Bryan Caplan  

How Welfare Hurts Walmart

PRINT
Bans Against Headscarves Can B... 11-99 Foundation: Buying Prote...
Walmart's critics often argue that food stamps, Medicaid, and other poverty programs subsidize its labor force.  Since government pays a big part of its workers' living expenses, Walmart doesn't have to.  Is this true?

As long as non-workers remain eligible for poverty programs, the answer is no.  This is basic supply-and-demand.  When the government offers free stuff to people with low incomes, the marginal benefit of work falls - and so does labor supply.  When labor supply falls, hours of work go down, and wages rise.  This could be very nice from the point of view of Walmart's workers.  From the point of view of Walmart's stockholders however, it's bad.

Not convinced?  Ask yourself: "If I ran Walmart, would I favor higher unemployment benefits?"  Of course not.  Why not?  Because higher unemployment benefits make it easier to not apply for a job at Walmart.  The same goes for any government program that makes idleness less unpalatable.

Once you grasp why standard welfare programs hurt Walmart, you are ready to search for counter-examples.  Is there any government program that actually increases labor supply?  Indeed there is: the Earned Income Tax Credit.  To benefit from this program, you have to work.  The more you work, the larger your tax credit.  When the EITC goes up, the marginal benefit of work rises - and so does labor supply.  This doesn't mean that Walmart is the sole beneficiary of the EITC; unless labor demand is perfectly inelastic, workers capture some of the program's benefits too.  But from Walmart's point of view, a bigger EITC is better.

HT: Perry Metzger


Comments and Sharing





COMMENTS (31 to date)
FoodStampsQuestion writes:

If food stamps, let's say, provides a worker with $1200 worth of good each year, then isn't a worker more likely to bargain for a lower wage from Walmart?

Arthur B. writes:

I'm trying to reverse engineer the intuition behind Walmart benefiting from welfare. Of course, such an intuition can be wrong (like most intuitions about the economy), but we can try to salvage it with:

- an income effect
- a heterogeneous labor market

"If workers acquire skills in order to satisfy a certain income requirement, introducing welfare shifts the supply of labor from skill to unskilled and benefits employers of unskilled labor."

JLV writes:

On the extensive margin, yes. On the intensive margin, you can make a case that the interaction of various means-tested programs (EITC and transfers) acts as a "trap" that keeps lower-income workers from leaving, e.g. Walmart for marginally better opportunities.

JLV writes:

Additionally, we have a framework to think about these things (Saez 2002, QJE). So I think (if the logic from a pure Negative income tax extends to other transfers) that Walmart's benefits from EITC vs. UE/food stamps depend on the relative size of the extensive vs. intensive margin labor elasticities.

mobile writes:

But welfare programs (and higher minimum wages) also subsidize Walmart's customer base, necessarily a much larger group than its labor pool. On net, standard welfare programs are probably beneficial to Walmart, and there is evidence that Walmart believes this and acts like it believes this:

http://www.slate.com/blogs/weigel/2014/02/25/walmart_s_shadow_minimum_wage_campaign.html

A higher EITC also benefits Walmart, though, with the added benefit of being less alienating to those powerful libertarian special interests.

RPLong writes:

If welfare programs subsidize Walmart's customer base, they also subsidize everyone's customer base. There is no unique benefit to Walmart, specifically. The only exception here is suppliers of luxury goods, which I don't think are relevant to the welfare/wage/marginal propensity to supply labor conversation.

John Thacker writes:

Regarding the EITC, I actually have seen a criticism floating around more left-leaning people saying that the EITC allows Walmart to lower wages to make up the difference, and thus that Walmart captures all the benefits of the EITC. This is usually said in the context of a campaign for raising the minimum wage instead.

Of course it seems unlikely that labor demand is perfectly inelastic in an economy that has unemployment, unless we were truly post scarcity. It just takes a bit of explaining to people.

James B. writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment. We'd be happy to publish your comment. A valid email address is nevertheless required to post comments on EconLog and EconTalk.--Econlib Ed.]

Glen Smith writes:

I'd suspect that if there was no welfare and assuming Walmart continue with it's marketing strategy, Walmart stores would still be almost as severely understaffed as they are now due to any welfare effect. From my experience, I'd agree that Walmart is a net welfare beneficiary.

Rob Rawlings writes:

I agree with Bryan about EITC and Wal-Mart likely views on UI.

In theory at least however if an employer said to a low-IQ worker something that amounted to "work for us at the minimum wage and we will help you to get extra state benefits that otherwise you wouldn't be able to get because the application process is too complex" then this employer could be said to be exploiting the benefits system.

MacDonald's allegedly runs a "benefits hotline" for its employees which gives a little bit of anecdotal evidence for this theory.

http://billmoyers.com/2013/10/24/audio-mcdonalds-tells-full-time-employee-to-apply-for-welfare-benefits/

HH writes:

"those powerful libertarian special interests."

