Home > musing > What are Walmart’s wage incentives?

What are Walmart’s wage incentives?

December 3, 2013

Suppose you have a employer – think Walmart – that has a ubiquitous presence nationally – think the United States. Is there ever a point, as that employer grows in size and employs more and more of the nation, that its agenda becomes aligned with the national agenda of prosperity and well-being?

That’s the interesting assumption behind a recent Guardian article called Walmart and Downton Abbey: rampant inequality and detachment from reality written by . From the article:

The best thing the top brass at Walmart could do to preserve their own privileged status would be to raise wages for their workers. A recent study by the progressive thinktank Demos illustrated that the company could afford to pay its workers an additional $5.83 an hour (pdf), enough to bring their wages just above the poverty level, simply by ending the company’s share-buyback program. This way prices could stay as they are but sales would increase as more workers would have more money to spend.

This comes up a lot in my Occupy group as well – the idea that raising wages would be good for low-wage companies like McDonalds and Walmart. The question I have is, is it true? (Aside to readers: if you’re aware of a paper that does this analysis, please tell me!) My guess is no.

Let’s put it this way. If I’m a small company then it’s pretty clear I don’t want to raise wages if I don’t have to. The lower the wages for my workers are, the more I get to keep or spend on other things. But as I grow in size, it might actually make sense, depending on context. If I employ 50% of the population, which is indeed an enormous number of people, then how much I pay them goes straight to the bottomline of how much they spend at my store. But again, it all depends on context.

And there’s and important bit of context going on here, which was beautifully explained recently by Bloomberg columnist Barry Ritholtz in his column entitled How McDonald’s and Wal-Mart Became Welfare Queens. From that article:

Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest group of Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s “associates” are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies.

My point is this. Given their welfare queen status, the agenda of Walmart and other huge low-wage employers is not actually aligned with the nation’s. As long as it can lower wages below poverty level, leaving Uncle Sam to make up some of the difference, and either pocket that difference or distribute them to their shareholders, they’ll continue to do so. The incentives are wrong.

And instead of appealing to their greed and telling them it’s in their best interest to raise wages, which I don’t believe is true (but I’d love to be wrong!), we need to raise political awareness about how the system actually works. And my guess is we should either raise the minimum wage - and then tie it to inflation - or establish a basic income guarantee.

Categories: musing
  1. Abe Kohen
    December 3, 2013 at 7:40 am

    I agree with some of what you say, however, it is not Uncle Sam making up the difference, but taxpayers making up the difference (as in your Bloomberg quote).

  2. Guest2
    December 3, 2013 at 8:26 am

    Good example of how incentives hard-wire economic decisions. But don’t forget — this is ontological as well — these sets of incentives become hard reality for Wal-Mart’s execs, and this makes the cognitive bubble that they live in is just as real as yours.

    So, I guess I’m saying forget about trying to make them “aware” of anything. If it’s not their reality, they won’t see it. Reality drives cognition, especially for massively large organizations.

    And don’t forget about how Wal-Mart influences the national agenda by trying to make it look like theirs! Lobbying, influence peddling in all its forms, etc., is the flip side of the question you raise. .

  3. poorfade
    December 3, 2013 at 9:08 am

    my only concern with raising the minimum wage has become the effects it’ll have on the very small “small businesses”. I’m sure the walmarts and mcdonalds of the nation could afford $10 a hour, but as an anecdotal example, a friend owns a small independent smoothie bar. she pays her employees $8+ a hour. I know she wouldn’t be able to afford $10+. How many other similar companies, such as salons, would be in a similar predicament?

  4. December 3, 2013 at 9:09 am

    ” or establish a basic income guarantee”

    Social Credit

    http://www.mindcontagion.org/sc/sc_intro.html

    • December 3, 2013 at 10:02 am

      On the flip side if you’re guaranteed a basic income, what would motivate you to seek a job,, especially if you are an unskilled person?

      • December 3, 2013 at 10:25 am

        People say that all the time but it’s actually amazing what people already do for no money, even when they need money.

      • sglover
        December 4, 2013 at 4:06 pm

        Fear of the whip has been the great driver ever since the first priest-king schemed for his ziggurat. Maybe we could start to imagine moving beyond that?

        • December 4, 2013 at 4:11 pm

          No freakin’ idea what you are saying, sglover. Can you please rephrase that for those of us lacking your superior education, and perhaps without the requisite condescension?

  5. Josh
    December 3, 2013 at 9:38 am

    it seems clear that no company could possibly be big enough that the increased spending benefit of giving a raise to their employees could increase their sales enough to offset the cost. Even if their employees spent 100% of their increased income in the store, since their profit margins are less than 100%, they wouldn’t break even.

