What determines wages

by Russ Roberts on May 25, 2006

in Standard of Living, Wal-Mart, Work

What determines wages? Some say that a nation should strive to acquire high-paying jobs if it wants a high standard of living. In this view of the world, jobs are boxes that workers jump in and out of. Each box has a bar code that determines how much the job pays. The goal is to get a good box with a high wage attached to it.

An alternative view of the world is that the bar code is on the worker’s forehead.  The worker gets scanned not the job.The wage depends not on the job title but on the skills of the worker.

This sounds like an irrelevant semantic distinction—after all, workers with lots of skills are in high-paying jobs. But I think the distinction keeps you from making errors of reasoning about the source of prosperity.

For example, the bar code-on-the-box view of wages worries about outsourcing and technological change because these often destroy high-paying jobs. The bar code-on-the-forehead view of wages (the one I think is correct) embraces outsourcing and technological change because they create wealth. The workers that are displaced will use their skills somewhere else.

In the box view of the world, Haiti can get rich by creating its own pharmaceutical industry because chemists are well-paid. In the forehead of the world, Haiti gets rich when its people acquire knowledge.

I was thinking about this listening to a podcast by Douglas Baird on Coase‘s theory of the firm. (I’m halfway through it and really enjoying it other than Baird’s aside  describing the Coase Theorem.)

Baird points out that one of the obsessions of Henry Ford was to improve the precision of the parts of a car sufficiently so that unskilled people could assemble a car. When the parts were not machined precisely, there was a highly skilled highly paid worker called a fitter who was able to get the imperfect pieces to mesh. 

So was better precision a good thing or a bad thing? In the box view of the world, it was bad. America lost the high-paying jobs, the jobs for fitters. But in the forehead view of the world, the world where wages depend on human capital (skill, knowledge and knowhow), Ford’s improvement was good for the world. By finding a more efficient way to make cars, wealth was created. The people who were once fitters went on to do new things, new things that were possible partly because people now had more resources available that were once spent on assembling cars.

In the box view of the world, another reason that Ford’s innovation was bad was that it created a lot of unskilled jobs, the jobs on the assembly line that paid less than the fitter jobs. But in fact, Ford increased the demand for low-skilled workers, so if anything, those workers also benefited.

The box view of the world thinks the existence of Wal-Mart impoverishes America because it causes the creation of low-paying jobs. In fact, Wal-Mart is good for low-skilled workers because Wal-Mart, just like Ford, has found a way for low-skilled workers to be productive in a profit-making enterprise. That increases the demand for low-skilled workers and makes them better off.

Be Sociable, Share!

Comments

comments

98 comments    Share Share    Print    Email

{ 49 comments }

save_the_rustbelt May 25, 2006 at 10:15 am

"For example, the bar code-on-the-box view of wages worries about outsourcing and technological change because these often destroy high-paying jobs. The bar code-on-the-forehead view of wages (the one I think is correct) embraces outsourcing and technological change because they create wealth. The workers that are displaced will use their skills somewhere else."

Perhaps we (the working riff-raff) do think in those simplisitic terms, but don't we pay academic and politicians to think in more sophisiticated models?

Oh wait, that may be the problem.

Noah Yetter May 25, 2006 at 11:16 am

Another day, another post, another save_the_rustbelt comment devoid of content.

MjrMjr May 25, 2006 at 12:53 pm

In theory I agree with Russell's analysis. I think the barcode explanation is much more valid than the box. But why then the fact that despite levels of education and training rising, median wages in the U.S. have been stagnant for the last five years? Does global labor arbitrage have a larger effect than the better barcodes USians are now sporting?

Half Sigma May 25, 2006 at 1:00 pm

I don't understand this box and forehead dichotomy. Why aren't the rules of supply and demand sufficient to explain wages? Why do we need boxes and foreheads?

If the worldwide demand for chemists is high relative to worldwide supply, then a Haitian program to create more chemists would slightly lower the worldwide salary of chemists but increase the wealth of Haiti.

Half Sigma May 25, 2006 at 1:03 pm

And now thinking about Walmart, Walmart by being so big has created more bargaining power for the enterprise so is able to enhance profits for shareholders (the capitalist class) by supressing wages for the workers.

Pre-Walmart, a low wage worker might have made $10/hour, but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class.

Cornelius van Vorst May 25, 2006 at 1:10 pm

Why aren't the rules of supply and demand sufficient to explain wages?

They are, but that's not the only subject Russ is addressing.

For example, S/D would show that as demand for fitters falls, the quantity and price exchanged will likewise fall. But that analysis leaves unanswered what happens to the the no-longer employed fitter.

