Why Wal-Mart Pays Less

by Russ Roberts on July 13, 2005

in Work

I was talking to a journalist the other day who told me that Wal-Mart didn’t pay much so they could keep prices low.  He was worrying about Wal-Mart’s influence on the wage and benefit structure.  Wal-Mart employs about a million people.  That’s a lot of people, but it’s a small fraction of the total US employment which is about 140,000,000.

I think a lot of folks think that Wal-Mart doesn’t offer health insurance to all of its workers because Wal-Mart’s mean or greedy or too interested in profits.  A lot of people are mad at Wal-Mart because they pay less than the average wage in the economy.

There’s a simple way to look at it.  Wal-Mart doesn’t offer health insurance or pay more than they do because they’ve found that they can attract enough workers with the pay package they currently offer.  Period.  For other companies, they have to offer health benefits to attract workers.  They reason they offer health insurance isn’t because they’re socially responsible or kind or altruistic.  They find that to compete for workers they have to offer it.

Paradoxically, Wal-Mart doesn’t determine what it pays its workers or what benefits it offers any more than you can set the price of your house when you want to sell it.  Suppose houses of similar quality and location sell for $500,000.  You’re free to set any price you want, but if you set a price of $1,000,000, you’re going to wait a long time for a buyer.  Oh, you might get a slight premium above $500,000 because you did such a nice job renovating your kitchen.  Or maybe a little less if your taste in kitchen’s is real different from most people’s.  You don’t set the price of your house.

Wal-Mart is in the same situation.  They don’t determine the compensation of their workers in any real sense.  The compensation of their workers is set by the market for people of a particular skill level and the alternatives in the work place available to workers of that skill level.  What Wal-Mart does have some control over is the level of customer service and knowledge and skill used by their workers. 

In general, the warehouse stores, Wal-Mart’s Sam’s Club and its biggest competitor Costco, pay their workers more than the standard discount retailers such as Wal-Mart, Target and K-Mart.  I assume the reason for this is that the level of skills those warehouse stores require is higher.  Maybe it’s because you have to be able to drive a forklift or do other stuff that’s necessary in a warehouse store.  But it’s not because the head Sam’s Club is a nicer person than the head of the regular Wal-Marts.

Attempts to force Wal-Mart and similar stores to offer benefits or raise wages is going to punish the people with the lowest skill levels because it will diminish the choices available to them.  Wal-Mart will find ways to substitute capital and technology for people.  The people who remain employed there will make more money.  That will be seen.  What will be unseen is the reduction in wages elsewhere in the economy.

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