Arnold Kling  

Productivity vs. Distribution

Should Pacey Teach Economics?... Policy Specifics...

Jeff Madrick is not impressed with Wal-Mart.

Critics are compiling evidence that Wal-Mart's success, while entrenched in the brilliant management of new technologies, is dependent on low labor costs...

A new study by Arindrajit Dube and Ken Jacobs of the University of California, Berkeley, has produced clear evidence of Wal-Mart's comparatively low wages. The researchers calculate that in the San Francisco Bay Area, the company's average wage, about $11 an hour, is roughly 30 percent below what unionized workers get in local grocery chains.

...most Wal-Mart critics say a crucial way to improve conditions is to change laws to make labor unions easier to organize. Mr. Lichtenstein says a substantial raise in the minimum wage - back to its 1980 level, before inflation eroded it - would have still more impact.

I think that this approach to looking at wages at Wal-Mart is almost a textbook example of bad economics.

Economic theory would say that low-skilled workers are not going to earn high wages. If you force employers to pay low-skilled workers high wages, then employers will higher fewer low-skilled workers. They will substitute highly-skilled workers and capital.

Economic theory also would say that Wal-Mart's use of low-skilled workers as a way to hold down costs has benefits for others in the economy. Consumers benefit from lower prices. Shareholders benefit from profits.

Madrick says that other companies could try to imitate Wal-Mart, and he implies that this would be bad news for low-skilled workers. But it would be good news for low-skilled workers! The more competition for low-skilled labor, the higher will be their wages.

What low-skilled workers and everyone else needs is more Wal-Marts.

For Discussion. Consider four types of industries: Unionized with productivity growing (e.g., manufacturing); unionized with productivity not growing (e.g., hospital workers); nonunionized with productivity growing (e.g., Wal-Mart); nonunionized with productivity not growing (can't think of a good example at the moment). What are the economic benefits of each category?

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CATEGORIES: Income Distribution

TRACKBACKS (9 to date)
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The author at Tex the Pontificator in a related article titled Low Wages and Walmart writes:
    A frequent criticism of Walmart is that its wages are too low. EconLog explains why that criticism and calls for forcibly raising Walmart's wage level are wrongheaded: [Tracked on September 2, 2004 4:16 PM]
The author at The Liberal Order in a related article titled The New York Times and Bad Economics writes:
    Arnold Kling is correct, this is simply poor economic reasoning. Moreover, it is a remarkably innovative exploiter of the latest technologies, enabling it to run its huge retail network highly productively, and providing its 20 million or so daily cust... [Tracked on September 3, 2004 7:40 PM]
The author at Ashish's Niti in a related article titled Indian consumers are getting a bad bargain writes:
    Indian consumers are getting a bad bargain because of restriction on retail businesses (such as FDI). [Tracked on September 4, 2004 9:08 AM]
COMMENTS (8 to date)
Brad Hutchings writes:

So, according to the Dube-Jacobs study, a unionized Ralphs (Kroger) employee who is on strike more than 30% of the time since thy left work last November would be making less than the typical WalMart worker.

Unions are a bit of an anachronism. That's not denegrating their membership, but the percentage of unionized workers in the economy has been shrinking for 25 years. We're not all becoming managers nor are we all becoming free agents. Other institutions are replacing unions in the role of aggregating workers. Think temp agencies, which more and more are acting as a gateway to professional jobs. In effect, corporate America has outsourced the union. What are the benefits of this kind of arrangement?

muckdog writes:

Some folks tend to think that a job at Walmart is some sort of career "final destination." I believe that low-wage jobs like Walmart or fast food should be transitional jobs, where folks work while they're young, going to college, or trying to pick up a few extra bucks part time.

Walmart is not a career; and, we shouldn't encourage folks to be seeking vesting privileges.

Dave Meleney writes:

With all the concern about the $11/hour workers it seems we've all but forgotten the hard working people who make the stuff we buy at Wal-Mart. Some of them are only making 50 cents an hour.

As I travel in China and find factories in more and more remote areas every time I go back, it is always astounding to see how rapidly an area can change from one with no phones and few bikes and no refrigeration to one in which people have healthful diets, better schooling, and real opportunities for children to grow in mind and body and spirit.