Robert Cote May 25, 2006 at 1:31 pm

Wages ultimately reflect productivity. Chinese wages stay low because they invest in low productivity jobs for societal reasons. The US a mismash in this respect. A lot of the recent outsourcing is a symptom of bad management that thinks productivity v. wages is a linear calculation. Replacing a US worker with two half as productive overseas workers at one quarter the price is not a two to one competetive advantage.

One more point. Henrey Ford for all his faults once dismissed his critics for paying high wages, $5/day, by reminding them that he was also creating a working class that could afford his products.

TW May 25, 2006 at 2:07 pm

[One more point. Henrey Ford for all his faults once dismissed his critics for paying high wages, $5/day, by reminding them that he was also creating a working class that could afford his products.]

That was his PR spin. The real reason he paid the high wages was to combat the problems of worker absenteeism and presenteeism that the Detroit auto industry was faced with.
By paying the top wage in the industry, Ford could chose from among only the best workers to hire. And once a worker got a job with Ford, the higher opportunity cost helped to motivate them to work hard enough to be able to stay with the company.

Al May 25, 2006 at 2:08 pm

"Pre-Walmart, a low wage worker might have made $10/hour, but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class."

Half-Sigma, I think it's pretty clear low wage workers are better of with Wal-Mart than without. Most shop there and get a far better value for their dollar than at Hecht's or Macy's. Also, low wage workers are not barred from buying Wal-Mart stock if they wish- so they are not barred from what you describe as the capitalist class.

Also, do you know if the presence of Wal-Mart has depressed wages? I confess I don't- but I'd imagine the influx of a permanent legal underclass (illegal immigrants) would drive down wages more than anything Wal-Mart can do.

Xmas May 25, 2006 at 2:09 pm

Half_Sigma,

That's the wrong approach:

Before Wal-Mart one low-wage worker earned $10 per hour.

Post Wal-Mart two low-wage workers earn $8 per hour. That's $6 more in the pockets of low-wage earners.

John Dewey May 25, 2006 at 2:47 pm

Half Sigma: "Pre-Walmart, a low wage worker might have made $10/hour, but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class."

When and where were low wage workers earning $10/hour? According to the BLS, the 1982 average wage rate for all private workers was just $7.86. Low wage workers must have earned considerably less.

When was the pre-WalMart era? Walmart didn't reach a billion dollar in sales until 1979. BLS statistics show that average hourly earnings, adjusted for inflation, are slightly higher than 20 and 25 years ago.

Who is this "capitalist class" you refer to? Does it include all the participants in pension plans and 401K's? I know folks who earn less than $10/hour today and who also own stocks and mutual funds. I also know folks who were low wage workers in their 20's but who now live off their investments in their 60's and 70's.

Robert Cote May 25, 2006 at 2:48 pm

TW comments: "The real reason he paid the high wages was to combat the problems of worker absenteeism and presenteeism that the Detroit auto industry was faced with. By paying the top wage in the industry, Ford could chose from among only the best workers to hire."

That too (worker reliability) as well as increasing productivity. Neither were the "real" reason. Both were components of a difficult and dynamic economic optimization formula. Ford was an optimizer in an era when the concept was unknown. If his scions had any huevos they'd buy a '06 Civic (and '72 through '05) and -steal- everything. They made a half step recently when the Ford Escape adopted the Toyota -last- generation hybrid technology.

You may dismiss Henry Ford's $5/day creating a middle class as spin but it worked. In another case of unintended consequences it saved our asses. His implementation of productivity enhancing manufacturing techniques played a major part in winning WW-II. I also assume your use of the word "presenteeism" is one of voting present and not participating. Trust me, that didn't happen in HFs day. He once even hired a noted efficiency expert to review his operations with exactly that in mind. Years of success had necessitated outside review and an infusion of new ideas on top of his groundbreaking work. The expert returned having learned new ideas to advance the concept of efficiency from what he had observed and was left with but one negative comment. "Mr. Ford, I cannot find but a single thing I am even qualified to criticize. You are ahead of the science that describes your practices. The one exception, that guy down the hall with his feet on his desk. Apparently that's what he does, all he does, for a quite handsome salary at that." Henrey Ford replied, "Yes, several years ago that young man came up with an idea that has saved me several dollars per automobile ever since. As I recall he was doing the exact same thing at the time. He's there in the expectation that even if he never repeats I am (and the world is) the beneficiary."

Half Sigma May 25, 2006 at 4:29 pm

"Who is this "capitalist class" you refer to? Does it include all the participants in pension plans and 401K's?"

No, it does not, because the average 401K plan participant's income from stock holding is tiny compared to his earnings from working.

When a majority of a person's income comes from capital and not labor, then he has finally reached the capitalist class.

