What's Good for Wal-Mart...
by John Miller
Dollars and Sense magazine, January/February
2006
"Who's Number One? The Customer!
Always!" The last line of Wal-Mart's company cheer just about
sums up the Wall Street Journal editors' benign view of the behemoth
corporation. But a more honest answer would be Wal-Mart itself:
not the customer, and surely not the worker.
The first retail corporation to top the
Fortune 500, Wal-Mart trailed only Exxon-Mobil in total revenues
last year. With 1.6 million workers, 1.3 million in the United
States and 300,000 offshore, Wal-Mart is the largest private employer
in the nation and the world's largest retailer.
Being number one has paid off handsomely
for the family of Wal-Mart founder Sam Walton. The family's combined
fortune is now an estimated $90 billion, equal to the net worth
of Bill Gates and Warren Buffett combined.
But is what's good for the Walton family
good for America? Should we believe the editors that Wal-Mart's
unprecedented size and market power have redounded not only to
the Walton family's benefit but to ours as well?
Low Wages and Meager Benefits
Working for the world's largest employer
sure hasn't paid off for Wal-Mart's employees. True, they have
a job, and others without jobs line up to apply for theirs. But
that says more about the sad state of today's labor market than
the quality of Wal-Mart jobs. After all, less than half of Wal-Mart
workers last a year, and turnover at the company is twice that
at comparable retailers.
Why? Wal-Mart's oppressive working conditions
surely have something to do with it. Wal-Mart has admitted to
using minors to operate hazardous machinery, has been sued in
six states for forcing employees to work off the books (i.e.,
unpaid) and without breaks, and is currently facing a suit brought
by 1.6 million current and former female employees accusing Wal-Mart
of gender discrimination. At the same time, Wal-Mart workers are
paid less and receive fewer benefits than other retail workers.
Wal-Mart, according to its own reports,
pays an average of $9.68 an hour. That is 12.4% below the average
wage for retail workers even after adjusting for geography, according
to a recent study by Arindrajit Dube and Steve Wertheim, economists
at the University of California's Institute of Industrial Relations
and long-time Wal-Mart researchers. Wal-Mart's wages are nearly
15% below the average wage of workers at large retailers and about
30% below the average wage of unionized grocery workers. The average
U.S. wage is $17.80 an hour; Costco, a direct competitor of Wal-Mart's
Sam's Club warehouse stores, pays an average wage of $16 an hour
(see box on p. 13).
Wal-Mart may be improving its benefits,
as the Journal's editors report, but it needs to. Other retailers
provide health care coverage to over 53% of their workers, while
Wal-Mart covers just 48% of its workers. Costco, once again, does
far better, covering 82% of its employees. Moreover, Wal-Mart's
coverage is far less comprehensive than the plans offered by other
large retailers. Dube reports that according to 2003 IRS data,
Wal-Mart paid 59% of the health care costs of its workers and
dependents, compared to the 77% of health care costs for individuals
and 68% for families the average retailer picks up.
A recent internal Wal-Mart memo leaked
to the New York Times confirmed the large gaps in Wal-Mart's health
care coverage and exposed the high costs those gaps impose on
government programs. According to the memo, "Five percent
of our Associates are on Medicaid compared to an average for national
employees of 4 percent. Twenty-seven percent of Associates' children
are on such programs, compared to a national average of 22 percent.
In total, 46 percent of Associates' children are either on Medicaid
or are uninsured."
A considerably lower 29% of children of
all large-retail workers are on Medicaid or are uninsured. Some
7% of the children of employees of large retailers go uninsured,
compared to the 19% reported by Wal-Mart.
Wal-Mart's low wages drag down the wages
of other retail workers and shutter downtown retail businesses.
A 2005 study by David Neumark, Junfu Zhang, and Stephen Ciccarella,
economists at the University of California at Irvine, found that
Wal-Mart adversely affects employment and wages. Retail workers
in a community with a Wal-Mart earned 3.5% less because Wal-Mart's
low prices force other businesses to lower prices, and hence their
wages, according to the Neumark study. The same study also found
that Wal-Mart's presence reduces retail employment by 2% to 4%.
While other studies have not found this negative employment effect,
Dube's research also reports fewer retail jobs and lower wages
for retail workers in metropolitan counties with a Wal-Mart. (Fully
85% of Wal-Mart stores are in metropolitan counties.) Dube figures
that Wal-Mart's presence costs retail workers, at Wal-Mart and
elsewhere, $4.7 billion a year in lost earnings.
In short, Wal-Mart's "everyday low
prices" come at the expense of the compensation of Wal-Mart's
own employees and lower wages and fewer jobs for retail workers
in the surrounding area. That much remains true no matter what
weight we assign to each of the measures that Wal-Mart uses to
keep its costs down: a just-in-time inventory strategy, its ability
to use its size to pressure suppliers for large discounts, a routinized
work environment that requires minimal training, and meager wages
and benefits.