Yes, if the political economy of the US tells us anything, it's that it's secretly run by hardcore libertarians.

:)

Jay writes:

@John Thacker

Every time I hear about a new Walmart opening in an urban area, hundreds of people lining up around the block for jobs. If this doesn't signal that they're able to lower wages and still attract employees, I'm not sure what will.

John Hall writes:

Maybe there is a better reply to Ritholtz's argument, but this doesn't seem like it. At a minimum, your argument only considers the effect on labor supply for the change in poverty programs, while ignoring the impact of the demand for products from Walmart. Assuming poverty programs are financed through taxes on the rich and that the rich are less likely to shop at Walmart than those on poverty programs, you would have to consider the change in demand as well. It seems to me like the effect of unemployment benefits on labor supply would be tiny compared to the impact on demand, but it's really a measurement issue.

mobile writes:

@RPLong - Yes, I'm claiming that welfare programs have a specific benefit to Walmart. Compared to, say, the other 29 companies in the Dow Jones, Walmart's customers skew poor even more than its labor pool, and welfare programs (anti-poverty welfare programs, anyway) tend to transfer money from people that don't shop at Walmart to people that do.

David R. Henderson writes:

@Jay,
Every time I hear about a new Walmart opening in an urban area, hundreds of people lining up around the block for jobs. If this doesn't signal that they're able to lower wages and still attract employees, I'm not sure what will.
John Thacker was talking about a change in wages in response to a change in law. You’re talking about a level of wages at a given point in time. Those are very different.

Dan writes:

The question is whether these are benefits that Walmart would have to pay if they did not exist. At an extreme, if the wages did not cover food costs then workers would not have the energy to work, If food was provided for free then Walmart can afford to pay lower wages then would have to cover food costs. Similarly, if they benefit from a healthy workforce, then medicaid is a form of subsidy and Walmart doesn't have to pay as much in wages.

Tim writes:

@Dan

Similarly, if they benefit from a healthy workforce, then medicaid is a form of subsidy and Walmart doesn't have to pay as much in wages.

That presumes that Medicaid improves health outcomes of the poor. Jury is still out on that one, but the early results indicate no such effect.

RPLong writes:

@mobile - It sounds like you're suggesting that Walmart unfairly benefits from welfare programs because it offers prices that are attractive to welfare recipients. Would you prefer that Walmart raise its prices to try to avoid this issue?

Thomas Sewell writes:

If Wal-Mart didn't hire these folks at all, they would still receive welfare benefits like food stamps, medicaid, etc...

So it's nonsensical to say that Wal-Mart employing them has an effect of subsidizing their labor force. The government is subsidizing low income people, not Wal-Mart employees specifically. Wal-Mart just happens to employ many of them, giving them an additional income the government might otherwise end up paying.

As an additional benefit to their employees, companies like Wal-Mart and McDonalds teach their employees work and life skills to their benefit, including how to navigate a usually not-so-friendly bureaucracy.

If someone came along and said, "I'll hire at $8-$10/hour everyone who needs a job right now and get them doing productive, wealth-building work!" it takes a really screwed up view of economics and life to try and turn that into a big negative for society.

mobile writes:

Walmart's low prices are a great boon to the poor, and the poor would not be better off if Walmart raised prices (Walmart probably wouldn't be better off, either).

I was making a normative statement, contradicting Bryan's normative statement, that higher welfare benefits would be a net benefit to Walmart, and that conceivably it could pursue shareholder interest by supporting such policies. Although now that I think about it, if the benefits were too generous, some Walmart shoppers might graduate to Target and Costco.

Hazel Meade writes:

Regarding the EITC, I actually have seen a criticism floating around more left-leaning people saying that the EITC allows Walmart to lower wages to make up the difference, and thus that Walmart captures all the benefits of the EITC. This is usually said in the context of a campaign for raising the minimum wage instead.

I've seen this argument too, but I don't think it makes sense. I don't know anyone who would accept a lower wage because they are getting a government subsidy. The argument could be made that because the labor supply will increase that wages will go down, somewhat, but I doubt the drop would entirely cover the amount of the subsidy.

But this only makes sense if we also have straight welfare levels high enough to make people willing to drop out of the workforce rather than work, but also low enough that the added EITC is sufficient to make working suddenly worth it. But if welmart captures all the benefits the effect is nil.

If you're already getting welfare, so you don't want to work, and the EITC induces you to start working, you're not going to agree to work for a lower wage that negates the benefits of the EITC. The whole point that it increases the labor supply depends on there being a net wage increase.

Arthur_500 writes:

Welfare can't benefit Wal*Mart employees. If the necessary wage to get off Welfare is $15/ hour then Wal*Mart would have to pay in excess of that in wages and benefits to compete with Welfare. Why work and have a lower standard of living?

Since Wal*Mart is so large they could keep some prices of common necessary items a bit higher knowing that many of their customers are paying with Food Stamps. But those are customers and not workers.