True_Liberal May 25, 2006 at 4:47 pm

Half_Sigma, you've misindentified the beneficiaries of the lower wage.

If you think it's the capitalist "class" (including many Walmart employees, I bet), you need only look at Walmart's recent stock price history to disabuse yourself of THAT silly notion.

The real beneficiaries are you and me and every other Walmart customer who walks out of the store with a better value for our buck.

Travis May 25, 2006 at 6:19 pm

All forehead vs box ideas aside, I think people tend to forget that the "outsourcing creates wealth" is a long run view, where labor is perfectly mobile.

"The people who were once fitters went on to do new things,"

In reality, the people who were "fitters" probably found themselves in a world no longer demanding their skills. Highly skilled "fitters," for example, are poor computer programmers, unable (unwilling?) to uproot their family to a region where "fitters" are still needed, and feel they are too old to learn a new trade. For an easy example, look at regions of the US that once specialized in textiles and what has happened to their (once-)skilled laborers.

Its the short run vs long run outlook.

save_the_rustbelt May 25, 2006 at 10:34 pm

Change cannot be stopped only managed.

The idea that managing the change for the benefit of displaced workers seems to be out of vogue with the intelligensia, although welfare to help oil companies adjust seems to be ok.

Noah, I try to write simple ideas in short sentences so you can read them. Maybe I'll try some longer sentences next time.

The barcode versus box idea has some value as a starting point, but is much to simplistic a view of labor markets and the lives of workers. Economists seem to forget we are dealing with people not statistics.

Luke May 25, 2006 at 11:08 pm

First of all, it should be noted that economists define the real wage in a labor market to be the marginal product of labor.

Also, economists tell what is, not what ought to be.

save_the_rustbelt May 25, 2006 at 11:14 pm

The Wal-Mart discussion seems to assume that everyone working at WM is working at the top of their skill level, and therefore there is a good match.

Has it occurred to anyone that some of the workers at WM are working below their skill levels because there are no readily available alternatives? I know there are some of the 5 1/2 million former manufacturing workers are there.

You can argue that this is good because any work is better than no work. This is tolerable as a short term adjustment, but what if it becomes along term trend?

The barcode theory seems to assume that all skills are readily transferable – maybe in the long run, but certainly not in the short run.

happyjuggler0 May 26, 2006 at 12:57 am

Worker's don't get paid by how productive they are, although it definitely acts as a ceiling on how much they *can* get paid.

I'm guessing that McDonald's has to pay its Monday-Friday breakfast lunch workers more than its Sunday-Thursday dinner workers, although their productivity is virtually identical. But the supply of such workers is much higher after high school gets out. During the day however McDonald's has to compete with Walmart and Home Depot and yard work and all kinds of other job suppliers which usually don't require off the job training. Thus Walmart is pushing up the wage level for the marginal worker at McDonalds or perhaps elsewhere by reducing the supply of such workers.

Egging on Walmart or any other company to pay its workers a better pay/benefit package will not improve the wages of daytime McDonald's workers of the US.

The "solution" for further raising the wages of the marginal low skill worker, assuming he/she does not improve their skills via off the job training, is to further increase the supply of such employers for low skill workers.

Thus, using Communist terminology, the poor in the US need more employers willing and able to exploit them. Walmart is too far ahead of the employee compensation curve right now to really matter what they pay their workers. What matters is that they simply hire more of them, along with "everyone" else.

The low skill worker has another alternative to praying that new employers create crappy jobs (thus changing the supply/demand balance and raisng wages by definition), or praying that unions get out of the way of job creation. They can also get off the job training, thus moving themselves into a different skill set with less supply to counter the demand of employers.

Such off the job training is usually called education.

JohnDewey May 26, 2006 at 7:19 am

Half sigma,

Thanks for explaining that relative sources of income determine whether one is a capitalist – that only when investment income exceeds wages does one become a member of your capitalist class. Now that I understand your definition, I can disagree with your assertion:

"but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class."

I already pointed out that BLS data do not support your claim that Walmart reduced worker's wages. Now I reject as well your implication that only your narrowly-defined capitalist class benefits from Walmart's efficiencies and profits.

All direct and indirect shareholders of Walmart are enriched by Walmart's profits, not just the the few who rely primarily on investment income. Beneficiaries also include everyone amassing wealth for use during retirement. I think that's a larger group.

Your 19th century narrow definitions of capitalist and worker classes do not seem valid anymore. Framing arguments within those outdated definitions is a distortion of economic reality.

As others pointed out, consumers enjoying lower prices receive the greatest total benefit from Walmart's efficiencies. Those consumers are more likely to be members of the worker class rather than the capitalist class you defined.

Slocum May 26, 2006 at 8:09 am

"Before Wal-Mart one low-wage worker earned $10 per hour."

