Retail Rage

09.05.13

Why We’ll Be Better Off if the Walmart Protests Fail

Employees of the big box store are planning a national day of protest for higher wages. Economist Richard Vedder on why we’ll all be in trouble if they get their way.

The American economy has shown anemic, sputtering growth for several years—largely because businesses, investors, and consumers have been angry and fearful of public policies constraining their ability to operate efficiently and profitably.

That, in part, why I’m hoping that Walmart workers’ national protest movement will be a monumental failure.

A group of unhappy workers at the nation’s largest private employer, joined by labor unions under a coalition called “Making Change at Walmart,” is leading a protest for higher wages and settlement of other grievances. And this when things seem to be brightening a bit; look at the rapidly rising auto sales, for example. Yet, at a time when the proportion of Americans working full-time is at a low for the 21st century, some workers are saying “We will not work unless you raise our wages dramatically—by one third or so.”

The most basic principle in economics is the law of demand: when something becomes more expensive, people buy less of it. This is true for America’s employers. Higher wages mean fewer jobs. The history of movements in unemployment since 1900 can be explained very well by changes in inflation-adjusted wages as they relate to the productivity of workers, as Lowell Gallaway and I demonstrated at great length in Out of Work: Unemployment and Government in Twentieth-Century America; other researchers, such as UCLA’s Lee Ohanian and University of Pennsylvania’s Harold Cole, have reached the same conclusion using different data and methodologies.

The retail trade industry is a low-wage industry, and probably always will be. The skill requirements for most jobs are very modest, and profit margins are extremely small. Take Walmart. Last year the company made about $17 billion on sales of $469 billion. Profits were about 3.6 cents on each dollar of goods sold. Labor costs are much larger than profits, so a large increase in those costs, such as by establishing a minimum Walmart wage of $12 an hour and insisting the company hire workers for enough hours to ensure medical benefits under Obamacare, would raise labor costs at least $10 billion a year and probably much more, reducing profits by well over half if not accompanied by price increases or other actions to try to reduce the damage to profitability.

The retail trade industry is a low-wage industry, and probably always will be.

You might say, so what? Won’t the nearly two million workers who work for Walmart be better off, spend more and have better lives while only a few mostly rich stockholders will lose? That sounds good, but is simply not true. I would predict one or more of the following scenarios would happen. First, if the protest action somehow were successful (which I think is unlikely) and things went exactly as the organizers of the action wanted, the price of Walmart stock would fall dramatically, perhaps 50 percent, wiping out about $120 billion in stockholder wealth. About one third of that wealth is held by institutions like pension funds and mutual funds, so directly or indirectly millions of Americans would take a meaningful hit—perhaps having to receive slightly smaller pensions or have to work longer to recoup losses because of the lower value of their Walmart stock holdings.

Alternatively, Walmart might try raising prices 3 or 4 percent to cover their higher costs. That would lead to a decline in living standards for tens of millions shopping regularly at the world’s largest retailer. They would have less money to spend on other things. Higher wages for a million or two Walmart workers would mean far more millions would have less income—their paychecks would buy less at their favorite store.

A third scenario is that, with prices rising at Walmart under the second scenario, consumers would start shopping elsewhere, maybe Target if it were not impacted by the Walmart action, or maybe at relatively low cost Internet providers like Amazon. Walmart, facing falling sales, would lay off workers, and put far more on part-time work to avoid providing expensive medical benefits or pay Obamacare-dictated fines. Consumers would be less satisfied than before, having to go to a store that they previously had found less desirable. The price of Walmart stock would no doubt be impacted noticeably, with some of the effects noted above.

Roughly 90 percent of American private-sector workers prefer the freedom associated with a non-union environment, and I very much doubt that Walmart workers in a fair secret ballot election would vote to demand a union, since unionization is relatively rare in retail trade and related businesses like fast-food restaurants (the same analysis, roughly, applies if we were talking about McDonald’s instead of Walmart). Union dues tend to be high relative to wages. The Obama administration, perhaps wanting to renew the class warfare it was waging before the Syria affair distracted it, might try to use its muscle to pressure Walmart into compliance, but I doubt that would work—the stakes are too high for Walmart and the administration’s powers are too limited. 

Rather than striking against iconic businesses like Walmart or McDonald’s, we should be celebrating their existence. Walmart has done more to reduce poverty than most government welfare programs. It has put a seven-digit number of Americans to work over the decades. It has made goods available at lower costs to millions of relatively low-income consumers. It has greater increased their consumer choices relative to the pre-Walmart age. Similarly, McDonald’s has provided literally hundreds of millions of consumers around the world with tasty, relatively low-cost food quickly and efficiently. It’s no wonder that sometimes economists use the Big Mac to compare prices and living standards around the world, given its worldwide appeal. And millions of Americans learned about the world of work and the discipline of doing a job and serving the public by working as teenaged employees at McDonald’s and many other restaurants and discount stores.

Just as the American economy is seeing a little light at the end of the tunnel, we don’t need militant workers or a sympathetic government to do things that will add more tunnel.