Morality vs. Reality

by Russ Roberts on July 24, 2006

in Politics, Prices, Wal-Mart

The Chicago City Council wants companies that operate in the Chicago area with more that a billion in sales and stores greater than 90,000 square feet to pay workers in those stores at least $10 an hour and provide $3 in benefits. The Chicago Sun-Times reports:

Target is putting
plans to build three South Side stores "on hold" — and making veiled
threats to close existing Chicago stores — if the City Council
mandates wage and benefit standards for "big-box" retailers,
African-American aldermen warned Thursday.

The saber-rattling is
intensifying as the clock winds down toward a July 26 showdown vote on
plans to make Chicago the nation’s first major city to establish a
"living wage" for stores with at least 90,000 square feet of space
operated by retailers with $1 billion in sales.

Minneapolis-based
Target becomes the second retailing giant to threaten to pull out of
the lucrative Chicago market in a last-ditch effort to stop an
ordinance championed by organized labor that breezed through the City
Council’s Finance Committee 15-6 and has attracted support from 33
aldermen.

Wal-Mart
has threatened to cancel plans to build as many as 20 Chicago stores
over the next five years if retailers are required to pay employees at
least $10 an hour and $3 in benefits by July 1, 2010.

I like the words "threats" and "saber-rattling." They imply the whole thing is a morality play. The greedy retailers want to get away with low wages. The City Council stands up for the workers. They spar. They threaten. They counterpunch.

But that is not what is really happening. If the law passes, the question for Target and Wal-Mart will not be whether to carry out the "threats" they made. They will look and see whether it is still profitable to operate in the Chicago area. If it is not, it will appear as if they are carrying out their threat. If it is still profitable, it will appear as if they "backed down" and the Council called their bluff. But companies try and make profits. That’s what they do. If you make it unprofitable for them to operate a store, they will close it down.

The best part of this story comes here:

Ald.
Leslie Hairston (5th) said she has a letter of intent from Target to
build a new store at Marquette and Stony Island in her ward. But the
developer has told her the store is "on hold" and that Target may close
existing Chicago stores if the big-box ordinance goes through.

Hairston
called it little more than a scare tactic. And even if the threat turns
out to be real, she’s standing firm in support of organized labor.

"Wal-Mart
and Target could pay their people a living wage. Then we wouldn’t have
this problem, and people could actually live on the money they made,"
Hairston said.

To Ald. Hairston, it’s a question of morality, of blame. Hairston seems oblivious to the possibility that the opening and closing of stores depends on profitability.

Imagine a different world. A world where the City Council was blamed for the failure of Wal-Mart and Target to pay a decent wage. Here’s how the story might read:

After years of disastrous decisions in running the public schools, it has become clear that Chicago’s City Council has failed the children of the Chicago area. After attending these mediocre schools, many children of the city have inadequate skills to be successful in the labor market.

"Something must be done," declared Ald. Johnson. "If we had decent schools, we wouldn’t have this problem and people could live on the money they made."

Johnson has proposed a bill that would require all Chicago City Council members and teachers and administrators in the Chicago school system to pay a special tax. The proceeds of the tax would help provide workers in the member’s district with a living wage.

How much money would such a tax raise? Its main impact would be to discourage people from being members of the City Council and teachers and administrators in the Chicago school system. If somehow the revenue from this tax outweighed the higher taxes necessary to pay the salaries necessary to continue to staff the schools and the City Council, this would be a better way to help poor workers than taxing the employers who provide the jobs.

We could debate whether it’s Wal-Mart’s fault or Target’s fault or the City Council’s fault (or someone else’s fault) as to why some workers in Chicago make less than $13 an hour including benefits. But the real question is how to help those workers, not how to punish the people you might think are at fault. Punishing retailers who then leave town is a very strange way to help the working poor.

Mayor Dailey seems to understand the dynamics:

Mayor
Daley is taking the threat seriously. He has challenged aldermen who
oppose Wal-Mart’s 20-store expansion to describe how they would replace
the 8,000 lost jobs.

Ah, a dose of reality. Much simpler to assume no jobs will be lost and that the impact of the law is to help workers at the expense of profits.

