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January 13, 2006

If Only There Was A Better Way...

If I have a pet peeve with economists, it's arguments like this:

Economics says that ultimately this [the Maryland law forcing Wal-Mart to pay 8 percent payroll into health benefits] will reduce the wage income of low-skilled workers in Maryland. That is, Wal-Mart is not going to suddenly increase compensation for low-skilled workers. It either has to cut wages, cut hiring, or both.

Bull. Wal-Mart could also pay executives less money or raise prices on certain items by a couple pennies. This is the same argument made by tax-cutting Republicans against entitlement programs: given our revenue situation, we've got no choice but to cut benefits. It's as if the only way to bring revenues and spending into line is fiddle with spending, revenues being an immutable fact of nature handed down by God at Sinai.

But so far as I know, nothing Moses got dictated the price for pickles or the percent of GDP going towards taxes. You can increase revenues, you can raise taxes, you can hike prices. And considering the minimal difference between Wal-Mart's current spending on health benefits and the 8 percent mandate, the price hike required would be minimal. Meanwhile, economists seem unable to even countenance the idea, much less argue against its wisdom. But their strange economic aphasia aside, Wal-Mart doesn't have to cut employee compensation. They can just -- gasp! -- make a bit less in profits, or increases prices imperceptibly. If they take the more punitive route, that's their decision, not a law of nature.

Also, I should probably direct you to my post on the actual Maryland law, which I think atrocious policy but very smart politics. You're all going to disagree with me, so feel free to flame me in comments.

January 13, 2006 | Permalink

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Maryland lawmakers Thursday overrode Gov. Robert Erlich's veto and approved a measure, directed at W [Read More]

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Comments

I think I'm in agreement on all of your points.

Posted by: Jedmunds | Jan 13, 2006 12:36:54 PM

If they doubled the price of toilet paper, would economists buy only half as much toilet paper?

When companies see workers sort of like they see toilet paper, the analogy is relevant.

Posted by: Neil the Ethical Werewolf | Jan 13, 2006 12:59:31 PM

Ezra

I'm curious what you think would be good politics AND good policy.

Some local folks are considering a similar measure (which has been instituted at local levels) to try to dissuade WalMart from opening 2 new local stores. As I understand it, similar measures have worked in the past, far better than taking WalMart on via zoning (which in our case isn't an option). So what would you do?

Posted by: emptywheel | Jan 13, 2006 1:03:40 PM

They can just -- gasp! -- make a bit less in profits

They're publicly traded, no? In which case they have no business (ha!) choosing to lower their profits. You're trying to place the incentives on the wrong actor here.

They could choose to compensate their top executives less lavishly. That would be proper corporate governance, and should be demanded by the shareholders.

Posted by: Allen K. | Jan 13, 2006 1:11:59 PM

Allen, I don't believe Ezra's advocating Wal-mart voluntarily lower their profits. You're right that would be dumb. But, he was pointing out that the argument against an External requirement to raise comepensation does not mean necessarily that they will reduce wages or # of employees. They could in fact either raise prices or in lieu of that take a bit of a cut in their profits, whichever makes better business sense once the conditions concerning how much they have to pay have changed.

Posted by: Jedmunds | Jan 13, 2006 1:36:58 PM

The usual refrain from economists is that a company can raise prices if they have a competitive edge - market power. With this edge, profits do not get impacted except positively if prices are increased. Does the largest retailer in the world have market power? Ask their competitors or ask their suppliers? You bet they do. Are stockholders buying Target in preference to WalMart? Hell no. They know which company is setting competitive terms for the overall consumer staples and consumer discretionary businesses, and it isn't Target (or CcstCo, for that matter).

Without an edge, the higher prices must not be so much higher than competitors that they lose overall sales significantly enough to reduce profits. There is no ready evidence that higher wages or benefits of Walmart employees would reduce profits if they raised prices to offset increase costs.

Many conomists, the business media, and received wisdom seems to believe that prices only go down, and that wages and benefits must come down in order to maintain profits. Where is the evidence for this?

When Kool Aid appears to be Mother's Milk, then anything can be made to appear preordained as truth.

Posted by: JimPortandOR | Jan 13, 2006 2:04:30 PM

I have to admit that working within current revenue constraints is a much more feasible position to take than automatically claiming with every change "raise revenues".

Too bad that so often the claimed economical solution is merely constructed ignorance of the problem combined with intentional neglect.

Posted by: perianwyr | Jan 13, 2006 2:34:15 PM

Well, you see, if you cut executive salaries by even a nickel, all of the executives would jump ship to some other retail giant that happens to need a regiment of union-busting padlock junkies. Or else they'd stop exerting so much effort (and gosh, no one can measure executive peformance and discipline those who don't work hard enough) and the shareholders, golly me, would suffer. And we can't have that either. Luckily studies have shown that the performance of line workers is utterly unaffected by their pay or morale...

Posted by: paul | Jan 13, 2006 3:56:19 PM

I'm reminded of a post Neil did a while ago, pointing out the reason that employment doesn't fall much with min wage hikes, is that most employers have a monopsony, wherein the wages they pay are pretty inelastic. Neil could you link that?

Anyway, Walmart is even more so, since it's a monopoly often. They are hiring X workers regardless, and would probably pay twice that if they had to, but they don't.

Posted by: Tony Vila | Jan 13, 2006 5:45:17 PM

Let me try and see how this might work in a simplified example. If I have a choice between getting a job at Wal-Mart or Floor-Mart and they both pay $10 an hour, then I'll be indifferent to where I work, assuming conditons are the same at both places. But if Wal-Mart is now forced by law to provide a decent health plan I'm not going to want to work at Floor-Mart, I'm going to want to work at Wal-mart. This means that Wal-Mart can now lower it's wages and still attract workers. If workers on average regard an 8% health plan as being equal to receiving 8% of wages then Wal-Mart will be able to pay $9.20 an hour instead of $10 and still attract enough workers. However, if workers think an 8% health plan is only worth 4% of wages, then Wal-mart will have to pay $9.60 an hour to keep the same number of workers. Since Wal-Mart now has to pay more to keep workers than Floor-Mart, Floor-Mart has an advantage that may allow it to out compete Wal-Mart.

(Note that it is possible that workers may regard an 8% health plan as being worth more than 8% in wages, but as long as they can buy competeing private insurance this is unlikely.)

Posted by: Ronald Brak | Jan 13, 2006 7:55:38 PM

I'm feeling a little behind on this and needing info since we have an impending Wal-Mart Supercenter in my possibly crushable town. Why only Wal-Mart? Why not make this a requirement of every business (or, say, of every business over a certain size)? Is it legal to single out Wal-Mart here while other corporations could get away with it? Or, in other words...what the Hell?

Posted by: Sara | Jan 13, 2006 8:43:25 PM

Here's my post that Tony is talking about, and here's the charts with curves.

Posted by: Neil the Ethical Werewolf | Jan 14, 2006 4:56:58 PM

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Posted by: judy | Sep 29, 2007 11:24:05 AM

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