Saving money and living better

Despite recent protests, Wal-Mart Stores Inc. has been benefiting low-income Americans for years.
November 26, 2012

The nation’s largest retailer received yet another snippet of bad public relations last week. The United Food and Commercial Workers International Union, which does not actually represent Wal-Mart Stores Inc. employees, planned protests outside 1,000 Wal-Mart stores on Black Friday. The fight hit the press several days beforehand, but sales were higher than last year’s annual post-turkey splurge. This is good news for the low-income individuals of America whom Wal-Mart benefits.

Wal-Mart is widely known for its low prices, but it doesn’t have the same notoriety for the positive impact of those prices. A variety of studies have found Wal-Mart to have prices 8 to 39 percent lower than its competitors. As the nation’s largest grocer, Wal-Mart has a sizeable effect on food prices. According to an independent paper by Massachusetts Institute of Technology economists Jerry Hausman and Ephraim Leibtag, the existence of big-box grocers like Wal-Mart makes consumers better off by 25 percent of annual food spending. That’s the equivalent of giving each household in America an extra $782 worth of groceries. This disproportionately benefits low- and moderate-income consumers who spend a greater fraction of their income on food. The effect on food prices alone raises the wealth of the bottom quintile by 6.5 percent.

What of Wal-Mart’s other necessities? In a 2005 study, Global Insight estimated that Wal-Mart’s low prices saved American consumers $263 billion dollars in 2004. That’s the equivalent of $2,329 per household. Again, this disproportionately benefits low-income consumers because they make up a larger portion of Wal-Mart’s customers.

From time to time, Wal-Mart receives heavy public criticism for its working conditions, but these criticisms are often propagated by myth or exaggeration. In a paper titled “Wal-Mart: a Progressive Success Story,” Jason Furman, an economic adviser to both Sen. John Kerry and President Barack Obama, debunked many of these myths. Furman analyzed a recent opening of a Wal-Mart store in Glendale, Ariz. The store received 8,000 applications for 525 jobs with wages starting as low as $6.25. Furman notes that this Wal-Mart had a lower acceptance rate than his alma mater, Harvard. At least 8,000 people believed that the opportunity at Wal-Mart was better than their present circumstance.

Perhaps the most common allegation against Wal-Mart is that the company pays its employees poorly, but the data for this allegation are inconsistent. Different studies have made contradictory conclusions about Wal-Mart wages relative to comparable jobs. These contradictions suggest that Wal-Mart wages are actually comparable to competitors. One study estimated this impact as decreasing retail wages by 4.7 billion dollars in 2000. Supposing this study true and contradictory evidence false, it’s only one side of the coin. It makes no difference to a consumer whether he earns an additional dollar or whether the cost of what he buys decreases one dollar. The Wal-Mart effect of saving consumers $263 billion with low prices dwarfs the dubious and alleged $4.7 billion in wage reductions. These disparate figures make it hard to condemn the company so easily.

Wal-Mart critics allege that its low wage forces people to need welfare programs, such as Medicaid. However, these critics omit the relevant facts. Furman outlines in his paper that 5 percent of Wal-Mart employees received Medicaid benefits, but this is less than the 6 percent average for retail employers. Of Wal-Mart employees, 81 percent are eligible for health coverage compared to 61 percent in the retail sector. Additionally, Wal-Mart is part of the mere 17 percent of all businesses that offer its part-time employees health benefits.

Critics are quick to point out that Wal-Mart earned $15.7 billion in profits last year. It can afford to pay its workers more, they allege. However, with $447 billion in revenue and $431 billion in costs, Wal-Mart operates on a profit margin of 3.5 percent. With 2.1 million employees, 1.4 million in the U.S., even a modest increase in compensation across the board would quickly erode profits. A smaller profit margin would make the company too volatile and vulnerable to sudden, uncontrollable changes in revenue and costs.

Organizers of the Black Friday protests argued for higher wages, lower-costing benefits and more predictable hours. With its tiny profit margin, Wal-Mart doesn’t have much room to squeeze on compensation. Predictability is hard to come by in the retail industry. Like Target, Wal-Mart and other big-box retailers use computer programs to schedule employees. These programs take into account the store’s necessities as well as personal preferences. Using another method would increase costs that its competitors are not incurring. A worker who requires more consistent scheduling may have a tough time finding it in a retail job.

This may not sound perfect, but for 1.4 million Americans, a job at Wal-Mart is at least as good as the alternative. For 300,000, the job has been at least as good as the alternative for over 10 years. If Wal-Mart decided to raise its wage, it would likely face two options: It could lay off workers to keep costs under control, or it would be forced to raise its prices and cut away at the $263 billion in annual benefits to American consumers. Raising prices would also cut away at the company’s niche, eroding its business strategy and potentially turning it south in a hurry.

The reality is that Wal-Mart doesn’t have magical omnipotence over wages in the economy. It is the market of competing employers and competing laborers. Wal-Mart must set its wage high enough to compete for qualified workers but not too high to be uncompetitive over prices.

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