Friday, July 19, 2013

Walmart Workers Can't Be Paid Much More

. Friday, July 19, 2013

Sorry for the quiet around here. We've been busy with real projects. But to keep the lights on I thought I'd re-post something I wrote on Facebook that got long enough to be of bloggish length. It's not normal subject matter for us, but it is related to some these we discuss from time to time. It concerns Justin Fox's claim that low wages for employees of corporations like Walmart are a "social decision" distinct from economic logic. I think he's right, but not really in the way that he means.

There's a much better way to get at this. Walmart and other low-end retailers are both producers (of goods/distribution of goods) and consumers (of labor). Their business model is to forego some of their producer surplus (hence the very low profit margin, around 3% of revenues) in order to boost volume. Per store, Walmart makes around $1.4 million/year... it's just that they have over 10,500 stores so their overall profits (~$15bn) sound impressive and their revenues (~$450bn) are astounding.

If you considered each store as its own "small business" you'd wonder what the hell they were doing, because to staff those stores they have to hire a ton of people to accommodate all that volume. That's why this model only works at scale. To maintain even a 3% profit margin they have to extract some of their workers' producer surplus to make up for the surplus they have given to consumers to capture market share. This is what a high volume/low margin business looks like. It's even more severe at Amazon. But they don't capture as much of their workers' surplus as people think.

Walmart's stores are staffed on average by about 300 people who make on average $12.67 per hour or ~$25k/year if they work full-time and take two weeks of unpaid vacation. $1.4mn profit per store /300 workers = ~$4,500. So that's how much surplus value Walmart is "extracting" from labor, if you don't factor in anything else like retaining earnings, paying shareholders, investing in new stores/products, etc. That's a lot of trouble to make a measly $1.4mn! The only way it makes sense (for shareholders) is if volume is HUGE. Which it is. Since the shareholders are relatively concentrated -- six Waltons own nearly half of the shares -- they make a killing. But it's practically all volume.

Anyway, $3k or so is the upper limit of how much more each worker could earn under the current business model. Say it's the difference between $25k and $30k. That's certainly not nothing, but it does not represent such a qualitative difference in standard of living that anyone would consider Walmart employees to be well-paid if they all got the full $4,500.

So what else could be done other to increase that $4,500/year? Walmart could claw back some of their producer surplus from consumers by raising prices and using the proceeds to raise wages, which would constitute a simple redistribution from customers to employees assuming no money taken by management/ownership and completely inelastic consumer demand. Both assumptions are pretty heroic in this case. That would basically just shuffle cash from some poor people (Walmart's customers) to other poor people (Walmart's employees). Or they could reduce margins even further, but 3% is already pretty thin. Or they could raise margins by paying their suppliers (e.g. poor Chinese workers) even less, and give the extra profits to their American workers. They could redistribute salaries from management -- their CEO makes $20 million to manage a company with $450 billion in revenues -- but Walmart employs over 2 million people... we're talking 10 bucks per worker per year if the CEO was paid nothing at all.

So any redistributionary choice that would fundamentally change the situation would seem to involve deciding which group of poor people are made worse off: Walmart's customers, its employees, or its suppliers. The political equilibrium right now is a mix of employees and suppliers. Changing policy -- say, by raising the minimum wage -- involves changing two of those variables: one goes up, one goes down. There's just not enough cash which can be taken from management to make all that much of a difference on a per worker basis, even if you reduced managements' salaries to $0 and retained no profits for future investments or any other purpose. And per-worker profit is so low that there's a pretty firm limit on how much more they can be paid.

Now, Walmart's business model of extremely high volume at very low margins does not represent the entire economy, although I see a number of trends pushing more and more of the retail economy in that direction, so this logic won't always apply. But it's about as close to the competitive equilibrium models of econ 101 as contemporary markets get. So if there was ever a case to be made that wages are social decisions rather than economic decisions -- and there is, although I'd prefer "political decisions" over who captures the producer and consumer surplus to "social decisions", which just sounds slippery -- Walmart probably isn't the best example for Fox to use.