For the sake of the workers, I hope the ordinance gets overturned.

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{ 48 comments }

bbartlog July 24, 2006 at 10:43 pm

To be fair, it's entirely possible that the companies in question *could* operate stores profitably in this area even with these restrictions, and are indicating that they won't as a negotiating tactic. After all corporate officers understand game theory too. Still it's a stupid law.

happyjuggler0 July 24, 2006 at 11:17 pm

Memo to Chicago City Council:

An increase in price increases supply and reduces demand.

To increase price, you need to decrease supply or increase demand.

This is basic economics, something you apparently never learned.

An artificial increase in price for labor (aka wages) will decrease demand for that labor, and thus increase unemployment. Not good.

To increase wages for labor in a sustainable manner, you need to either: 1)Decrease supply of that labor. Or 2) Increase demand for that labor.

Analysis of 1) You, and only you have the power to decrease the supply of low-pay/ low-skill labor in Chicago. It is called upgrading worker skills. It is also often called education. Your government-run K-12 schools are pathetic. At the same time however you have a world class higher education institute in your city called The University of Chicago. Why extreme failure on the one hand and extreme success on the other? The US has the world's envy for our higher education system. Our trick is that our colleges and universities, both privately run and government run, must compete for students. Competition spurs businesses to improve or lose customers. I suggest doing the same in your city's K-12 system by employing vouchers and allow competition to bloom as parents instead of bureaucrats pick which students go to which schools, inducing improvement in both private and government run K-12 schools.

Analysis of 2) How do you increase demand for low skill labor in your city? Increase the number of employers! How to do that? Glad you asked. I suggest ending all labor restrictions that are on your books (there are already too many on the state and federal level as is, *you* don't certainly need any at all), as well as radically reduce forms that need to be filled out as well as permissions that need to be obtained, thus becoming employer (the necessary precursor to employees) friendly.

Also, along those lines I suggest doing everything in your power to legally stop unions from coercing customers and employees from entering Chicago businesses (keep in mind those businesses are employment mechansisms) in the event of a strike. This probably means a strong police effort along the lines of what Thatcher did early in her term as Prime Minister of the UK when she transformed her country's economy from the sick man of Europe to one of its powerhouses.

Keeping in mind that government exists not for the sake of existing, but to serve its citizens, I suggest cutting tax rates on *all* employers (who are a necessary precursor to employees) in your city as much as possible, ideally to a 0% tax rate. I am not familiar with Chicago taxation, but this likely means property taxes, although if you are dense you might also have other taxes as well.

These measures will increase the quality of education in your city as well as the number and quality of jobs. Your reelection once that happens ought to be a slam dunk, although of course that is probably the furthest thing from your minds since your one and only goal is of course to serve the people.

blink July 24, 2006 at 11:35 pm

I love the turnabout regarding the dismal state of public education. I have two comments to add. First, while I am glad Mayor Dailey sees some benefit in having superstores around, I reject his reason. The expected rejoinder is: we will replace the “lost” jobs by building a new ______ (sports stadium, convention center, other unnecessary public works endeavor). Rather, Mayor Dailey should laud WalMart and Target for stretching the dollars of Chicago’s low income residents.

Second, this IS a morality play, but the heroes and villains are reversed. The situation is the small-scale analog of the “stationary bandit” Dr. Boudreaux described in a previous post. Here, however, as the city council attempts to extract further rents for favored groups, it may find that the prey is less stationary than the bandit.

Wild Pegasus July 25, 2006 at 3:21 am

This is ridiculous. Instead of this, stop subsidizing big boxes with tax breaks, direct subsidies, and free infrastructure upgrades. If they build it, they pay for it, and they pay the same rate as any other business.

- Josh

JohnDewey July 25, 2006 at 5:28 am

kimo: "The big box retailers, especially those that do business in excess of a billion, are not going to cede their territory."

I think it would be more accurate to say that the big box retailers are not going to cede their customers.