How Low are Wal-Mart's Everyday Low Prices?
Even if one doesn't subscribe to the editors'
position that it is consumers, not Wal-Mart, who cause job losses
at downtown retailers, it is possible to argue that the benefit
of Wal-Mart's low prices to consumers, especially low-income consumers,
outweighs the cost endured by workers at Wal-Mart and other retailers.
Jason Furman, New York University economist and director of economic
policy for the 2004 Kerry-Edwards campaign, makes just such an
argument. Wal-Mart's "staggering" low prices are 8%
to 40% lower than people would pay elsewhere, according to Furman.
He calculates that those low prices on average boost low-income
families' buying power by 3% and more than offset the loss of
earnings to retail workers. For Furman, that makes Wal-Mart "a
progressive success story."
But exactly how much savings Wal-Mart
affords consumers is far from clear. Estimates vary widely. At
one extreme is a study Wal-Mart itself commissioned by Global
Insight, an economic forecasting firm. Global Insight estimates
Wal-Mart created a stunning savings of $263 billion, or $2,329
per household, in 2004 alone.
At the other extreme, statisticians at
the U.S. Bureau of Labor Statistics found no price savings at
Wal-Mart. Relying on Consumer Price Index data, the BLS found
that Wal-Mart's prices largely matched those of its rivals, and
that instances of lower prices at Wal-Mart could be attributed
to lower quality products.
Both studies, which rely on the Consumer
Price Index and aggregate data, have their critics. Furman himself
allows that the Global Insight study is "overly simplistic"
and says he "doesn't place as much weight on that one."
Jerry Hausman, the M.I.T. economist who has looked closely at
Wal-Mart's grocery stores, maintains that the CPI data that the
Bureau of Labor Statistics relies on systematically miss the savings
offered by "supercenters" such as Wal-Mart. To show
the difference between prices at Wal-Mart and at other grocers,
Hausman, along with Ephraim Leibtag, USDA Economic Research Service
economist, used supermarket scanner data to examine the purchasing
patterns of a national sample of 61,500 consumers from 1988 to
2001. Hausman and Leibtag found that Wal-Mart offers many identical
food items at an average price about 15%-25% lower than traditional
supermarkets.
While Hausman and Leibtag report substantial
savings from shopping at Wal-Mart, they fall far short of the
savings alleged in the Global Insight study. The Hausman and Leibtag
study suggests a savings of around $550 per household per year,
or about $56 billion in 2004, not $263 billion. Still, that is
considerably more than the $4.7 billion a year in lost earnings
to retail workers that Dube attributes to Wal-Mart.
But if "Wal-Mart hurts wages, not
so much in retail, but across the whole country," as economist
Neumark told Business Week, then the savings to consumers from
Wal-Mart's everyday low prices might not outweigh the lost wages
to all workers. (Retail workers make up just 11.6% of U.S. employment.)
Nor do these findings say anything about
the sweatshop conditions and wages in Wal-Mart's overseas subcontractors.
One example: A recent Canadian Broadcasting Corporation investigative
report found that workers in Bangladesh were being paid less than
$50 a month (below even the United Nation's $2 a day measure of
poverty) to make clothes for the Wal-Mart private label, Simply
Basic. Those workers included 10- to 13-year-old children forced
to work long hours in dimly lit and dirty conditions sewing "I
Love My Wal-Mart" t-shirts.
Making Wal-Mart Do Better
Nonetheless, as Arindrajit Dube points
out, the relevant question is not whether Wal-Mart creates more
savings for consumers than losses for workers, but whether the
corporation can afford to pay better wages and benefits.
Dube reasons that if the true price gap
between Wal-Mart and its retail competitors is small, then Wal-Mart
might not be in a position to do better--to make up its wage and
benefit gap and still maintain its price advantage. But if Wal-Mart
offers consumers only minor price savings, then its lower wages
and benefits hardly constitute a progressive success story that's
good for the nation.
If Wal-Mart's true price gap is large
(say, the 25% price advantage estimated by Hausman), then Wal-Mart
surely is in a position to do better. For instance, Dube calculates
that closing Wal-Mart's 16% overall compensation gap with other
large retailers would cost the company less than 2% of sales.
Raising prices by two cents on the dollar to cover those increased
compensation costs would be "eminently absorbable,"
according to Dube, without eating away much of the company's mind-boggling
$10 billion profit (2004).
Measures that set standards to force Wal-Mart
and all big-box retailers to pay decent wages and provide benefits
are beginning to catch on. Chicago, New York City, and the state
of Maryland have considered or passed laws that would require
big-box retailers to pay a "living wage" or to spend
a minimum amount per worker-hour for health benefits. The Republican
board of Nassau County on Long Island passed an ordinance requiring
that all big-box retailers pay $3 per hour toward health care.