UPDATE: Tyler Cowen's column today speaks to a related issue: the politics of wealth vs income.


jdw said...

Wal-Mart's customers are not all poor; some are quite middle class. If you want to be serious about your assertion, you'd need to prove that the customers are poorer or about as poor as the employees. I don't think you'll be able to do that.

There are other problems with your analysis, but the reasons why Wal-Mart might raise employees' wages matters a lot. If it's due to an industry-wide unionization (affecting Amazon and Target and other major competitors), then it's a different situation than if mgmt just decides to be altruistic.

In any case, you should explain why Costco has found a different route to profit.

Raymond Cote said...

You do not consider the significant employee impact of taking some of the $4,500.00 and providing healthcare for their employees.

Lee G. said...

So I think taking the average wage is a bit misleading in this situation, since you're combining the lower-level employees (store associates, etc, making about 8-21K/year[1]) with upper management, who is prob. making around 40+K a year (my assumption) and firmly in the middle class.

Also, adding an extra 5K to wages (moving from 25K to 30K) is a 20% increase in wages. While that may not be considered a qualitative difference (US Federal Poverty Line calculations may say otherwise though O_o), I would not dismiss that as insignificant.

Absent from your analysis in the second to last paragraph is the passing on the cost of raising worker's wages to the consumer. If this is done in a manner that tries to maximize social mobility (like in the paper below), and not an across the board average wage increase, you could bring wages for entry-level rank-and-file Wal-Mart workers to $12/hour at a cost of 46 cents per customer per trip.


Unknown said...

"Walmart Pays Workers Poorly And Sinks While Costco Pays Workers Well And Sails-Proof That You Get What You Pay For"

"Apr 24, 2011 - Walmart's labor costs amounts to about 1 percent of the company's annual sales of $305 Billion"

"Walmart wages are so low that many of its workers rely on food stamps and other government aid programs to fulfill their basic needs, a reality that could cost taxpayers as much as $900,000 at just one Walmart Supercenter in Wisconsin"

Those three headlines sum up Walmart IMO. Costco succeeds very well while paying their staff appropriately, while Walmart in essence dumps a lot of their overhead back on US tax payers for food stamps and medicare.

Consider this..If Walmart doubled it's salary across
the board for all workers, it would raise their labor costs from 1% to 2% of sales. In other words, if they passed that 1% on to buyers, a 99 cent bottle of Snapple would "JUMP" to $1.00. Seriously? That would crash Walmart?

What the article ignores is (1) Most employees do not work 40 hours and do not earn the average quoted, (2) You don't have to raise everyone's salary..Just raise it incrementally from the bottom up and (3) What kind of an idiot would applaud Walmart shifting the costs of their very profitable business onto the backs of the taxpayer?

Anonymous said...

This post reminded me why I don't read this blog on a regular basis. The post has do many problems, as the previous commenters made clear. Kindred's an idiot.

Kindred Winecoff said...

Thanks for the comments folks.

All of your specific criticisms could be right and I wouldn't mind. I'm not all that interested interested in Walmart per se, and all of the calculations made above are very much "back of the envelope".

What I'm really interested in is the shift in the economy towards high volume/low margin models. It's been around for awhile -- think Woolworths and other five-and-dimes back in the day -- but only recently has this model combined with global production chains to operate on such a massive scale. Two-thirds of the country shops at Walmart every month. 1% of the total labor force works at Walmart. That's big.

The increasing prevalence of the high volume/low margin model has implications for the capital-labor distribution of income. It's not like earlier periods in capitalism. It's a different set of relations. The Walmart/Amazon/Google model is not based on capitalists using monopoly power to exploit workers. These companies are operating within a highly competitive market, where survival depends as much upon capturing efficiency gains from scale economies than anything else. The old "we need unions" story might not apply today in the same way that it has in the past. This is more like superstar economics, with the Walton family as the superstars.

