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The Wages of Wal-Mart

Julian Simon taught me the importance of putting your money where your mouth is.  Anyone who does so is much more likely than are those who don’t really to believe what he or she says.  Consider the current antipathy for Wal-Mart.  A typical example is this letter in today’s New York Times:


“The Good Goliath” (column, Nov. 29), John Tierney’s defense of Wal-Mart, misses the point. Nobody denies that Wal-Mart offers low prices to consumers. What opponents of Wal-Mart’s practices argue is that the social good of low prices must be balanced against other important values.

Putting our children to work in factories would cut costs to consumers, but we all believe that this is morally unacceptable and would hurt our country in the long run.

In the same way, many of us believe that Americans working hard at full-time jobs should not be receiving wages that keep them living in poverty without health care.

James Dawes

Careful reading of this letter reveals all manner of implicit assumptions – such as that employers (rather, than, say, neighbors or charitable institutions) have the chief moral responsibility of providing philanthropic assistance to people who have jobs.

But the most interesting assumption is that Wal-Mart can afford to pay higher wages.  This assumption, in turn, implies one of two deeper assumptions.

The most likely deeper assumption is that Wal-Mart’s failure to pay higher wages and fringes is born of that company’s greed.  This assumption, in turn, implies that Wal-Mart is earning profits that it doesn’t need (“rents”) – returns that it or its shareholders can do without.  It would be out of these super-normal profits that higher wages and fringe benefits are paid.

The alternative deeper assumption is that Wal-Mart is charging consumers prices that are too low – prices that, if they were raised, would increase Wal-Mart’s profits and, thereby, enable it to pay higher wages.

Because Wal-Mart is not protected by government from the competition of other retailers for its customers, or from the competition of other firms for its workers, the throngs of people who complain that Wal-Mart is paying its workers too little should also believe that an enormous profit opportunity is theirs for the taking.  Here’s why.

Suppose that deeper-assumption one is true – that is, Wal-Mart is earning above-normal profits, principally by underpaying its workers.  Well wow!  What an opportunity to enter the market in competition with Wal-Mart.  A new, rival retailer can match Wal-Mart’s low prices while at the same time offer higher pay-packages to workers.  Wal-Mart will have to raise its employees’ pay to avoid losing its entire work force, or it’ll go bankrupt.  (For a somewhat different angle on what he calls “the fallacy of affordability,” see Russ Roberts’s post here.)

Alternatively, suppose that deeper-assumption two is true – that is, Wal-Mart could, if it would only do so, raise its prices, earn higher profits, and use some of these higher profits to fund the payment of higher wages.  Were this situation in fact the case, it would imply that Wal-Mart is currently failing to maximize its profits.

Here, too, entry by a new rival would be profitable, for Wal-Mart is here assumed to be an especially inept operation.  Such a buffoon of a business surely can be out-competed by persons of even moderate intelligence and perception.  (Of course, Wal-Mart is correctly and widely regarded as a profit-hungry, highly skilled operation that quickly and fully exploits all available opportunities for profit open to it.  Thus, this deeper-assumption two would, quite sensibly, be rejected by everyone upon realizing its full implications.)

Regardless of which of these two deeper assumptions motivates the allegation that Wal-Mart “can afford” to pay higher wages and fringes, those who make this allegation – if they genuinely believe it to be true – should immediately open their own retail stores in competition with Wal-Mart.  If they are correct, they’ll improve not only workers’ welfare and raise their own net worth; their involvement in running a commercial enterprise will spare us all their shrill complaints about Wal-Mart.


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