But that's an incorrect assumption. Workers in local retail shops (clothing stores, hardware stores, etc) were (and are) paid less than at Walmart. The working conditions at independent mainstreet shops are more congenial, but the pay is lower not higher.

Slocum May 26, 2006 at 8:21 am

My complaint with this analysis is that neither the 'box' nor 'forehead' view is correct or complete. Training a lot of computer programmers in an area with no software industry doesn't necessarily create a software industry, it may create a pool of unemployed or underemployed programmers — and a stream of emigrees to places that already have a software industry. The poorer state spending all the money to invest in the education of all those programmers only ends up subsidizing the state with the software industry (which benefits from all those educated immigrants whose education it did not have to pay for).

For the 'forehead' view to work at all, the place where those foreheads are located must be congenial to new business development, but even that is not sufficient to guarantee that education will lead to prosperity–there is still a lot of path dependency. It would be a foolish longshot, for example, for the people of Kansas to decide to invest in the education of film students with the idea that a local film industry would arise. A much more likely result would be educated young Kansas heading off to Hollywood.

liberty May 26, 2006 at 9:22 am

>Highly skilled "fitters," for example, are poor computer programmers, unable (unwilling?) to uproot their family to a region where "fitters" are still needed, and feel they are too old to learn a new trade.

In general most people – even older people – are intelligent and flexible enough to work in more than area. It is one of the best adaptation of the human species. Intelligence, opposable thumbs and the ability to put both to many and various uses. Certainly I would not expect the people to move out of the country or for all to become programmers, but if the job market is good and robust all over America due to the comparativew advantage, surely these workers can find something allowing them to stay in their home town or an even better match if they move within their state or to a nearby state; something that they are good at and enjoy and which allows them to ease into a new pre-retirement career and then retire in comfort. On the other hand, if protectionism forces us to keep jobs made redundant by machinery or against advantage, this will kill productivity, slow the economy, slow growth and wages, and there will be little choice in what jobs any American can do.

>It would be a foolish longshot, for example, for the people of Kansas to decide to invest in the education of film students with the idea that a local film industry would arise. A much more likely result would be educated young Kansas heading off to Hollywood.

You have chosen very specific kinds of training, as opposed to broader education, to make your point. In general, if a country invests in education it will be able to be much more productive. If a small island invested in software development it would not send off all the kids to a country that already has a software business as you suggest, instead people would outsource to the island; because they would charge less that the programmers that are surrounding by firms. That is clear from supply and demand. On the other hand, with highly mobile labor between Kansas and Hollywood and highly desirable firms in Hollywood, the labor tends to flock to Hollywood no new firms in the industry may follow. On the other hand, if the new talent of producers are a real challenge to Hollywood and can attract talent to Kansas, they could create the New Hollywood in Kansas. After Silicon Valley came about in California, the new flock of technology that sprouted up in New York did not all hop a plane to California – when they became a threat they became known as Silicon Alley.

spencer May 26, 2006 at 9:41 am

Over the last decade WMT has been responsible for a large share of the US productivity rebound. Over this period retail productivity growth has been significantly higher then manufacturing productivity growth. — Their is a strong body of research showing this. Personlly I calculate a monthly index of real retail sales per retail employee hour that is a great first approximation of retail productivity.

Economic theory tells us workers pay should be closely related to worker productivity.
But over the past decade we have seen no improvement in the relative retail pay of retail employees — average hourly earnings in retail has been very stable at some 76% to 78% of total average hourly earnings.

So my question is why haven't retail workers benefited from the very strong growth in retail productivity –stemming largley from the influence of WMT and other big box retailers–as economic theory suggest they should.

John Dewey May 26, 2006 at 11:03 am

Spencer,

What measures do you use for retail employee hours? Would it include all employees involved in distribution and sales of retail products?

Has the work of stock clerks and checkout clerks changed much in 20 years? Their worktools are still box cutters and scanners, though scanners have improved. They still stack merchandise, accept currency, and bag purchases. If all else were equal, including labor supply, I wouldn't expect their wages to increase.

My guess is that wages have increased for some jobs performed for retail companies. These would include:

- buyers responsible for dollar transactions a hundred times larger than 20 years ago;

- computer programmers developing international inventory and purchase order software; and

- engineers designing giant automated warehouses.

I don't think all the technical workers are employed by the large retail companies. So their wage increases might not be included in retail industry wage rates.

