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The Wages of Wal-Mart

Posted By Don Boudreaux On December 31, 2004 @ 8:58 am In Myths and Fallacies,Wal-Mart | Comments Disabled

Yesterday I wrote [1] about Liza Featherstone’s recent attempted exposé [2] of Wal-Mart.

One of Featherstone’s claims that I didn’t deal with there is her allegation that Wal-Mart free-rides on government welfare payments. Her argument (which, I recall, is not unique to her) is that welfare payments enable Wal-Mart to pay lower wages. The allegation, in other words, is that taxpayer-funded welfare increases the supply of workers. (For those of you who know basic economics, the supply-of-labor curve shifts to the right, lowering the equilibrium wage and increasing the number of workers hired.)

Almost anything is possible. The condition under which Featherstone’s hypothesis is most likely to be true is that many people in Wal-Mart’s pool of potential workers must be so desperately poor that working in the absence of welfare payments would yield them too little income to be worthwhile. Because no income at all likely means starvation, the wages that Wal-Mart allegedly would pay even in the absence of government welfare payments would be so low that potential workers simply wouldn’t find it worthwhile to take jobs; they’d stay home and starve because the wages they’d earn by working at Wal-Mart would be too low to keep them alive. Government welfare payments, by helping to keep these workers alive (hence, in the labor market) enable these workers to accept Wal-Mart’s low wages.

The argument, then, is not so much that government welfare payments increase the supply of labor as that these payments create Wal-Mart’s supply of labor.

Featherstone probably would deny that she has the above in mind. (I try not to be mean or accusatory, but I must say that it’s damnably difficult to figure out what Featherstone has in mind. She hurls assertions rather than offers analyses. She flings about mere anecdotes – which in many cases only doubtfully support her assertions – without furnishing a single set of organized facts.) She likely supposes that without welfare payments, workers would “need” – and, hence, demand and get paid from Wal-Mart – higher wages. That is, she likely believes that the supply of workers available to Wal-Mart would be lower, but still positive, in the absence of welfare payments.

This proposition is even more dubious. If workers bid their wages up to (say) $10 per hour without welfare payments, two things must be true. First, these workers must generate at least that much marginal revenue for Wal-Mart – that is, these workers must be sufficiently productive that they are each worth at least $10 per hour to Wal-Mart – otherwise greedy, profit-obsessed Wal-Mart would not pay them this much. Second, other employers must be in competition with Wal-Mart for these workers. Without sufficient competition for these workers, Wal-Mart could indeed hire many of them at wages below the level of the (marginal) value of their contribution to Wal-Mart’s bottom line.

So, if Wal-Mart pays its workers $10 per hour, we can be sure that (1) these workers produce value for Wal-Mart at least equal to $10 per hour, and (2) other employers compete with Wal-Mart with sufficient intensity to drive these wages up to $10 per hour. (The validity of this latter proposition is enhanced by the fact that Wal-Mart’s U.S. work force isn’t unionized.)

What is it about receiving welfare that reduces this ability to earn $10 per hour? Do welfare payments reduce workers’ productivity? Unlikely – but if so, then, yes, wages paid by Wal-Mart will fall, but so too will the value that Wal-Mart gets from its workers. Wal-Mart doesn’t gain by any such effect.

Do welfare payments reduce the competition of other employers for workers? Not likely.

Do welfare payments reduce the eagerness of employees to earn as much per hour as possible? Again, unlikely – but I suppose that Featherstone has something like this effect in mind. Insofar as welfare payments reduce the amount of wages that workers “need,” Featherstone likely would explain, they are willing to work for less than they would accept in the absence of welfare payments. So even if competing employers would still offer, say, $9.90 per hour to attract away Wal-Mart employees, the representative Wal-Mart employee would reason “Heck, I get $X from the government, so I don’t need this princely wage. I’ll reject the competing offer and let Wal-Mart cut my wage to (say) $8.00.”

Seems highly dubious.

Indeed, insofar as welfare payments reduce workers’ willingness to work, government welfare payments reduce the supply of labor and, thus, raise the wage that Wal-Mart (and other employers) must pay for workers.

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[1] I wrote: http://cafehayek.com/2004/12/discount_analys.html

[2] Liza Featherstone’s recent attempted exposé: http://www.thenation.com/doc.mhtml?i=20050103&s=featherstone

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