When a large city restricts the size of big box retailers, the retailers just cut a good deal with a suburban city and locate on the edge of the big city. If Chicago passes this ordinance, WalMart and Target will likely place their stores around the perimeter of the city. Chicago will lose millions in sales tax revenue. Chicago residents will pay more for gasoline to transport them to the suburbs. Eventually Chicago will start to depopulate as other large cities have done.

mcwop July 25, 2006 at 7:52 am

Solution? Make sure your store has < 90,000 square feet. Oh yeah, if labor costs jump then the stores can continue to automate checkout, and take other actions. Then where are the less skilled, and uneducated going to work? Bottom line, is less jobs.

I do not understand why it is fashionable to bash Wal-mart, and Target. Did (or does) K-Mart pay high wages? Did Woolworths? Did Ames? No, those stores did not. But I guess people need their bogeyman. I do not shop at Wal-mart, because I do not like the store. However, its existence does not bother me, nor does it harm me.

Not an Economist July 25, 2006 at 7:57 am

The grocery store near my home pays excellent union wages to its employees. Unlike other stores I visit, at this store there are always long lines of customers extending back up the aisles waiting for an open checkout register, and a massive array of unmanned registers. The result is that you generally spend about 30 minutes waiting in line for one of the "scan it yourself" machines or one of the three highly paid cashiers generally available.

I guess my point is that even if Walmart doesn't pull out of Chicago it doesn't mean that the city or workers have sucessfully "stuck it to the man". It may just mean that fewer senior citizens will be able to greet people to supplement their dwindling social security, and that Chicagoans will start forming long lines to wait for a highly paid (but no more qualified or efficient) cashier to check them out.

Mcwop July 25, 2006 at 8:15 am

Not an Economist,
Those grocery store wages are not that much better than Wal-mart.

See this paper:
http://www.tc.columbia.edu/iee/PAPERS/workpap11.pdf

Most of the campaign against wal-mart is unions that see a large number of potential new members in a power grab.

John Pertz July 25, 2006 at 9:32 am

I dont think we should argue about the city council's actions in an economic sense. I get the feeling that this is pure politics. The city council members who are advocating for the law may know full well that its effects may be sub optimal socialy. However, as actors within the political market place they are chosing to act in a self interested way so that they can advance their own careers as politicians. Unlike the real market place, self intersted behavior by bureacrats can have damaging effects for the rest of us. In this particular case socialism sells and thats what they are providing to the consumer(voter). The law will not effect the city council member's lives as they can just blame the law's negative outcomes on another contrived "bad guy", which they will need to create another bad law to supposedly stop.

David July 25, 2006 at 10:15 am

Unskilled workers need more money to pay black-market prices for foie gras now that the aldermen have banned it in Chicago.

Randy July 25, 2006 at 11:04 am

It might be a good idea to just let them do it. Stop fighting these fools and let them learn from their mistakes. Somebody above mentioned that this is just a political tactic. That is correct. But it is a political tactic that is doing real damage. It needs to be stopped. And what better way to stop it than by a demonstration of real consequences.

suncraig July 25, 2006 at 11:07 am

Here is a columnist Eric Zorn form the Chicago Tribune citing that the "big box" ordnance will be beneficial,

http://www.chicagotribune.com/news/columnists/ericzorn/chi-0607250007jul25,1,7949433.column?coll=chi-news-col

" Big stores will not close. In fact, new big-box behemoths will open in hard-luck neighborhoods. These stores will make money for their owners and provide a decent buck to their employees. Employment rates and municipal tax receipts will rise.

Why do I think this?

In part because of the hard numbers: A similar though broader "living wage" ordinance took effect in Santa Fe, N.M., in 2004, and a follow-up study by the University of New Mexico found that private sector employment growth proceeded to outpace the overall growth in New Mexico, gross retail receipts grew faster than inflation and employment levels rose.

San Francisco raised the local hourly minimum wage to $8.82 (the federal minimum is stuck at $5.15) at about the same time, and economists at the University of California at Berkeley who studied the impact concluded that, "on the whole, the San Francisco economy has adjusted relatively easily to the citywide wage policy. The policy has generated the benefits that were desired by the voters and with surprisingly small costs."