Neal Phenes May 26, 2006 at 11:34 am

I worked in one professional discipline of an industry for almost 20 years. I switched to a different discipline within the same industry 5 years ago. It differed substantially in the day to day functions and subject matter. However, my new employer saw the bar code on my forehead and recognized my ability to produce. The point all employees must recognize is that we are all entrepreneurs running our own businesses called "Me Incorporated" (actually it is a sole proprietorship but you get what I mean). We can thrive by developing attractive skill sets and talents that can be exploited. The key is thinking "outside of the box" for employers and employees.

spencer May 26, 2006 at 12:30 pm

The data I use is for all production workers and the wage data is for the
same group of workers.

It would not include supervisors and management — that is why I call it a
first approximation. In my regression model of the relative performance of the
S&P index of retail stocks my index is a
very powerful variable.

I have talked to the experts at BLS and they agree that my measure is a good first approximation.

But if you are talking about a clerk at WMT you are completely wrong — their productivity has risen massively.
If you doubt this go talk to WMT management or read their Annual reports or 10-K fillings.

I do not do the wholesale sector, but the productivity data shows that the wholesale distribution sector has also had very strong productivity growth. The growth in these two sectors is the primary difference between US and European productivity growth rates . There is a strong body of respected economic research on this.

Also note I did not say retail wages have not increased, I said that relative retail wages have not increased and main stream economic theory and even the economics they teach at GMU says it should. As a matter of fact every time you have made your arguments against the minimum wage you have used that theory.

spencer May 26, 2006 at 12:57 pm

To discuss the impact of WMT and the other big boxc retailers you have to understand their model and what they are actually doing.

What WMT has done is apply the grocery store low margin, high turn-over model to the other retail sectors.

I'll describe the most simple aspects of the model.

If you start out with a $100 in capital
and buy a $100 in merchandise in period one and sell it for $101 you have made a profit of $1 on your original investment of $100.
This does not look like a great rate of return. But if period one is only one week and you can turnover your merchandise every week and make a $1 profit every week at the end of 52 weeks you have made a $52 profit — a very nice return on your $100 of capital. this is the grocery store business model.

The typical retailer manages to turn their
merchandise some 5 to 10 times a year. If they buy $100 of merchandise and sell it for $105 dollar some ten times a year they will have $50 in profits at the end of the year.

What WMT, and some of the other big box retailers like Home Depot developed was a system where they turned their merchandise
some 20 to 30 times a year. Ok, if they sell $100 worth of merchandise for $102
some 26 times a years at the end of the year they will have profits of $50.

But note they are selling the goods at an
average price of $102 so they can undercut the $105 the other retailers are charging.

So if you are a clerk or a stock boy, or whatever at a big box retailer that turns its inventory 26 times a year as compared to a typical retailer that turns inventory
10 times a year you are selling 2.6 times as much merchandise as the same clerk or stock boy at a traditional retailer. So your productivity is 2.6 times the traditional store clerk.

If you walk into the typical retailer you see that its employees have a lot of downtime where they do nothing but wait for a customer to show up. But at WMT that downtime is massively reduced.

Now I know when you add back in overhead and everything else the model gets more complicated, but this is the heart of the WMT story and everything else flows from it.

John Dewey May 26, 2006 at 1:53 pm

Spencer,

I see now that you are not measuring the entire WalMart business and its productivity, but merely the retail customer service portion.

Your lengthy description of low margin discounting does apply, of course, to all four of the retail giants that started in 1962: Target, K-Mart, and Woolco as well as WalMart. Anyone who reads an economics blog should have already understood the concept, but I guess it helps to lay it out.

From what I've read, the heart of WalMart's story is not the discount retail model you described.

The initial strategy that drove WalMart's success was their decades-long focus on small markets. By not directly competing with the other three giants, they were able to expand and gradually achieve economies of scale already enjoyed by K-Mart, Woolco, and Target.

Two later factors allowed WalMart to eventually emerge as the retail winner:

- a completely automated network that cuts distribution costs and times to absolute minimums;

- an inventory control and information system that far surpasses anything yet tried by its competitors.

I had assumed you were referring to these more important business factors when discussing WalMart productivity.

liberty May 26, 2006 at 2:22 pm

>Also note I did not say retail wages have not increased, I said that relative retail wages have not increased and main stream economic theory and even the economics they teach at GMU says it should. As a matter of fact every time you have made your arguments against the minimum wage you have used that theory.

I don't. Why would we look at relative retail wages – retailers compred with the other sectors as you suggest ("average hourly earnings in retail has been very stable at some 76% to 78% of total average hourly earnings.")?

Instead, I would look at Walmart wages against thier competitors wages and the wages in their sector over the past twenty years. I'd look at growth in their wages as compared with growth of wages of non-productive industries. I would run a regression to see how productivity correlates with wage growth.

But I would not simply compare "retail wages" agains "average wages in all sectors" because not all retailers have been as productive and we don't know how productive the rest of the sectors have been.