    HOWEVER, it is possible that happier employees (or employees that only need to work 2 jobs instead of 3) work harder or provide better customer service and so are more productive so it COULD be beneficial. In addition, if there were an increase in the minimum wage, Walmart would benefit not just from increased sales to their own workers but also increased sales to McDonald’s workers, etc. All of these effects suggest that even if it isn’t a net benefit to Walmart, it isn’t as costly as it might seem.

    Of course, Walmart and McDonald’s executives obviously don’t believe this. This could be because these effects aren’t big enough, because the government subsidy undermines it or because they are just ignoring it for reasons previous commenters have noted. It’s very hard to tell which.

    However, none of this is necessary to justify raising the minimum wage. We are not arguing that it should be done because it’s good for Walmart or McDonalds but because it is good for the workers and country.

    • Mark
      December 3, 2013 at 12:52 pm

      I haven’t read the referenced source articles so I can’t say how they explained it, but the idea is not that the added wages go directly back into Walmart revenues. The added wages go back into the economy at large bringing broader prosperity which in turn encourages investment, new businesses, and more jobs overall (lower unemployment). It is this broader economy which then adds to the Walmart bottom line. Some believe that theew is a quantifiable “multiplier” that tells you how much money will result in the system as a result of private sector activity. I can’t explain that point.

      Under Supply Side (our model now for 30+ years), the rich are allowed/encouraged to profit more highly and keep more of the(ir) money. This means the system is top heavy and wants to invest. New businesses spring from that greater availability of biz funding. But top heavy economies don’t consume anywhere near as strongly and Demand Side economies, where the aggregate middle class income is a greater percentage of over-all GDP. So consumer demand is dampened and the supply side players must compete on price and the offer of easy debt. Raising the minimum wage is a Demand Side strategy, much like Obama’s tax strategy has (mostly) been.

      So, you’re right, it’s not about helping Walmart or McDonald’s but it is about finding out HOW to help the workers and the country as a whole – which needs to include investors as well. The economy does grow and more and more is ever available to us, but the “us” can in many cases be a very narrow set of people. The right way to look at the ‘desired’ economy is to look for way to creat balance and overall prosperity.

      • December 3, 2013 at 1:05 pm

        So why not raise the minimum wage to $50 an hour? Oh, somebody has to pay for it, and oh, and more of the remaining jobs where the US is still competitive will get outsourced (or “undocumented workers will take below minimum wage jobs) as well. The law of unintended consequences.

        • Josh
          December 3, 2013 at 1:18 pm

          Yes, you’re right. You’ve successfully skewered your straw man.

          And nobody has suggested a $50 minimum wage for those reasons.

        • December 3, 2013 at 1:33 pm

          You do realize that $50 was arbitrary. So what is the right level that balances all the different factors and WHO is going to pay for it at ANY level?

        • Mark
          December 5, 2013 at 1:52 pm

          Hi Abe – I guess the point here is that an arbitrary minimum wage level is just not useful for discussion. Obviously $50 an hour wouldn’t work financially, so no one would propose that.

          $10 an hour is a different matter. That rate would fit into Walmart’s profit margin. So potentially it could be paid by entirely by investors. Of course it wouldn’t, at least not entirely. Walmart would try to shift the costs – and as I always say/joke, ‘all costs trickle down.’ As many have pointed out many times, the price of goods might jump up by as much as wages increase, resulting in nothing more than inflation. But that particular ‘law’ of unintended consequences is not easily verified with the data. It’s more of a hunch and a particularly oversimplified one at that. Given the nature of markets, the costs of the wages will spread out looking for a comfortable home. Some costs would trickle down to vendors and some, I believe, would claw its way back up to investors. The bull-run has extended beyond reason in any case. One clear ‘intended consequence’ is that the US government would be less on the hook to subsidize Walmart’s employees, and would therefore face fewer pressures to raises taxes. That’s a possible payback to investors who have benefited from the investor friendly tax policies of the last 30 years.

          No, I can’t sew everything up nicely for you. But experience with watching different strategies tried over the course of my lifetime has convinced me that flatter (income/wealth) economies are much healthier. And that a dignified, prosperous low-income working class is considerably more beneficial to the economy and to society than a speculative wealthy ownership class mostly watching the boom – bust cycles (that they themselves foster) trying to pick a wave to ride.

        • December 3, 2013 at 3:35 pm

          A little Tylenol will soothe aches and pains. A lot will kill you. Similarly, raising the minimum wage to $50 an hour might not work, but raising it to $15 an hour would probably help.