Ultimately Wal*Mart needs employees and the only way they get employees is to provide an adequate wage and benefit for the labor market. Why get angry with Wal*Mart if they have plenty of employees willing to work for their wages?

tesc writes:

FoodStampsQuestion,

you are assuming the WM wannabe employee is desperate to work for any amount if he is not hungry.

You are saying this

Not Hungry implies lower wages bargaining.
-H-->LW

Which is logically equivalent to

higher wages or not low wages implies hungry.

(-LW or HW) --> H

You're saying that if we see higher wages Is because workers were hungry causing them to bargain for Higher wages.

Is that a proper causal connection ?

I think is the other way around. Not being hungry allows the worker to wait for higher wages.

Rather then take low wages in desperation because they are hungry.


Ken Schulz writes:

Is no one concerned about the signaling function of price (of labor)? Full-time workers who qualify for government assistance are selling their labor at less than cost. Employers are given an incentive to hire 'too many' workers, and to under-invest in productivity improvements. I favor a strong safety net, but we need to balance out the labor-market distortion it introduces.

Kirk Taylor writes:

As anyone who has reviewed the EITC table knows, there is no legal way to make up for a drop in wages with EITC. You lose far more in wages than you gain in EITC. On the opposite end, you lose far less in EITC then you gain by having wages go up. It is actually, for a government program, well designed. The only real problem is that far too many people do not understand this simple point, and they therefore respond to an incentive that does not exist (I can't work more because I will lose my EITC.)

It does lower the incentive to earn more money above the peak of EITC by lowering the real value of the extra dollars earned, but it's less than 20 cents on the dollar on average.

Everyone should look at the EITC tables, it tells you a lot about its effects.

Brandon Berg writes:

Easier rebuttal: If welfare is a giveaway to Walmart, why don't we just repeal it?

Hazel Meade writes:

As anyone who has reviewed the EITC table knows, there is no legal way to make up for a drop in wages with EITC. You lose far more in wages than you gain in EITC.

If this was true then the EITC would not induce anyone to take a job rather than live on welfare.
But the argument that EITC reduces wages *depends on* people being incentivized to work rather than accept welfare.
If the EITC causes the labor supply to increase to the point that wages drop LOWER than they would be without the EITC, then there should be a net *reduction* in the labor supply, because fewer people will be incentivized to work.

You can't say the EITC will cause an increase in the labor supply AND that it causes net wages (factoring in the EITC) to be lower than they would be without the EITC. It is logically inconsistent.

Hazel Meade writes:

@Dan
At an extreme, if the wages did not cover food costs then workers would not have the energy to work, If food was provided for free then Walmart can afford to pay lower wages then would have to cover food costs. Similarly, if they benefit from a healthy workforce, then medicaid is a form of subsidy and Walmart doesn't have to pay as much in wages.

What makes you think Walmart pays it's employees based on how much they need?

Every employer pays based on their marginal productivity. If the cost of employing them is greater than their marginal productivity, Walmart is going to lay people off. The cost of the employee's food and healthcare is entirely irrelevant to Walmart's calculation.

In an environment with no welfare at all, it's possible that nobody would be willing to work for low wages. But obviously that would mean that ALL retailer's costs would be higher, which would mean that prices would rise for consumers.

If anyone is capturing the benefits from welfare, it is Walmart's customers. We're all benefitting from the low prices which we get because the retailers we buy from are able to pay cheap wages. Of course, we're paying for the welfare benefits through taxes too, so ....

Jon writes:

Wal-Mart, and established corporations in general, do benefit when people suffer more. I think in your more free market capitalist societies, such as Haiti, you regularly see unemployment in the 50% range. Desperate people will work for nothing, and will do exactly as they are told. Profits go up.

Bryan's concern is for "Wal-Mart". The profit of the company is more important than having a population that can afford enough nutritious food, housing, and access to needed health services. So for Bryan not only should we not have welfare (people suffering more will drive wages further down) we should prefer more unemployment, which has the same effect. More for stock holders, less for the people that do the lifting.

The flip side is also true. Give people a guaranteed minimum income via taxation and they won't go work for any crappy company. They'll expect something decent and respectable. This has been tested several times, particularly in lower income regions, and the results are extremely positive. For people. Not necessarily for corporations. So I suppose for Bryan that would not be very interesting.

tesc writes:

Brandon

Perfect!

Dan JJ writes:

Feb 26, 4:39

Jon writes
"Gobbledygook gobbledygook utopian paradise gobbledygook das kapital gobbledygook "

Is Walmart subsidized by welfare? Is 7/11? Food Lion?, Safeway? Any place that accepts food stamps?
Food stamp or not, there will be grocery stores. Grocery store or not, there will be rationed credits for obtaining food.

You want to blame a business for seeking a way to benefit from govt hubris? Uh... Ok. So... Reduce govt hubris.

Comments for this entry have been closed
Return to top