The comparison between Costco and Walmart is somewhat misleading. Costco charges customers a $55 membership fee (from which they get $2bn/year in revenue)... Walmart doesn't. Costco has fewer than 650 stores... Walmart has nearly 11,000. Costco has 160,000 workers... Walmart has more than 2.1 million. Costco is a quasi-cooperative warehouse wholeseller that specializes in bulk, while Walmart is a retailer that focuses on volume. Costco sells many more high-end (i.e. high margin) items than Walmart, and has a richer customer base. Costco sells around 4,000 items which they sell in bulk, while Walmart sells around 100,000. Costco makes about three times as much revenue per employee as Walmart (which is why they're able to pay more while still operating on low margins). A direct comparison between them probably isn't fair; they have two different business models, and what "works" at smaller scales doesn't always work at larger scales. Maybe it could, but that remains to be seen. No wholeseller has ever existed at the scale Walmart is at.

But even still, the most you can say is that Costco is that it's a somewhat-better version of Walmart. Costco is still a low margin business. If you look at a comparison of what their workers actually receive -- in terms of health care, unionization rates, etc. -- it's not quite as stark of a difference as folks often seem to think. Salaries tend to be higher, but they employ far fewer people both in aggregate and on a per-store basis.

On other points, I would first suggest that folks read Jason Furman, who is now in the Obama administration and is certainly not a right-wing free-market shill for corporate oppressors. The study that Lee linked (thanks!) shows that Walmart shoppers are "disproportionately middle- and lower-income. (Costco shoppers average $85000/year in income.) It suggests basically the same thing as me: Walmart workers could be paid around $4,500/year more -- they estimate between $1670 and $6500, so the mean point estimate would be a bit lower than I was working with. Whether that's a qualitative difference in standard of living is in the eye of the beholder, I guess, but also remember that higher wages around this margins means eligibility for fewer federal aid programs. In any case the net result is not huge.

In order to get big changes in distribution you'll need huge changes in policy; a $10 or $12 minimum wage isn't going to cut it, and unionization won't either (because there just isn't much to negotiate over). These things can help around the edges, but that's all.

Anonymous said...

If you're not going to bother to do the actual research to look at the specifics of wages, working hours, etc at Walmart, you probably shouldn't write a blog post flatly declaring that Walmart workers "can't be paid much more." When people call you out on your misleading figures, you then claim you're not actually interested in Walmart per se - which is pretty disingenuous to say the least.

Second of all, a pretax wage increase of $4,500 a year is pretty significant for low-income families. Yes some might be priced out of federal aid programs, but under what twisted logic does one of the country's largest and most profitable corporations get away with forcing its employees to survive on federal benefits?

The HBS poster is absolutely right - these are social decisions in the sense that there is no inherent economic reason that, at the least, workers can't be paid a little more and treated with dignity.

Kindred Winecoff said...

Chill out.

By saying I really care about the broader macro phenomenon rather than the particulars of Walmart I wasn't being disingenuous: I was accepting the added nuance of the commenters as being useful. Which is why I thanked them. But we really are seeing a different form of capitalism than we've seen in the past. That's worth considering too.

All the numbers I used have references in the post. I'm dealing with averages here, which are crude measures of course (which is why I thanked Lee for the additional reference), but the "specifics" are accurate as far as I can tell.

As for "twisted logics", well that's why I said that this was a social decision in the first paragraph and then said why I preferred the term "political decision" in the last paragraph. Many people have appealed to the Costco example as a viable alternative. The Costco model implies fewer workers per store, higher renumeration for the workers they do employ, and fewer products for sale. We could legislate towards the Costco model if we wanted to, but there would be downsides: fewer people with jobs (on a per-store basis) and fewer items to buy.

My point is that *under the current high volume/low margin model* renumeration can't go up much for large numbers of workers. That's because Walmart's profitability is all based on volume, not on margin. As a percentage of revenues they aren't all that profitable.