  6. badmax
    December 3, 2013 at 10:20 am

    Walmart pays 18 billion in taxes per year (approx. 8,100$ per employee). Can you really blame them for trying to get their money’s worth? How about some tax credits for raising the minimum wage? Uncle Sam would save on costs, collect a small premium at the personal income level and the employees would get more disposable income.

    • RTG
      December 3, 2013 at 7:40 pm

      Except for some of those taxes go to pay for things that Walmart needs to operate. Like police protection in the neighborhoods where they are located. Or paved roads on which to drive their delivery trucks. Or a public education system so their customers and employees can read the labels in their stores.

      Frankly, I think Walmart gets off fairly cheap.

    • Mark
      December 5, 2013 at 3:08 pm

      Hi badmax, While I agree that subsidizing wages is better than subsidizing underpaid workers with government programs and other looks-like-giveaways, I feel strongly that a tax-credit subsidy-based economy is wrong. I’m not against all tax credits, but propping up the minimum wage is too big. Without any credits, Walmart will be able to deduct every penny of the wage increase from the income reported on their taxes and that should do them quite nicely. Hourly wages represent the lion’s share of costs beyond cost of goods sold and the tax savings will be substantial. To actually subsidize wages also adds unnecessary complexity. As such the potential for unintended consequences is greater (and more mysterious) and the solution looks more like cronyism. Cronyist market supports have been the pattern that we’ve seen over the last couple of decades and both sides of the political spectrum see that as a mistake (although neither side acts to restrain it). I think it’s time to get the US government out of the business of paying Walmart’s employees for them.

  7. Michael L.
    December 3, 2013 at 11:24 am

    I suspect there’s some lower limit beyond which Walmart couldn’t lower wages and keep workers coming into work, although I don’t pretend to know what this limit is. There probably isn’t even one such limit but several of them depending on the worker. If Walmart keeps lowering wages and having them replaced by social welfare programs workers might decide to do whatever they have to to keep welfare benefits coming in instead of going to work at Walmart. It’s true that some welfare benefits require recipients to work in return for them but this kind of “work” might be better than Walmart especially if Walmart’s wages have become very low. This is directly related to the basic income, which, by the way, I support.

    As said by an earlier responder, the basic income could result in a decrease in labor supply if it were set high enough. But, as you said, people also engage in a lot of activities that look like work for no pay at all. Also, just because labor supply might decrease due to a basic income, that doesn’t mean that a basic income is bad policy. The concern is that with a basic income and more economic security that’s not dependent on selling their labor, people might have more time to get into bad habits like drugs, etc. That of course could happen. But they could also spend more time caring for friends and family members, studying to improve their skills, engaging in civic pursuits to improve their schools and communities, etc.

    If you’re interested here’s a website that has a lot more info on the basic income guarantee:

    http://www.usbig.net/index.php

    In full disclosure I’ve been involved with the group on this website for a number of years.

  8. Mark
    December 3, 2013 at 11:57 am

    You haven’t suggested one obvious strategy, which would be to end financial supports for those at the bottom of the economy. This would force employers to make up the difference. In cases where employees remained stuck in such jobs, the decline in program services and financial supports would make them unhappier and less productive, thus increasing the pressure on the corps to address the actual economics and their business model. A brutal strategy with the vulnerable on the spear point (I’m not really suggesting this), but it would give us vision into what’s really going on and how the markets really behave. That is the intrinsic problem with government programs; we lose sight of how things might otherwise work.

    But no, I’m not pitching for the above approach; I agree with your idea. Still we might do the above as well as forcing a wage hike. Take away ‘most’ of the artificial supports and then raise the minimum wage significantly (and as you said, tie it to inflation). This would test the theory of how income affects of lower income consumer behavior and therefore Walmart profitability. In general I believe in supporting advancement for the underclass with free and excellent schooling and healthcare and disagree with direct disbursements which are distorting. That said – I agree with the minimum wage. One downside in this case might be that Walmart wields so much power with its vendors that it would just double down on them for supply chain driven cost reduction. From the couple of vendor biz people I’ve talked to, that system is already as tight as a wire.