There are huge problems, and still about a hundred million Chinese who live on $75 a year or less... but the progress is unbelievable. It is the purchasing agents for Wal-mart and Target and Home Depot who are pushing incessantly for lower and lower costs that are central to the process. If they weren't pushing so hard for lower prices they wouldn't need to bother with getting new factories on line back in the boonies where unpredictable problems will arise. We wouldn't see millions of Chinese migrate from the poor areas to the richer areas and then later returning to manage the new plant back home.

If you've never experienced the physical sensation of enduring hunger, or had to decide which child you can afford to feed tonight, think carefully before you attack Wal-mart for they may be the real revolutionaries of our time.

For the really poor who live in China or India or the Dominican Republic.... their children's hope to live in the opportunity society that now predominates in much of China lies not with the followers of Mother Theresa but with the followers of Sam Walton.

bob boyd writes:

Hmmm...interesting. Has the labor union been 'outsourced' not to temp agencies but to government?

In this case, the laborer who's labor is not worth the 'minimum' according to welfare regulations can get at least the minimum by working at WalMart AND receiving full or partial benefits accorded by government depending on their household status? Thus, the college student gets spending money who otherwise wouldn't have gotten a job and the entry level high school dropout get's 'transitional' first employment without government transfers. And the single mother also get's a job and some cash transfer.

The left-side of my brain thinks this is the best possible situation. Society (via the legislative sausage factory) determines a reasonable living standard AND employers only have to pay wages up to the marginal productivity of labor. On the whole, taxes are lower for everyone, including the employer, than if minimum wages were above marginal labor productivity because more people are working. Showing up to a job is good for just about everybody if it keeps them away from daytime television ;-)

But, the right side of my brain is twisted in a knot. When the CEO of Hollinger Publishing (Lord Black, oohh what a title for a villain)makes off with $400M in cash and the rest of us have to pay taxes to buy food for his newspaper carriers, something is amiss.

I wish my economics professor had connected economic principles with real-world outcomes and shown what the non-economic consequences can sometimes be even when most efficient economic principles attain.

Good luck teaching at GM, Arnold. I read your blog often and hope you keep writing it.

John Thacker writes:

nonunionized with productivity not growing (can't think of a good example at the moment)

What about, say, traditional handcrafts such as handmade furniture and art? Not precisely industries in the typically used sense, though.

Lawrance George Lux writes:
Consider four types of industries: Unionized with productivity growing (e.g., manufacturing); unionized with productivity not growing (e.g., hospital workers); nonunionized with productivity growing (e.g., Wal-Mart); nonunionized with productivity not growing (can't think of a good example at the moment). What are the economic benefits of each category?

Unionized-growing: certification of Labor share of Business profits, protection of Labor through health and retirement benefits; downside: slower rate of Business growth, lower Profits, slightly higher competitive Product prices, extremely higher non-competitive Product prices.

Unionized--non-growing: protection of Labor wages and benefits, maintenance of industry standards; downside: loss of recapitalization rates, loss of Profits, and higher Product pricing.

Nonunionized--growing: rapid Investment and expansion, competitive against other Business, and highly profitable; downside: Labor invariably loses Profit-sharing in Growth, almost always losing in Wage standards as well, inferior Product produced over time-though Product prices tend to be lower.

Nonunionized--nongrowing (cattle feeding excellent example): Almost always facing Purchaser unification which eliminates creditable Wages or Profits, almost always dealing with big-ticket items like health care or cattle and surviving upon single Payment euphoria: no real upside, as the Purchaser unification turns into Seller unification, so Consumer prices remain high. lgl

Shaq writes:

unionized with productivity not growing (e.g., hospital workers)
What do you base this generalization. In fact, the need for health care has outstripped resources for health care. Most hospitals have done more with relatively less manpower via technology gains.

Lawrance George Lux writes:

Exactly, and this has not helped either Consumer or Labor. Medical facilities have done a equally good job in divesting Patients who cannot pay, and suppressing Wages. lgl

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