I.e., Walmart is in the top 10 American corporations in terms of overall profit. But they aren't in the top 50 in terms of profit as a percentage of revenues:

That list ends at 50 but Walmart isn't even close: #50 has ~500% the return on revenues that Walmart has. With small margins and tons of workers there's just not a whole lot that can be redistributed per worker.

jdw said...

"In order to get big changes in distribution you'll need huge changes in policy; a $10 or $12 minimum wage isn't going to cut it, and unionization won't either (because there just isn't much to negotiate over). These things can help around the edges, but that's all."

This is where you get into trouble because you're closing off a discussion in an area that you don't seem to particularly understand. That's not a scientific approach and it invites the kind of pushback you're getting. Plus, $4500 a year is a lot to negotiate over-- or are we paying academics so much that that doesn't matter to them?

Wal-Mart's retail model has two foundations-- low-cost, high volume and a vast array of products and services which includes some labor intensive offerings. Many retailers, unionized and not, pay people in their higher skill and higher-productivity departments noticeably higher wages than those in services outside the core. Wal-Mart could do that and keep all its people.

Or, Wal-Mart could shed low productivity services, which you've suggested would lead to "fewer jobs" without factoring in that those services would generally return to small businesses.

JR said...

It's probably true that many Walmart store associates could be paid more and/or provided with better benefits. However, in Fox's piece he uses the example of Ford more than doubling factory workers' wages and how this helped bolster and create the middle class - basically an idea that Krugman and others have been advancing for quite awhile: The benefits and wages won by unions in the first half of the 20th c. were the foundations for the unprecedented growth during the 50s & 60s.

What I think Kindred is getting at is that Wal-mart - and companies like it (i.e. not Costco) - don't have a business model that can support the type of wages and benefits won by the treaty of Detroit - in the present, the average UAW worker earns $25+/hour base pay, a decent pension, lifetime no deductible/no copay healthcare for themselves and their families, rather awesome overtime pay (sometimes as high as 2.5) etc etc.* Walmart shifting starting wages from $8.50/h to $12.50/h will obviously enhance welfare for those store associates (a good thing) - but it's a far cry from the contracts and conditions which allowed industrial manufacturing laborers to "create the middle class" in the 50s and 60s. In order to achieve something like that again, a new approach has to be taken as we are in a "new economy". I think that's Kindred's main point.

That being said, I know little about Walmart's business model (or retail business in general) and the numbers behind it, so maybe he's right, maybe he's wrong (please don't accuse me of hating labor). Either way, certainly a line of inquiry worth pursuing IMO.

*Not counting the recently introduced "second tier", which as of 2011 accounted for about 5% of GM's hourly workforce

Kindred Winecoff said...

JR nailed it exactly: the structure of global capitalism has changed dramatically... the "left" (nearly 100% bourgeois really) argument hasn't adapted. At all. Neither has the right.

Sorry, but cliche anti-corporatism/statism isn't going to do the trick any more.

Steve Roth said...

You're doing partial equilibrium. Assuming Y is fixed.

Increased wages hence incomes could result in increased consumer spending so higher Y.

Not saying it's so, but you can't do this without thinking about whether Y changes.

Steve Roth said...

And then of course if Y is variable in your model, you gotta think about the Fed's and congress's reaction functions...

Unknown said...

Why raise wages when the US Taxpayer will pick up the slack ie welfare, food stamps, housing assistance, etc?

In effect, US taxpayers are subsidizing walmart wages. The evidence is clear on this, epsecially walmart workers who have children at home.

What's more, by subsidizing walmart workers wages, taxpayers are actually giving Walmart a competitive advantage over the taxpaying businesses that compete with walmart!!!

It is a beautiful system that works perfectly for wally-world. Why mess up a good thing for them?

LFC said...

Interesting post. I haven't followed all the debate in this comment thread.

I think your characterization of J. Fox's pt as being that wages "are a social decision distinct from economic logic" is perhaps not *quite* right. I just read the Fox post and ISTM what he's saying is that the orthodox marginal-productivity theory of wage determination doesn't work well. He points out that there's been a divergence betw. wages and productivity growth in the US economy in recent yrs., a pt I've seen made by others (and no doubt you've probably answered it somewhere that i don't recall offhand).