The Wisconsin Department of Workforce Development recently reported that a 55 cent hike in that state's hourly minimum last year resulted in an additional $175 million in payroll taxes and a $3 million rise in state taxes."

has anybody read the studies he cites in his article?

stew July 25, 2006 at 11:52 am

The unions with the assistance of Maryland's legislature tried this against Walmart and lost. http://www.nysun.com/article/36484

http://americanthinker.com/articles.php?article_id=5697

Randy July 25, 2006 at 12:30 pm

Suncraig,

Honestly, my bottom line is that, as long as Walmart, Target, etc., aren't forced to do business there, the voters should get what they want. Personally, I don't think they're going to be better off. I kind of like shopping at the big box retailers and the people who work there are probably glad they have jobs. But its not for me to decide. If the voters decide that they would rather pay fewer workers more, than pay more workers less, that's not up to me.

Mcwop July 25, 2006 at 12:34 pm

suncraig, that study cited in the tribune article was debunked as it did not control for basic econmic factors. For example, maybe Sante Fe grew faster for other reasons.

http://www.epionline.org/study_detail.cfm?sid=90

Swimmy July 25, 2006 at 1:02 pm

Randy: Politicians are excellent at spin and voters are often too busy with their lives / own politics / dogmas / whatever to investigate economic cause-and-effect. It's doubtful that the myriad consequences arising from wage-fixes will even be tied to the laws. Politicians, of course, will just blame the retailers if anything goes screwy.

John Dewey July 25, 2006 at 1:05 pm

suncraig,

I'll respond separately about each city you referenced.

Aaron Yelowitz, University of Kentucky, analyzed the first phase of the Santa Fe minimum wage increase. His conclusions are very different than those of the Univ. of New Mexico:

"Santa Fe's living wage increase led to significant and negative consequences for employees in the city – particularly the least skilled employees. The increased likelihood of unemployment and a decreased number of hours worked were all highest for low skilled employees."

Here's the link:

http://tinyurl.com/ltrlj

Randy July 25, 2006 at 1:51 pm

I hear you Swimmy. Democracy is the theory that people should get the government they deserve – and get it good and hard.

But seriously, people tend to move away from poverty and towards prosperity. Does it really matter if those left behind don't understand what happened? Its still their own damn fault, whether they understand it or not.

kebko July 25, 2006 at 2:00 pm

1) I guess it's more morally upstanding to pay $9/hr. in an 80,000 sq. ft. store than to do the same thing in a 90,000 sq. ft. store. Ah…makes sense.

2) If Wal-Mart & Target came to town, they would destroy jobs because they work more efficiently than all the little mom & pops who are working 70 hour weeks & paying their workers $8/hr. to make $40,000/yr. But I find it humorous that killing jobs is frequently cited as a complaint against Wal-Mart. The implication of this thinking is that we would be more wealthy as a society if more people were involved in retail. I suggest that this neighborhood in Chicago set up a system where every citizen gets a little street kiosk where they sell an item (books, underwear, light bulbs). Everyone could be employed in the retail sector. The sheer number of jobs created would make the city a boomtown.

happyjuggler0 July 25, 2006 at 2:34 pm

One huge problem with locations that raise the minimum wage and have an objectively successful economy afterwards is that the reason these locations enact such economically dubious regulations is they say in effect: "Hey, we're rich and getting righer, and we ought to bring up those on the bottom by having a living wage".

The key here is noting that these locations were highly likely to be successful in the near future or they wouldn't have enacted such regulations in the first place. If the economy was in a depression, it would be eminently clear to most people, even on the economic left, that an increase in minimum wages to $13 an hour would be a disaster.

Therefore to say that minimum wage increases in San Francisco that coincides with an objective increase in the economy of San Francisco is *because*, or despite, of the minimum wage is foolhardy. The real question is: Would San Francisco's economy have done even better without such legislation? The other question is what happens during the next downturn? Are the poorest residents going to be doing even worse than otherwise due to the high fixed labor costs that only looked reasonable during a booming economy? Becasue you can be sure that such minimum wages or living wage laws won't be eliminated to help the poor in a downturn.

John Dewey July 25, 2006 at 2:46 pm

"Becasue you can be sure that such minimum wages or living wage laws won't be eliminated to help the poor in a downturn."