Wal-Mart's stake in making sure that such proposals don't become
law or spread nationwide goes a long way toward explaining why
80% of Wal-Mart's $2 million in political contributions in 2004
went to Republicans.
Henry Ford sought to pay his workers enough
so they could buy the cars they produced. Sam Walton sought to
pay his workers so little that they could afford to shop nowhere
else. And while what was good for the big automakers was probably
never good for the nation, what is good for Wal-Mart, today's
largest employer, is undoubtedly bad for economic justice.
John Miller teaches economics at Wheaton
College and is a member of the Dollars & Sense collective.
Sources: "Is Wal-Mart Good for America?"
Wall Street Journal, 12/3/05; "Gauging the Wal-Mart Effect,"
WSJ, 12/03/05; Arindrajit Dube & Steve Wertheim, "Wal-Mart
and Job Quality--What Do We Know, and Should We Care?" 10/05;
Jason Furman, "Wal-Mart: A Progressive Success Story,"
10/05; Leo Hindery Jr., "Wal-Mart's Giant Sucking Sound,"
10/05; A. Bernstein, "Some Uncomfortable Findings for Wal-Mart,"
Business Week Online, 10/26/05, and "Wal-Mart: A Case for
the Defense, Sort of," Business Week Online, 11/7/05; Dube,
Jacobs, and Wertheim, "The Impact of Wal-Mart Growth on Earnings
throughout the Retail Sector in Urban and Rural Counties,"
Institute of Industrial Relations Working Paper, U-C Berkeley,
10/05; Dube, Jacobs, and Wertheim, "Internal Wal-Mart Memo
Validates Findings of UC Berkeley Study," 11/26/05; Jerry
Hausman and Ephraim Leibtag, "Consumer Benefits from Increased
Competition in Shopping Outlets: Measuring the Effect of Wal-Mart,"
10/05; Hausman and Leibtag, "CPI Bias from Supercenters:
Does the BLS Know that Wal-Mart Exists?" NBER Working Paper
No. 10712, 8/04; David Neumark, Junfu Zhang, and Stephen Ciccarella,
"The Effects of Wal-Mart on Local Labor Markets," NBER
Working Paper No. 11782, 11/05; Erin Johansson, "Wal-Mart:
Rolling Back Workers' Wages, Rights, and the American Dream,"
(American Rights at Work, 11/05); Wal-Mart Watch, "Spin Cycle";
CBC News, "Wal-Mart to cut ties with Bangladesh factories
using child labour," 11/30/05; National Labor Committee,
"10 to 13-year-olds Sewing 'I Love My Wal-Mart' Shirts,"
12/05; Global Insight, "The Economic Impact of Wal-Mart,"
2005.
The Costco Alternative? Wall Street prefers
Wal-Mart
In an April 2004 online commentary, Business
Week praised Costco's business model but pointed out that Costco's
wages cause Wall Street to worry that the company's "operating
expenses could get out of hand." How does Costco compare
to low-wage Wal-Mart on overhead expenses? At Costco, overhead
is 9.8% of revenue; at Wal-Mart, it is 17%. Part of Costco's secret
is that its better paid workers are also more efficient: Costco's
operating profit per hourly employee is $13,647; each Wal-Mart
employee only nets the company $11,039. Wal-Mart also spends more
than Costco on hiring and training new employees: each one, according
to Rutgers economist Eileen Appelbaum, costs the company $2,500
to $3,500. Appelbaum estimates that Wal-Mart's relatively high
turnover costs the company $1.5 to $2 million per year.
Despite Costco's higher efficiency, Wall
Street analysts like Deutsche Bank's Bill Dreher complain that
Costco's corporate philosophy is to put its customers first, then
its employees, then its vendors, and finally its shareholders.
Shareholders get the short end of the stick." Wall Street
prefers Wal-Mart's philosopy: executives first, then shareholders,
then customers, then vendors, and finally employees.
In 2004, Wal-Mart paid CEO Lee Scott $5.3
million, while a full-time employee making the average wage would
have received $20,134. Costco's CEO Jim Senegal received $350,000,
while a full-time average employee got $33,280. And Business Week
intimates that the top job at Costco may be tougher than at Wal-Mart.
"Management has to hustle to make the high-wage strategy
work. It's constantly looking for ways to repackage goods into
bulk items, which reduces labor, speeds up Costco's just-in-time
inventory, and boosts sales per square foot. Costco is also savvier
... about catering to small shop owners and more affluent customers,
who are more likely to buy in bulk and purchase higher-margin
goods."
Costco's allegedly more affluent clientele
may be another reason that its profit per employee is higher than
Wal-Mart's and its overhead costs a lower percentage of revenue.
However, Costco pays its employees enough that they could afford
to shop there. As the Business Week commentary noted, "the
low-wage approach cuts into consumer spending and, potentially,
economic growth." -- Esther Cervantes
Corporate watch
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