My point is this: I don't think Fox thinks that the era of Fordism is coming back or can be brought back, tho his reference to Ford at the end might suggest he thinks that. Rather, I think he's using Ford to make the general pt that there is no abstract "logic of the market" that sets wages at a particular level. Now as you observe, Walmart's business model is such that it apparently doesn't have a lot of rm to pay its employees more than several thou more a yr. But that's a different pt: a company's business model is one thing; "the logic of the market" as an abstraction is another. And it's the latter, ISTM, that is Fox's target. The post does not provide answers, ISTM, so much as seek to open more space for debate.

Also: as I recall you say in the post (I can't pull up the text here) that Walmart pay averages $12.67/hr. In which case why does Walmart object so vehemently to the DC living wage law, which if i'm not mistaken sets the 'living wage' at around that level? I guess, to answer my own question, b/c Walmart wants to be free to pay its entry-level hires a lot less than 12.00/hr.

Mike said...

While it may be not "complete", to me this post provides the most clear and non-biased picture of Walmart and the arguments concerning their low wages.

It is asinine to suggest that a company working off a 3% margin could simply take 1% of this margin and use it to raise wages. Plus, all of these half-cocked studies that use this 1% to raise the lowest wages don't take into account that if you raise the lower tier employees wage by $5/hour then everyone else who already makes more will need to slide up as well. Department heads, shift managers, drivers, etc., if the starting wage goes up so much the wages of employees with more tenure and more skills.

Walmart's management is not the core and the crux of the problem, it is the manner in which we have re-structured our society. Over the years consumers have demanded lower and lower prices, which has resulted in the low margin/high volume model. We also consume a lot more than we used to, across all goods, which plays into the same model.

Clearly it would be a good idea for humanity to strive to create a new reality that isn't based on consumer greed and corporate greed, but so many people want to have their cake and eat it too.

Back when we bought 1 telephone every 10 years it made sense that a telephone manufacturer could charge a high margin on that product, and we were willing to pay higher margins since a household was buying 1 phone per decade instead of 25-30 like we are now.

The more we buy the more we drive down margins and hence wages. There's no question that another 100 years of continuing our current model will leave the world in complete destruction, but this isn't because of Walmart, it's because of the new reality.

Arbitrarily picking out a few industries/companies that pay lower wages and thinking we can redistribute their profits and we'll all be happy is asinine.

I'm not saying we shouldn't strive towards creating a fairer world, where as many people as possible earn a living wage, but the root of the problem is in the way our society is structured (and not just the US, even more socialist countries have essentially the same issues) and not in the Walton family's ability to figure out how to distribute billions of dollars of goods more efficiently than anyone else.

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David xtree said...

Average cost for insurance on a group plan for a family is about $14,000 per year. So if Walmart decided that it will use all potential profits to pay for healthcare for all employees and their families, it could only cover $4500 of the $1400. So each employee would have to pay about $900 per month. And that is if Walmart makes $0 profit.

David xtree said...

You have completely ignored that the $4500 you are talking about would be better f Walmart operates at $0 profit. and if they did give every employee a &4500 raise, the government would still be paying for some entitlement benefits for their employees. This means that the only way for Walmart to pay enough that people wouldn’t be eligible for entitlements would be if they paid so much they they lost money instead of making a profit.

I agree that the system sucks as it is. But there is LITERALLY nothing that Walmart could do to fix it. It’s jsit not possible.

David xtree said...

other businesses that pay than Walmart do so because they can afford to. Because they have higher margins. Costco for example.

It’s easy to pay ten employees more than Walmart. But what about 1.4 million people?

David xtree said...

If Walmart eliminates profits and gave each employee an extra $4500, plenty of employees would still be getting entitlements from the government. Walmart flat out doesn’t make enough money to pay their workers enough that they won’t be eligible for entitlements. Do you expect them to pay more but lose money?

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Walmart Workers Can't Be Paid Much More




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