Good point.

happyjuggler0 July 25, 2006 at 2:53 pm

kebko,

Your second point makes me laugh at how silly these people are. Well done.

How is this for a thought experiment? Imagine that WalMart is the preexisting retailer in a location. Then a bunch or well connected people who are friends of the mayor decide they want to open mom and pop retail shops nearby. The cost to them to stock up their stores is much higher than WalMart and no one would shop at their stores because their prices are ridiculously high and their selection is extremely low.

The only way to make their businesses viable is to get their friend the mayor to legislate that no big box retailers may exist in their town, including existing stores. They spin it as a job creating measure since they are more inefficent than WalMart and require more employees per sales dollars than Walmart would. Therefore WalMart shuts down, when they open up shop, the store owners make a decent amount of money, new jobs are created. Fabulous.

The only problem is that there is no such thing as a free mom and pop store. Theie goods coast much more to the locals than they used to pay, and thus the standard of living for the vast majority of locals goes down signicantly. These locals then are no longer able to afford to go out for pizza, movies, bowling etc. and therefore the local pizza places, movie theaters, and bowling alleys go out of business, laying off workers even if they do manage to stay in business. Oops, those well connected scumbags are not so fabulous after all and virtually everyone is worse off except for the mom and pop shop owners. No new jobs overall either after all.

It makes no difference whether the legacy retailers are the mom and pops, or if the legacy retailers are Walmart and local sevice businesses that make (more) money with Walmart's customers savings which result from lower prices.

Randy July 25, 2006 at 3:15 pm

I don't trust the studies that show no negative impact, because they simply don't match my experience of human nature. I don't know what they're missing, but I know they're missing something.

If I had to venture a guess, I'd say that they are looking in the wrong place at the wrong time. Wrong place – they measure employment at existing employers when the jobs lost are in startups that don't happen. Wrong time – and they look immediately after the law takes effect when negative effects such as price increases or fewer employment opportunities will take place gradually over the years.

Jeff Younger July 25, 2006 at 3:49 pm

The effects of central price-fixing schemes are well known. Why, oh why, do elected officials enact policies that are proven by theory and observation to fail. Every time. In all places. Without exception.

The domestic labor market is already over-regulated and over taxed. Creating price floors is the LAST thing to fix it.

It's so very, very frustrating.

John Dewey July 25, 2006 at 4:04 pm

Randy: "Wrong time – and they look immediately after the law takes effect when negative effects such as price increases or fewer employment opportunities will take place gradually over the years."

Exactly!

If Tennessee's minimum wage increased to $7.50 an hour, I would cut the hours in my bookstores immediately. But that would affect only a couple of employees. When my next lease comes up for renewal, in 2008, I would likely close a store and lay off 8 or 10 employees. A $2.00 hourly increase would reduce profits enough that I wouldn't risk signing a new five year lease.

Randy July 25, 2006 at 4:12 pm

Jeff,

I agree, it is frustrating. So let them have their way. Let them raise the minimum wage to $12/hr, nationalize healthcare, nationalize childcare, nationalize education, double or triple entitlements of all kinds. Its what they say they want. So give it to them. What will happen? The numbers will change but productive people will still come out ahead. And the unproductive will still be blaming others for their problems.

Teri Pittman July 25, 2006 at 4:34 pm

Maybe they would prefer for Walmart to provide union jobs, much like the janitorial company my husband worked for. The union took out $50 a month and he made $10 an hour. The union didn't even negotiate the contract for that wage. The school district insisted the workers be paid that much.

Much of the anti-Walmart bias is class based. It's a blue-collar store and it's hated by the same folks who dislike NASCAR. Walmart continues to be one of the few companies left where it is possible to start out on the floor and work your way into management. It's too bad that these officials are never concerned about the hourly wage that small business owners make.

donny July 25, 2006 at 4:53 pm

Thank god that officials aren't concerned with the wages small business owner's make. My family business's biggest customer just went belly up, owing us about seventy thousand. Not having the ability to pay ourselves as little as we want, working as many hours as we want, we might not be able to recover.
So should we recover, if we can't pay ourselves as much as some politician thinks? Or if we can't pay ourselves as much as the general populace thinks? Both should mind their own bloody business.

suncraig July 25, 2006 at 5:32 pm

There opposition but it might be to late,

"If City Council goes ahead and passes the "big-box" ordinance, it would show a couple of things. The first, of course, is that despite bad schools, the lack of black faces on construction sites and double-digit unemployment rates in black neighborhoods, unions still have a firm grip on this town.