What I am suggesting would give you insight specifically into how this growth in productivity has affected wages – what you are suggesting is vague and simply compares how retail compares with "everybody else."

Half Sigma May 26, 2006 at 3:45 pm

response to liberty:

The reality is that skilled workers who lose their occupation because their skills are no longer needed are screwed. It may have taken them their whole life to get as skilled as they are. They will never recoup the lost income.

This doesn't mean that we should halt progress. I don't want to go back to a world where everyone was a farmer. I'm just saying that people should stop pretending that it doesn't suck to be a victim of change, or that these people will ever recover because they probably won't.

spencer May 26, 2006 at 3:52 pm

Walmarts distribution and automation are integeral parts of the reason they can get the turnover they do. But without the turnover the big investment in distribution would not pay off.

Yes, Wmt start in rural less competitive areas played a role originally, but by the early 1990s that was no longer significant. And the shift in productivity for all retail started in the mid-1990s — after WMT became a national force.

But when I look at the productivity data I am looking at data for all retail productivity — the data problems have more to do with the point that the retail data includes things like auto dealers, food service, gas and fuel dealers, etc that we don't usually think of as retail .

I'm comparing apples to apples when I'm discussing retail wages and productivity.

But when you look at wages across sectors you find a very strong tie between relative wages in a sector or industry and relative productivity in that industry. It is why wages in manufacturing are higher then wages in the hospitality industrty, for example and why the highest wages are in the information tech area.

The reason retail wages are low is that retail productivity has been low. but over the past decade we have seen a strong surge in relative productivity growth in retail
that has not been accompanied by an increase in relative earnings. Theory says we should.

I am not knocking WMT. they are a great business model that has made a significant contribution to higher standards of living in the US. I'm just looking at the issue as just a curious economic development that I have problems understanding.

Half Sigma May 26, 2006 at 4:51 pm

"It is why wages in manufacturing are higher then wages in the hospitality industrty"

Manufacutring is unionized. The unionized workers have more bargaining power, so they are able to bargain for themselves higher wages.

Russell Nelson May 27, 2006 at 2:06 am

Half Sigma: please admit that you're not an economist:

"Pre-Walmart, a low wage worker might have made $10/hour, but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class."

What if Walmart has passed those savings on to the consumer, with the $2 difference enriching the (largely) poor who shop at Walmart. You seem to be presuming that Walmart didn't do that. An economist wouldn't make that mistake.

JohnDewey May 27, 2006 at 5:55 am

"Walmarts distribution and automation are integeral parts of the reason they can get the turnover they do. But without the turnover the big investment in distribution would not pay off. "

Spencer, it's not the high inventory turnover that made WalMart the most successful retailer. Many other retailers adopted the low margin, high volume strategy. Some were successful while others failed. But only one retailer has revenues exceeding $300 billion. If you are trying to understand Walmart, I think you'll need to understand what made them unique.

So what is unique about Walmart? I've given the answer already:

- a company culture and work ethic derived from their 25 year small town focus;
- a massive automated distribution network;
- an extremely well-designed inventory control system, including its sophisticated management information reporting.

Walmart's in-store productivity gains are, for the most part, derived from their high volumes. They are able to fully utilize checkout clerks, eliminating deadtime, as you pointed out. But that's just because the sales are higher. It's not because their checkout clerks are significantly more productive at performing their simple tasks.

I'm not familiar with the economic theory that wages must follow productivity increases. I'd prefer that a real economist explained the theory, but go ahead and take your shot if you wish.

As I see it, a task as simple as customer checkout work should always be the lowest paying job. If millions of teenagers and high school dropouts and English-speaking immigrants can do the job, the labor supply must be nearly unlimited. For me, that's the reason in-store retail wages remain low relative to all other occupations.

William Woolsey May 27, 2006 at 7:33 am

If workers in various firms or industries can do the same work, the increases in productivity in a single firm or industry won't cause wages to solely rise in that firm or industry.

In particular, large improvements in productivity in retailing doesn't necessarily lead to proportionately higher wages in retailing.

If the improved productivity in retailing results in an increase in the demand for labor in retailing, then workers will be pulled into retailing from other areas. This dampens the increase in wages in the retail sector. Efforts of other areas in the economy to keep their workers results in an increase in wages there as well.

The notion that wages reflect differential productivity requires an assumption that labor provision is monopolized and incumbent workers use their monopoly power to force wage increases that prevent firms from hiring more and hiring away from other industries.

In fact, the "box" theory makes the most sense if we assume that wage differentials involve successful exploitation of monopoly power by labor. For example, suppose the steel industry is such that a labor monopoly can generate high wages for unskilled workers. Workers stuck in jobs where there is no such monopoloy power make lower wages. If the industry migrates elsewhere (to excape the labor monopoly,) then the "good" jobs are gone.

