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

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