Under the proposed ordinance, superstores such as Wal-Mart and Target would be mandated to pay employees at least $10 an hour and $3 in benefits by July 1, 2010.

But underneath the feel-good rhetoric about all those poor black folks needing to make a living wage, the real battle with Wal-Mart is between the superstore and unions that are trying to organize its workers.

That's reason enough for union members to want to stick it to Wal-Mart. But what about the thousands of black people who are stuck in the unemployment line?

I put that question to the Rev. Michael Pfleger of St. Sabina Catholic Church because, quite frankly, I was surprised he was supporting this ordinance.

"We need to have jobs where people can work and still not be in poverty," he told me. "Wal-Mart has billions of dollars in profits. You should share your profits with your workers. I'm totally against this craziness that any job is better than no job."

http://www.topix.net/content/trb/0022989798044883265427181102351094314811
http://www.suntimes.com/output/mitchell/cst-nws-mitch23.html#

suncraig July 25, 2006 at 5:40 pm

The Alderman whose on business Ald. Tom Tunney (44th), who is also a small business owner and vocal opponent of "big box," added to Austin's criticism. He said the plan, which has been debated for many months, would ultimately lead to fewer jobs and hurt all businesses in the community –especially the small businesses it was designed to protect.

Share your thoughts on this story on the ChicagoDefender.com message board.

"You're telling employers that they need to pay $10 plus $3 in benefits," Tunney said. "If there's a Wal-Mart in the community, every business will be affected, sooner [rather] than later."

Tunney owns three of the four Ann Sather restaurants on the North Side, where, he said, workers start at the minimum wage but have a chance to work up to better pay and benefits. On Thursday, Tunney said that the "big box" ordinance threatens to put him out of business because he would have to raise labor costs to keep workers from applying to larger stores.

"If a Wal-Mart replaced Wrigley Field, every business in Lakeview would be paying $10 plus $3 and that shock on the system is going to reduce incentives for employers to open their doors," he said.

"Ann Sather may just close," he added. "Our labor costs in the restaurant business is close to 40 percent now…We've got a property tax bill that has tripled. Now how much can you put on small business – especially if they own the real estate – before they say: 'Wait a second, I'm in the wrong business."

But Ald. Joe Moore (49th), whose amendment to phase in the minimum wage over four years passed the City Council Finance Committee in June, said Tunney's small business would be untouched if the ordinance passes.

"I don't see how they could close," he said. "They're not affected by the ordinance."

Instead Moore accused the measure's opponents, like Tunney, of talking tough to intimidate aldermen into voting down the proposal.

"All I can say is, Chicken Little is alive and well in the City of Chicago," he said. "Everyone's talking about the sky is going to fall…Since they have failed to beat the ordinance on its merits, they're now resorting to scare tactics."

Both sides are awaiting a showdown in council chambers during the next City Council meeting July 26, when Moore said he is "confident" the ordinance will be put to a vote.

happyjuggler0 July 25, 2006 at 5:42 pm

I managed to miss the part that the ordinance doesn't take efect until July 1 2010.

It will pass because of the lead time. It should be interesting to see what happens in four years.

waltermb July 25, 2006 at 9:13 pm

When I hear about situations like this, I think that the attitude of retailers is myopic. They make hollow threats and protest new laws, but when they get passed, they take no action for fear of hurting themselves in the short term.

However, I think what is needed is for a retailed to take a stand. Therefore, rather than threating to not open stores (and thus deprive people of something they never knew to begin with), these stores should give people a taste, and then yank it away. Specifically, in the runup to this law passing, they should hire as many people as possible and then when the law passes, fire all of them. I concede that this is a bit mean, but such drastic actions are needed to prevent worse laws from being passed in the future.