I read about a woman making 60k per year for driving cars from the end of the assembly line to a parking lot. To me, the existence of such jobs suggests that the "box" theory has some value.

Of course, being an economist, I don't believe that labor monopolies are good for people in general or for workers in general.

True_Liberal May 27, 2006 at 10:27 am

"I read about a woman making 60k per year for driving cars from the end of the assembly line to a parking lot. To me, the existence of such jobs suggests that the "box" theory has some value."

Not necessarily, WW. To give credit where credit may be due – she may be part of the quality control system too, and she checks out all the driver-controlled functions and writes up defects. Depending on her fault-analysis ability, she might be a critical link in delivering a top product at reasonable cost. Driving could be only a small part of her job.

(Yes, I'm speculating here… we just don't know enough yet.)

save_the_rustbelt May 27, 2006 at 10:27 am

Wal-Mart is cutting purchases in order to trim inventories, because growth and profits are slowing.

Apparently the bulwark of the new American retail/service economy is slowing.

Are we in big trouble now? Time will tell.

True_Liberal May 27, 2006 at 10:38 am

"I'm not familiar with the economic theory that wages must follow productivity increases. I'd prefer that a real economist explained the theory, but go ahead and take your shot if you wish."

I don't think it's an "economic theory" so much as a contractual deal between a piece-worker (or an incentive plan) and an employer.

If a worker can turn out more goods per hour, and is paid by the piece, then he should be paid per that deal. If the COMPANY institutes a better, faster process and the guy can now produce faster, the pay rate per piece may be decreased, but the guy's average paycheck should not suffer.

On the other hand, if the WORKER comes up with a better, faster method, the worker should enjoy the fruits of his creativity, and the piece rate SHOULD NOT decline.

(This from an Industrial Sociology text 40+ years ago – Don't know if I can track it down precisely…)

JohnDewey May 28, 2006 at 6:15 am

True liberal,

I agree with the concept that workers should be rewarded for productivity improvements they cause. My guess is that management doesn't share completely the productivity gain, and I don't think they should. Some of the increased productivity gain should be passed along to the customer.

As I see it, workers and management should act as a team to improve the value provided to customers. They compete with other firms also seeking lower costs. In order to remain copetitive and retain jobs, workers and management alike should always try to stay one step ahead of the competition. Some productivity increases will arise from the worker ranks, some from the management ranks. The reward to both groups for productivity gains is simply retention of employment.

JohnDewey May 28, 2006 at 6:30 am

William Woolsey,

Thanks for the explanation.

My guess is that WalMart's productivity increases initially reduce total demand for labor in the retail sector. If 10 WalMart checkout clerks can now do the work formerly done by 20 clerks at 20 mom-and-pop stores, demand for clerks drops by 10 workers.

Lower labor demand due to increased productivity is not the complete picture, of course. WalMart's lower prices lead to purchases of more goods by consumers. In some cases, the freed up dollars will generate new retail businesses that employ retail clerks.

True_Liberal May 28, 2006 at 8:15 am

You gotta love it:

"Opponents of two proposed ordinances that would set a minimum wage for employees of big-box retail stores contended Thursday (5/18) that passage would hurt the very people the measures are intended to help, give Chicago a black eye in the business world and set the city up for a defeat in court."

See: http://www.chicagotribune.com/news/local/southsouthwest/chi-0605190297may19,1,262212.story?ctrack=1&cset=true

spencer May 28, 2006 at 3:21 pm

William Wooseley — I think you have it that it is more the supply-demand factors that drive retail wages then the productivity argument. Retail remains about the largest source of jobs for the unskilled in this economy so for all pratical purposes a retail firms like WMT faces a perfectly elastic supply curve — witness the examples of thousands of people lining up for jobs at new walmart stores.

On the other hand I strongly disagree with Half-Sigma that unionization drives what
employees earn rather then productivity.
An employee at a firm must produce enough for it to be profitable for the firm.
Unionization is just one method for the individual that works in a high productivity industry to capture some of the benefits of productiivty. It is how the pie is divided.

John Dewey — your analysis of a retail clerks productivity is internally inconsistent. productivity is output per unit of input. If the walmart clerk sales
five times as much merchandise in one day because of the walmart distribution system then the clerk in a small business competitor the wmt employee is five times as productive. The reasons are probably completely due to the capital wmt had put in place and their superior management, but that does not negate the fact that the clerk still sells five times as much as the competitors clerk.