  9. December 3, 2013 at 5:17 pm

    Thinking about the conjecture that as a company grows larger they accrue more benefit from wage rises,(because they employ a more significant proportion of a population which aligns their goals more closely with the whole population’s), whatever goal alignment there is is surely trumped by their size extinguishing competition for workers. Even within a small town, if someone (Costco? I don’t know, there’s no Walmart in Oz) opened up a similar sized (in terms of workforce) store nearby and offered to pay workers $1/hr, Walmart would lose workers, possibly forcing them to increase wages. Walmart’s sheer size looks to have killed this form of competition, so they are a monopolistic price setter. If this is a cause of their low wages, the best policy to introduce would have the effect of reducing the size of very large businesses, although it might need to do it indirectly, in order to avoid the attention of the Waltons.
    Other posters have also referred to Walmar’s excessive market power over suppliers, which really prevents capitalism functioning in any sphere where Walmart operate.

  10. December 4, 2013 at 12:25 am

    In aggregate of course, the effect of destroying the middle class is that corporations have gutted their customer base. They don’t even pay taxes and we are taxed to support their roads and their employees. A corporation since it is now considered a person is a two year old. This prolonged temper tandrum is destroying the corporation itself. We have to be the adult supervision. Walmart will pay more then other employers will be forced to follow. As demand for goods and services rises so too does demand for workers. We all need to grow a spine or else elect Elizabeth Warren to finally get some anti-trust going on.

  11. Joshua
    December 5, 2013 at 6:44 am

    FT has a really good blog post summarizing the econ blogosphere argument about raising minimum wages, complete with a nice collection of pro/con bullets: http://ftalphaville.ft.com/2013/12/04/1712102/should-the-us-raise-the-minimum-wage-thats-not-a-hook-we-actually-dont-know/

    The theoretical conclusion seems to be: there are better policies to achieve the target outcomes of higher minimum wages.

    The (politically) practical conclusion is more ambiguous based on existing vs new policy considerations:
    - changing the parameter of an existing policy seems easier than introducing a new policy
    - existing policies have established stakeholders in entrenched positions.

    • December 5, 2013 at 6:48 am

      Thanks!

    • Mark
      December 5, 2013 at 1:12 pm

      Excellent article. Thx. I still vote for the increased minimum wage. Flatter socio-economic systems are inherently healthier. Don’t have a detailed ‘quantifiable’ argument, but would argue that broader evidence over time and over different strategies tried in different countries demonstrates it. Wide income and wealth differentials produce incentives for specualtive investment habits and boom and economic outcomes. Bad wages at the bottom of the income ladder disincentivizes the most incentives-challenged group. And in my view all other forms of ‘stimulus’ are much more susceptible to cronyism and unintended consequences.

      • December 5, 2013 at 1:48 pm

        “Flatter socio-economic systems are inherently healthier.” Says who? I was born in Communist Hungary with its flat socio-economic system. Every day I thank God, the US government and the US military for airlifting us to freedom and to a much better life. My mom feels the same way.

        • Mark
          December 5, 2013 at 3:16 pm

          Adam Smith, the father of capitalism as a concept. I’m a staunch believer in capitalism / free enterprise so you’re arguing with the wrong person on the wrong point here. I’m comparing free market economies that mantain a flatter compensation structure to those that distort based on capital concentration at the top. Adam Smith warned against this outcome, as capital would naturally accumulate at the top and choke on itself (again per the father of capitalism), which is why Adams advocated progressive taxation as a good counterweight way back at the beginning of the industrial revolution.

  12. SamChevre
    December 5, 2013 at 1:40 pm

    I’m very unconvinced that a higher minimum wage would help inequality among workers much at all.

    On Wal-Mart specifically, they supported the last increase in the minimum wage; the cynical view was that they thought it would raise their competitors’ costs more than their own.

    I would be much in favor of a national basic income; that said, I see no reason to assume that someone’s ability to earn money is a good measure of their value, so I do not see a problem with someone working and still receiving net benefits from taxpayers.

  13. rob
    December 8, 2013 at 1:10 pm

    Food stamps and Medicaid paid for by higher-income taxpayers are much better and more progressive social and economic policies than either raising the minimum wage or guaranteed income.

    Some small businesses with narrow profit margins will have to pay for a raise in minimum wage (that’s regressive) and both raising the minimum wage and guaranteed income play into a market equilibrium than can backfire through inflation. Why flee food stamps and Medicaid, two of the best welfare-state models we have, for the sake of subserving a wage economy without guaranteed food and health, where you’d have to buy health insurance and where the wage-earner buys discount junk food with cash at a 7-Eleven rather than at a supermarket where fresh produce are at least available and encouraged by the stamps?

    Medicaid and food stamps are great. They directly, without any economic mediation, give people who need healthy (more or less) food and health care exactly those needs. Raising the minimum wage plays into the economic equilibrium — and who knows how that will play for sure? — without providing those people’s actual needs.

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