JohnDewey July 26, 2006 at 3:54 am

Teri Pittman: "Much of the anti-Walmart bias is class based. It's a blue-collar store"

That's certainly the current WalMart reputation. But WalMart's have also been successful in upper middle income suburbs – the affluent neighborhoods. Despite the furious opposition from a vocal minority in those affluent neighborhoods, Walmart is moving in everywhere. Rival suburbs are competing for the huge increases in sales taxes a Supercenter generates.

Some of the affluent class will resist Walmart to their death. Their neighbors will just ignore them and pocket the savings Walmart allows. And Walmart's reputation will slowly change.

andrew duffin July 26, 2006 at 11:08 am

Slightly off-topic, but I thought for a moment I was reading an old item from the 70's.

Is the mayor of Chicago STILL someone called Daley?

Has it become some sort of hereditary honour?

Or is this still the same guy?

Astonished.

Elias July 26, 2006 at 2:42 pm

I have one small quibble with Roberts’s write-up. I think he’s insufficiently cynical about Wal-Mart’s and Target’s profit maximization strategies.

Plainly, Roberts thinks that if it’s still profitable for those companies to operate in Chicago if it goes ahead with its “living wage” law, then they’ll do so. I’m not so sure. If I were advising those companies, I might counsel that they take the following approach: Conspicuously close up shop whenever any state or municipality erects a cumbersome “living wage” law—even when it’s still profitable to maintain a business there. Sure, you’d lose that source of profit, but you also might induce other communities not to go ahead with similar measures. And the net gains from squelching other communities’ “living wage” campaigns might outweigh the benefits of maintaining a profitable business in a “living wage” area. In other words, contra Roberts, it might make sense for corporations to play chicken over “living wage” laws. “Threats” and “saber-rattling” might be apt descriptions.

I don’t think that’s what’s actually going on here, mind you. But it would have been nice for Roberts to at least have grappled with the thought. Otherwise, however, like I said, I think it’s a good illustration of bad journalism.

Randy July 26, 2006 at 3:13 pm

Elias,

I just don't think the wage numbers are real. That is, the question for Walmart and Target is whether or not they can adjust to the new numbers – primarily, can they raise prices? And I think the answer is probably yes. The higher wage requirements will have an impact on the entire region (as someone above pointed out, even the mom and pops will have to raise wages to keep good employees) so Walmart and Target should have no problem raising prices to return the equilibrium. And if they can't, they will have to close doors. Because I don't see the reality changing, because equilibrium will necessarily return in short order, I see no point in a business decision which has no other purpose than to make a political statement.

Randy July 26, 2006 at 3:34 pm

So what does mandating a living wage of $10/hr + $3/hr in benefits really mean? It means that in a very short time, $13 dollars will buy only what the current minimum wage buys today, but workers will be forced to take roughly 23% of their compensation in the form of benefits. They will have an even harder time making it from paycheck to paycheck, but by God they'll have the benefits that they "need".

John Dewey July 26, 2006 at 4:24 pm

Randy,

A statewide living wage might have the impact you've suggested. All prices might be inflated by the amount of the minimum wage increase. The big box retailers would not factor in labor costs in choosing locations.

If suburban governments do not also lift their minimum wage, residents of the city need only cross the city limits to obtain goods at the old prices. Retailers in the city will be forced to match the lower suburban prices.

Will big box retailers remain in the city or relocate to lower cost suburbs? I think Chicago is only about 10 or 12 miles wide at most points. Why would a Walmart 5 miles from the city limit remain there?

Randy July 26, 2006 at 4:52 pm

John,

Re; "Retailers in the city will be forced to match the lower suburban prices."

At the periphery, this will certainly happen to some extent. But its no small feat to drive out of Chicago. I think it more likely that businesses will either raise prices, fail, or relocate to the suburbs – the latter two options further enabling those who remain in the central city to raise prices.

My main thought is that equilibrium must be, and therefore will be, restored. People will not freely participate in an unfair transaction. They may grumble about the deal, but if it is truly unfair, if there is no value in it, they will not participate. So what we know is that the current wages are not unfair. If they were, no one would accept them. Therefore the government intervention will create an unfair situation – which free people will restore to a fair situation in short order. I don't know all the details as to how they will do it. But I know that they will.

