for items --it's largely only redistribution of govt. moneys anyway!

HOW MANY CHINESE MISSILES ARE YOU ALL GOING TO BUY? HOW MANY SPY SATELLITES? ETC. ETC. EXS.
etc.etc.
Wal-Mart is a predator who bullies its vendors.
They don't dare speak of it either! Price-fixing.
Wal-Mart should have stayed in Ark.or in Mex/Guat. with the types it employs,who then live off govt. benef. services. And,massive immigration has screwed up many aspects of employment in U.S.

Walker writes:

Again one person's drain is another person's gain. What workers at Wal-Mart lose in lower wages (partially offset by the taxpayer) must be a gain for the stockholders or consumers (depending upon the degree the lower wages go into profits vs lower prices).

Granting this, and isolating the factor at hand, the state government is in effect transfering wealth from taxpayers to Wal-Mart consumers and Wal-Mart stockholders. A fraction of this transfer is then recovered by increased tax returns. However indirect, it amounts to a subsidy of Wal-Mart by the taxpayers. The state government could simply accept this subsidy or create a special "Wal-Mart Tax" to compensate as you suggest, but it should certainly be aware of the effect so that an informed decision can be made.

Boonton writes:
Am not a believer in non-skilled unions, but a living wage is a living wage, so the rest of society doesn't have to pick up the tab. All the yuppies and bobos must pay regular price for items --it's largely only redistribution of govt. moneys anyway!

The problems with this are:

1. The lowest skilled workers will not receive a living wage becuase employers will simply not hire them.

2. Those employers who do concentrate their employment at the low end will get punished the most. A company that hires highly paid professionals will feel little or no effect of a living wage policy.

A better policy would be to evenly divide the burden of supporting those at the bottom. Something like the Earned Incomt Tax Credit does this by supplementing low income workers. The policy doesn't discourage companies from hiring low skilled workers and it doesn't discourage low skilled workers from accepting a low wage job (as opposed to no job at all).

Granting this, and isolating the factor at hand, the state government is in effect transfering wealth from taxpayers to Wal-Mart consumers and Wal-Mart stockholders. A fraction of this transfer is then recovered by increased tax returns.

True but you must still count the benefit. If Wal-Mart lowers prices for millions of consumers then you must consider that benefit. Lower prices are a progressive benefit since they help the person with a low income more than a high one.

triticale writes:

Wal-Mart is a predator who bullies its vendors.

Sears was notorious for this thirty years ago when I first got involved in manufacturing. The overall practice of getting a manufacturer dependant on your business and then squeezing goes back, in the form Sears used, to at least the 1890s.

Costco is able to compete with Sam's Club while paying higher average wages by having a business model hust different enough as to use fewer workers. I'd rather be working at Sam's for a low wage than not work at Costco for a higher one.

Comments for this entry have been closed
Return to top