Thursday, August 31, 2006

Wal-Mart and Toddler Economics

By Tim Worstall : BIO 29 Aug 2006

Further to hackney a hackneyed word of the blogosphere, there seems to be something of a 'kerfluffle' over WalMart whirling through the commentariat -- a minor storm making the waves a little choppier than they normally are.
Sebastian Mallaby in the Washington Post and a more academic piece in the Washington Times wonder just what it is that progressives (or as I prefer to call Democrats: reactionaries) have against a company that reduces costs for, and thus boosts the real incomes of, 149 million shoppers, predominantly from the poor and middle classes.
National Review's Jonah Goldberg notes how cross The American Prospect's Ezra Klein was with his recent Los Angeles Times piece and, as is his right, makes fun of him. However, I do so hate to be contrary but I think Ezra is actually correct in this matter. As he says:
"I'm of the opinion that how to handle WalMart is among the two or three most important issues facing the country."
He's right you know. Whether we handle WalMart and the attendant issues as intelligent adults, capable of reasoning, or we do so as whining three-year-olds with all the attendant knowledge of incentives, utopian wishes and economic consequences such a three-year-old might possess is, indeed, one of the important questions facing the country.
At the heart of Klein's cluster of concerns is an entirely valid, even admirable, concern. He wishes the low paid to be paid more and to have better benefits to go with that higher pay. However, like a three-year-old, he's not quite capable of seeing what the consequences of such a wish would actually be. As he says:
"But in case you are interested, it goes something like this: Wal-Mart pays wages barely above the minimum and significantly below the average large retailer. Compared to Costco, or Target, Wal-Mart's salaries, benefits, and worker relations are atrocious. The question is not "Wal-Mart, yes or no?" but whether Wal-Mart can do better on all these metrics. Obviously, they can."
I'll give him an easy pass on Target as they don't in fact pay much better than WalMart. But let's look at Costco shall we? They do indeed pay much better ($17 an hour on average if memory serves me right, as against $9.60 at WalMart) and do indeed provide better ancillary benefits. So on Planet Liberal all we have to do is force (whether by fiat or shaming) WalMart into paying the higher wages because: look, see, we can see from the example of Costco that it's possible!
Indeed, it is possible. But what's getting missed is that little something that we in the real reality-based community have been trying to point out to the minimum and living wage fanatics for decades. When the price of something is raised people use or buy less of it. Now, we've been told endlessly that this isn't true, that raising the minimum wage won't mean job losses, or reductions in hours on offer, that companies will simply use their labor force "more efficiently". Which is exactly what we've been saying. Increased efficiency means using less labor to reach a certain goal. As the price of labor rises, companies will use less of it, as, again, we've all been trying to beat into the dulled synapses of the progressives like Klein.
The proof of this contention? The difference between WalMart and Costco in how much they pay their workers and how many workers they use. Costco does pay more; it also uses about one quarter of the number of employees.
Worth having a look at the two annual reports, don't you think? WalMart and Costco -- there you go -- audited 2005 accounts. Now, I'm playing a few minor games with these numbers: I'm not adjusting for certain subsidaries, minority interests and so on, I'm rounding numbers etc, but these only make minor differences to the overall picture:
Costco has sales of $51 billion, 110,000 employees (45% part time, similar to WalMart isn't it?) and WalMart has sales (in North America) of $191 billion and 1.3 million associates. So Costco has sales of some $465,000 per employee and WalMart $147,000 per employee. That sounds about right to me, it's been a number of years since I lived in the US but Costco is the place where you drag that 50lb bag of rice to the door yourself, right? WalMart is the one where cheery souls are employed solely to bid you good day as you enter? So, in theory, we could in fact get WalMart to pay the same as Costco by making similarly efficient use of labor: that is, firing between two thirds and three quarters of their staff.
You might note that despite having nearly four times more employees WalMart does not pay them one quarter of the amount: this is because a higher portion of turnover is actually devoted to paying said wages. Operating costs are not exactly the same as wages (and the two companies account for them slightly differently, as a note to the WalMart accounts -- too boring even for me to cut and paste -- states) but wages are contained within that number: 10% of turnover for Costco and 17% for WalMart. By this measure WalMart should, in order to be like Costco (as Klein would like), actually be reducing the wages on offer.
We could even look at the profit made per employee: $9,000 at Costco, $7,700 at WalMart. If we were of a Marxist cast of mind, seeing profit as purely and solely the surplus value extracted from the labor of the worker, we would thus say that Costco is even more exploitative than WalMart, would we not?
All of the above is of course most fun but really rather beside the point. We all know that WalMart is an extensive user of labor and that Costco is an intensive one. We really shouldn't be surprised that the pay rates are different in the two models. Indeed, our very basic model, that when a price rises, people use less of something, would predict it. Those who are paying a higher price for labor are indeed using less of it. This simply shouldn't be surprising to anyone.
Which is really rather where we came in, asking whether we were going to deal with WalMart on the basis of an adult intellectualism or the prejudices of a three-year-old. To wish that WalMart move from its current low wage and lots-of-labor model, to Costco's (relatively) high wage and low labor utilization is fine, but an adult view would include the acknowledgement that for WalMart to adopt the second model would require that they fire between 860,000 and 975,000 of their current workforce. The child's view would be that everyone should just be paid more because I want it to be so! -- i.e. that there are no side-effects to such decisions.
As I said up at the top, I think Ezra Klein has indeed identified an extremely important question, quite truthfully, one of the two or three most important issues facing the country. Are we adults or children? If we are to be adults of course we should also apply the same blindingly obvious logic to the minimum and living wage movements. As Costco proves, when companies pay more for the labor they hire, they hire less of it.
As an added extra bonus I look forward to Ezra's speech in which he explains why nearly one million people losing their jobs is going to be good for America. I'd most certainly pay good money to see him deliver it to those he is arguing should get fired.
Tim Worstall is a TCS Daily contributing writer. He recently wrote about why the USA is more like Sweden than you think.

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