John Dewey July 26, 2006 at 5:42 pm

Randy: "the government intervention will create an unfair situation – which free people will restore to a fair situation in short order."

I agree. But I don't agree that restoration means inflation of prices. Instead:

- economic activity increases in the close-in suburbs, which are not very far at all;

- city retailers keep prices low to match the close-in suburbs;

- high labor cost, big box retailers exit as leases expire;

- city of Chicago loses more tax revenue to the suburbs;

- Chicago city services decline slightly.

We may disagree about how easily city residents can get to the close-in Chicago suburbs.

suncraig July 27, 2006 at 12:46 am

The bill is now law

"The 35 to 14 vote by a bitterly divided City Council is a victory for organized labor, a stunning defeat for Wal-Mart and the latest in a string of legislative embarrassments for Mayor Daley."

http://www.suntimes.com/output/news/bigbox.html

It's maybe veto proof even if the Mayor Daley veto it.

John S. July 27, 2006 at 7:19 am

Now that they've solved the wage problem, maybe the Chicago City Council can tackle the price of gasoline, which is something like $3.40 per gallon in the city. How can the working poor afford that? If Council can control wages, they can control prices as well. Why not just decree that no retailer can sell gasoline for more than $1.00 per gallon within the city limits? That seems like an affordable price to me.

In fact, now that Council has shown its willingness to tinker with the levers of the local economy, the must take the blame for the continued high price of gasoline. Just as they have raised the price of labor, they have it within their power to lower the price of gasoline. Why have they not done it? I propose a march on City Hall. At night, with torches.

Randy July 27, 2006 at 10:24 am

John,

Your assumption seems to be that central city businesses can or will continue to operate with reduced or negative profits. This is the same assumption made by those who want to legislate higher labor costs. I'm thinking that those with insufficient pricing power will be forced to take the kinds of actions you describe, and that only those with sufficient pricing power will remain. And many of those with sufficient pricing power will very likely be the big box retailers.

Randy July 27, 2006 at 11:02 am

P.S. John, but you're right that our basic disagreement seems to be over how hard it is for inner city residents to reach the suburbs – and that may indeed be the critical factor. My personal experience is from living in Denver and Minneapolis as a young man without a car (you shop at whatever is closest), and later, driving out of Chicago at rush hour (nearly 2 hours in many cases). So I'm not inclined to think that people will routinely be willing to drive to the suburbs to shop, nor that the big boxes will just pack up and move – I think that they can and will raise prices.

John S. July 27, 2006 at 12:14 pm

Randy: I guess I should have made it clearer that my comment was meant as sarcasm. I don't think the city council can mandate lower gasoline prices, or higher wages. Attempting to do so will cause gas shortages and job shortages. Something's gotta give.

A few years back, some universities were proposing to pay their workers a "living wage". Did any of those proposals ever go through? If so, I would be interested to see what happened.

Randy July 27, 2006 at 12:20 pm

John S.,

And I should have made clear that I was replying to John Dewey :)

Your post is on target. Economic actions by government always have reactions.

John Dewey July 27, 2006 at 1:03 pm

Randy,

I'm arguing that the big box retailers who face higher labor costs will eventually exit the city. Some may believe the big guys will accept lower profits or raise prices. The smaller retailers have no reason to do either. They aren't covered by the living wage laws, so they can continue to price products as they have before. If the big box retailers either exit or raise prices, the small retailers gain share. But if they decide to match the price increases of the big guys, they will lose share to the suburbs.

John Dewey July 27, 2006 at 1:15 pm

Randy: "My personal experience is driving out of Chicago at rush hour (nearly 2 hours in many cases). So I'm not inclined to think that people will routinely be willing to drive to the suburbs to shop."

Would you please reconsider that argument? I don't know where you drove to, but I'm pretty certain it does not take two hours to drive from most points in the Chicago city limits to the closest suburbs. We're not talking about driving downtown Chicago to Naperville. Chicago city residents are probably already driving – during non-rush hour times – to the Walmarts in Skokie, Coutryside, and Evergreen Park right now.

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