Also John compare your comment in this discussion that because wmt is more productive that it leads to a drop in retail employment. You came to that conclusion yourself, remember.
But it is also the conclusion that numerous good economic studies have found and that you have refused to accept in earlier discussions at this blog. but is this a bad thing? I doubt it. What we want to do as a society is to eliminate low productive jobs
because that is the only way we can raise the standard of living of the entire population.

But see, we can all learn from open, honest discussions as I did by seeing that I needed to look at the question of real wages from a different perspective.

True_Liberal May 28, 2006 at 4:02 pm

Spencer says: "Unionization is just one method for the individual that works in a high productivity industry to capture some of the benefits of productiivty. It is how the pie is divided."

But if the company worked for is a low-productivity competitor in a high-productivity industry … Well, it's not rocket science, is it?

Of course, there's another function of the union: when their job security and wage scale is threatened by people willing to work for a lower wage, the union can lobby for increases in the minimum wage, to take the interlopers out of the job market… Well, it's not rocket science, is it?

JohnDewey May 28, 2006 at 5:39 pm

Spencer,

If you're going to cite earlier posts in which I participated, please be specific. I have no idea what posts you're referring to, and I cannot know what you may be taking out of context or misquoting.

If you are referring to my post earlier today, please note that it has two parts. First, as Walmart displaced mom and pop stores in small towns and in some suburbs, demand for retail clerks should eventually be reduced. But the second part of my post is equally important. WalMart's lower prices freed up consumers' dollars. Some of those dollars were likely spent at new retail businesses, especially those niche businesses that do not compete with WalMart.

Please be careful to distinguish between reduced demand for retail employees and a decline in the national number of retail employees. These are not the same thing. In a growing economy, we should expect demand for retail employees to grow. Assume that growth would be 4%. WalMart expansion might reduce demand so that retail employment grows only 3.9%. In this hypothetical example, retail employment still increased, though Walmart did reduce the amount of the increase.

Could you also be specific about the "good economic studies" you referenced? the ones that claim Walmart led to a decline in retail employment? I'd like to read these studies before accepting the conclusions you claim they made.

Zephyr May 28, 2006 at 9:38 pm

Walmart reduces retail jobs – just as larger more efficient farms have reduced farm employment over the past 100 years.

The labor resource is then available for other employment. Rarely is this visible to the casual observer in real time. It takes time for the adaptation to occur.

However, one thing is very clear, the fewer people it takes to perform a function, the cheaper that function becomes, and the more capacity our economy attains.

JohnDewey May 28, 2006 at 10:24 pm

Spencer,

Here's my understanding of how productivity increases can lead to higher wages:

Often a worker acquires a skill or gains job knowledge that allows him to perform his work either faster or with fewer defects. When that happens, his value to his employer increases. In order to retain this more valued employee, the employer increases his wages.

Consider another situation: a worker who already possesses specialized knowledge that cannot easily be replaced. He might also become more productive if the firm acquires capital or adopts more efficient processes or even just increases that worker's utilization. In such cases, the worker's value to the firm may increase because of the lead time required to replace him. In this case, it is the skills and knowledge possessed prior to the productivity increase that become more valuable.

A third case is where capital or processes or utilization increases the productivity of a worker who could easily be replaced. That worker is no more valuable to the firm than before. The firm will not increase his wages.

I think WalMart retail employees fall into the third category. They can easily be replaced, as they possess few skills. WalMart has little incentive to pay the m more.

Surely economic theory that explains the relationship between wages and productivity must distinguish between skilled and unskilled labor.

Half Sigma May 30, 2006 at 11:55 am

Increasing worker productivity obviously, in the short run, reduces demand for workers and thus lowers wages. Workers don't get the benefit.

Imagine that a worker is a gallon of gasoline. There is a new invention that makes each car drive twices as many miles on a gallon. Each gallon of gas becomes twice as productive. But this new invention will cause the price of gasoline to decline because drivers won't need to buy as much.

But the imagine that all the producers of gasoline get together and decide that they will only sell gasoline at a price 100% greater than the pre-gasoline price. People will then be forced to pay the higher price. This is equivalent to workers forming a union.

Now the producers getting together to "fix" prices is considered illegal, while the workers getting together to fix their wages is endorsed by statues. Whether it's right or wrong for the law to favor one and not the other is besides the point–the point is that unions DO benefit the workers just as price fixing benefits any industry.

John Dewey May 30, 2006 at 1:39 pm

"the point is that unions DO benefit the workers just as price fixing benefits any industry."

I see. So that explains why union membership has dropped from 34% to 13% the past 50 years, right? Or the job security that workers in auto, airline, steels, and textile industries have been enjoying?

I won't argue that unions don't benefit their members. But they no more engage in price-fixing than do the gasoline refiners. Both groups are at the mercy of the market.

Previous post:

Next post: