Why Wal-Mart Will Never Pay Like Costco - Bloomberg View

Why Wal-Mart Will Never Pay Like Costco - Bloomberg View

I found this link to my old employer on one of our many local housing blogs this morning. It's an old piece on the high wages paid by Trader Joe's, Costco and a handful of other outlets. The text in the link: "A not-so-subtle message for Wal-Mart: Big retailers can pay decent wages and thrive. [Atlantic]" Here's a clip from the article:

The average American cashier makes $20,230 a year, a salary that in a single-earner household would leave a family of four living under the poverty line. But if he works the cash registers at QuikTrip, it's an entirely different story. The convenience-store and gas-station chain offers entry-level employees an annual salary of around $40,000, plus benefits. Those high wages didn't stop QuikTrip from prospering in a hostile economic climate. While other low-cost retailers spent the recession laying off staff and shuttering stores, QuikTrip expanded to its current 645 locations across 11 states.


Many employers believe that one of the best ways to raise their profit margin is to cut labor costs. But companies like QuikTrip, the grocery-store chain Trader Joe's, and Costco Wholesale are proving that the decision to offer low wages is a choice, not an economic necessity. All three are low-cost retailers, a sector that is traditionally known for relying on part-time, low-paid employees. Yet these companies have all found that the act of valuing workers can pay off in the form of increased sales and productivity. Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we've been treated to a lot of impassioned reheatings of that old standby: "Costco shows it's possible" for Wal-Mart to pay much higher wages. The addition of Trader Joe's and QuikTrip is moderately novel, but basically it's the same argument: Costco/Trader Joe's/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.

Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it's meant -- that Wal-Mart could increase its wages by 50 percent and still prosper?

I wrote about this last spring in regard to Wal-Mart and Costco. Upper-middle-class people who live in urban areas -- which is to say, the sort of people who tend to write about the wage differential between the two stores -- tend to think of them as close substitutes, because they're both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart's customer base, that's where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That's Costco's business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.

As it happens, that matters a lot. I produced the following graphic to sum up the differences that these two strategies produce: 

(*WALMART FIGURES INCLUDE SAM’S CLUB, WHICH DESPITE HAVING MORE STORES, IS MUCH LESS PROFITABLE THAN COSTCO.)
What do you see? Costco has a tiny number of SKUs in a huge store -- and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.

But what about QuikTrip and Trader Joe's? I'm going to leave QuikTrip out of it, for two reasons: first, because they're a private company without that much data, and second, because I'm not so sure about that statistic. QuikTrip's website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce. That $40,000 figure is for an assistant manager, and seems to include mandatory overtime. To this let's add a third reason: QuikTrip is a convenience store, a business that bears minimal resemblance to a department store, the category into which Wal-Mart falls. I mean, yes, you can buy candy at both places, but you can also buy a candy bar at the movie theater, and I still wouldn't head to my local Wal-Mart for a 3:30 p.m. showing of "The Butler."

Trader Joe's is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart's), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe's brand), and its demographics (college-educated, affluent, and older). "Within a 15-minute driving radius of a potential site," one expert told a forlorn Savannah journalist, "there must be at least 36,000 people with four-year college degrees who have a median age of 44 and earn a combined household income of $64K a year." Costco is similar, but with an even higher household income -- the average Costco household makes more than $80,000 a year.

In other words, Trader Joe's and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe's, it also dramatically decreases the amount of space you need for your supermarket ... which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Both these strategies work in part because very few people expect to do all their shopping at Trader Joe's, and no one expects to do all their shopping at Costco. They don't need to be comprehensive. Supermarkets, and Wal-Mart, have to devote a lot of shelf space, and labor, to products that don't turn over that often.

Wal-Mart's customers expect a very broad array of goods, because they're a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he's likely to have no idea, because no person could master 108,000 SKUs. Even if Wal-Mart did pay a higher wage, you wouldn't get the kind of easy, effortless service that you do at Trader Joe's because the business models are just too different. If your business model inherently requires a lot of low-skill labor, efficiency wages don't necessarily make financial sense.

That's not the only reason that the Trader Joe's/Costco model wouldn't work for Wal-Mart. For one thing, it's no accident that the high-wage favorites cited by activists tend to serve the affluent; lower income households can't afford to pay extra for top-notch service. If it really matters to you whether you pay 50 cents a loaf less for generic bread, you're not going to go to the specialty store where the organic produce is super-cheap and the clerk gave a cookie to your kid. Every time I write about Wal-Mart (or McDonald's, or [insert store here]), several people will e-mail, or tweet, or come into the comments to say they'd be happy to pay 25 percent more for their Big Mac or their Wal-Mart goods if it means that the workers are well paid. I have taken to asking them how often they go to Wal-Mart or McDonald's. So far, no one has reported going as often as once a week; the modal answer is a sudden disappearance from the conversation. If I had to guess, I'd estimate that most of the people making such statements go to Wal-Mart or McDonald's only on road trips.

However, there are people for whom the McDonald's Dollar Menu is a bit of a splurge, and Wal-Mart's prices mean an extra pair of shoes for the kids. Those people might theoretically favor high wages, but they do not act on those beliefs -- just witness last Thanksgiving's union action against Wal-Mart, which featured indifferent crowds streaming past a handful of activists, most of whom did not actually work for Wal-Mart.

If you want Wal-Mart to have a labor force like Trader Joe's and Costco, you probably want them to have a business model like Trader Joe's and Costco -- which is to say that you want them to have a customer demographic like Trader Joe's and Costco. Obviously if you belong to that demographic -- which is to say, if you're a policy analyst, or a magazine writer -- then this sounds like a splendid idea. To Wal-Mart's actual customer base, however, it might sound like "take your business somewhere else."

This is not actually just a piece on how Wal-Mart can only pay low wages -- I don't know how much more they could afford to pay before they started to lose customers (or the board kicked the CEO out), and neither does anyone else writing about this. I'm actually interested in the larger point: the way that things most people rarely think about -- like the number of products that a store carries -- have far-reaching effects on everything from labor, to location, to customer service and demographics. We tend to look at the most politically salient features of the stores where we shop: their size, their location, the wages that we pay. But these operations are not so simple. They are incredibly complex machines, and you can no more change one simple feature than you can pull out your car's fuel injection system and replace it with the carburetor from a 1964 Bonneville.

http://econlog.econlib.org/archives/2016/02/why_minimum_wag.html

http://econlog.econlib.org/archives/2016/02/why_minimum_wag.html

Jonathan Meer and Jeremy West have found that increases in the minimum wage destroy jobs, not so much by destroying current jobs as by reducing the growth rate of new jobs.

That makes sense if employers' investments in capital are even partially irreversible, that is, if some costs of capital investment are sunk, as seems plausible.

Here's a simple numerical example to illustrate the point.

Imagine that an employer is contemplating investing $100K in the price and installation of a piece of machinery that he expects to last 5 years. Assume for simplicity that once it is bought and installed, the salvage value is zero. (Numbers greater than zero work also, but complicate the analysis, with no additional insight.)

Assume that the current minimum wage is $7 an hour and that the employer contemplates hiring a worker for a standard work year of 2,000 hours. At that wage rate, he can find a suitable worker. Assume that there are no other components of the pay package and that there are no other costs of production. Assume that the employer expects to be able to sell the annual output from the machine/worker combination for $37,000. Assume, for simplicity, a zero real interest rate. (That, by the way, is often a bad assumption but in recent years, it is not far off.)

If the employer expects no increases in wages over the next 5 years, will he make the investment? Yes.

The reason is that his costs over the 5 years are $100K for equipment and $70K for labor, for a total of $170K. His revenues are $185K. Net profit: $15K.

But now imagine that after 2 years of operating profitably, the employer faces a minimum wage of $10 an hour.

Had he known this in advance, he would have known that his cost of labor over the 5 years would have been $14K plus $14K plus $20K plus $20K plus $20K, or $88K. So his total costs would have been $188K. Compare that to the $185K of revenue and the employer would not have invested.

But the employer has invested. The equipment cost is sunk. Will the employer continue? Yes he will. The reason: he now compares $20K of annual labor cost to $37K of annual revenue and finds that it is worthwhile to continue.

So he will not lay off the labor.

However, other potential employer/investors facing the same numbers will not make the investment. So whatever growth rate of jobs there would have been will not come about. The growth rate will be lower.

Higher wages wouldn't help fired Yelp millennial (Opinion) - CNN.com

Higher wages wouldn't help fired Yelp millennial (Opinion) - CNN.com

(CNN)What happened late last week to Talia Jane -- who became suddenly Internet famous after being fired from her job at Yelp -- fits an all-too-easy narrative: underpaid 20-something writes desperate complaint about low wages and greedy corporate employer suppresses dissent by firing her.

But millennials working for starvation pay should learn something from Jane's fate: Things could be worse, and will be, when minimum-wage laws price them out of their jobs.

For many, Jane -- who wrote an open letter to her CEO about her situation -- is a sympathetic figure. She claimed she was making just $8.15 an hour after taxes working a boring job in customer relations for Yelp/Eat24. That's not a lot of money -- especially in San Francisco, and especially for an unfulfilled college graduate with an English degree and journalism aspirations.

Jane claimed her situation was so hopeless that she often went to sleep hungry, and many of her co-workers found themselves in similar situations. (Hours after publishing the letter, Jane was fired. Yelp denies her public statements had anything to do with it).

Critics pointed out that Jane did herself no favors by whining, and was in far-from-desperate straits.

"The issue is that this girl doesn't think working a second job or getting roommates should be something she has to do in order to get ahead after three months of an entry level job in the most expensive city in the country," wrote Stefanie Williams, a fellow millennial who started out waiting tables and worked her way up to the New York City lifestyle and job she wanted.

For others, Jane's circumstances present a compelling argument for the government to raise the minimum wage. Indeed, union activists would like the state of California to raise its minimum wage from $10 to $15. Numerous cities are gradually doing so -- San Francisco will have a $15-per-hour minimum by 2018.

Younger workers might cheer this news. They shouldn't. That's because a company like Yelp wouldn't pay an employee like Jane any more money, even if forced to do so. Instead, it would never have hired her in the first place.

It may sound harsh, but the reality is that a person's labor is only worth so much. Markets are far from perfect, but competition (not always, but usually) prevents companies from getting away with drastically undervaluing their employees -- if Yelp did that, a rival could poach all its workers by offering them slightly more money.

On the other hand, if Yelp had a policy of paying workers exactly what they needed to get by, rather than exactly what their labor was worth, the company would go out of business.

That's why high-minimum-wage laws are actually bad for the very people who think they need them most: millennials. Companies that are forced to pay workers a minimum of $15 an hour won't hire from the young, inexperienced, fresh-out-of-college crowd. They can't spend that much money on an unproven, untested investment.

Millennials may not realize it, but working for low pay is a competitive advantage (and a temporary one). Older workers have more obligations -- families to provide for, house payments to make, kids' tuition costs to pay -- and can't afford to work for less. Recent graduates can't beat them on raw talent, but they can beat them on price. For hardworking young people who just need to get a foot in the door and gain some experience, the minimum wage is, as Forbes editor John Tamny put it, "a cruel barrier."

The science bears this out. Studies often find that higher minimum wages correspond with decreased youth employment In fact, if the government's explicit goal were to make it harder for young people to compete for jobs, they could scarcely design a more perfect policy.

Writing on behalf of aging workers everywhere, the Foundation for Economic Education's Isaac Morehouse satirically observed:

"The obvious solution is to make it illegal to work for low wages. Working for free is absolutely out of the question. If young and poor people could simply offer to work for little or no pay, they'd soon be gaining valuable skills and competing with us for jobs!"

The recently fired Jane may need more money, but first she needs to find a new job, period. Raising the minimum wage would only make that harder for her.

Raising the Minimum Wage Won’t Reduce Inequality | New Republic

Raising the Minimum Wage Won’t Reduce Inequality | New Republic
(See original for links in document)

Raising the Minimum Wage Won’t Reduce Inequality
BY CHRISTOS MAKRIDIS
February 5, 2016
Walmart is giving more than one million of its employees a raise later this month as part of a plan that will lift all but its newest hires to at least $10 an hour.

The move, first announced last year, follows an aggressive campaign to get the largest private employer in the U.S. to lift worker wages and coincides with a nationwide push to raise federal and state minimum wages and a prolonged period of little growth in pay.

While Walmart’s decision is at least in part a result of that pressure, it’s still the action of a private company to revamp its own wage policies, as opposed to the result of a government forcing it to lift worker pay. Proponents of requiring just that argue raising the minimum helps reduce inequality. Critics contend it can actually worsen it by driving up unemployment and weakening economy-wide labor market flexibility by raising the costs firms face.

So what does the economic research say about the impact of minimum wages on income inequality and is there a better way to reduce it?

Minimum wage fallacies

Many of the articles in the mainstream press promoting minimum wages are incompatible with basic economic principles.

The first fallacy is that changes in the minimum wage do not affect the behavioral response among firms and individuals. The second fallacy is that higher wages will force companies to innovate in order to reduce costs. Both these arguments overlook some very basic, but informative, economic principles.

The first overlooks the fact that wages are designed to compensate workers for productivity. When wages are distorted, they affect the profit-maximizing decisions that businesses make. The textbook prediction, which is generally supported in the data, is that higher minimum wages reduce employment since companies restrict the number of workers they will hire. These adverse effects are especially likely given the pace of technological change and automation.

The second overlooks the fact that there are effective and ineffective ways to stimulate innovation among businesses. The idea that making hiring more costly will spur innovation is tantamount to requiring companies to reduce the size of their physical presence so they become more productive. While these types of distortions may prompt a small fraction of companies to innovate, misallocation more generally is a major factor behind cross-country differences in productivity.

Minimum wage and inequality

Nonetheless, economists themselves have debated how minimum wages affect employer decisions for many years.

In 1994, economists David Card and Alan Krueger were the first to provide some evidence that such effects may be small. But more recently, a consensus has generally emerged that changes to minimum wages have strong effects on jobs growth.

How minimum wages affect inequality, however, remains controversial. Detecting it with standard statistical methods is very challenging because their full effects are constantly changing and require data on both individuals and companies.

Back in 1999, Princeton economist David Lee used the Consumer Population Survey (CPS) from 1979 to 1989 to argue that the declining purchasing power of the minimum wage largely explains why inequality surged in the 1980s.

Other new research, however, has put that conclusion in doubt. Perhaps the most conclusive reassessment comes from economists David Autor, Alan Manning, and Christopher Smith earlier this year. Using many more years of microdata from the CPS, as well as a different statistical approach, they found that the minimum wage explains at most 30 percent to 40 percent of the rise in wage inequality among the lowest earners.

Since economists had thought that changes in the minimum wage could explain as much as 90 percent of the shift in inequality, these new estimates are important.

How wages affect worker behavior

While the extent is still uncertain, it’s clear that the minimum wage and other wage-setting forces such as tax rates and union bargaining power do in fact affect inequality and the labor market.

My own ongoing research, which focuses on the link between such wage-setting mechanisms and company behavior, suggests labor-market distortions like raising the minimum wage can have other negative effects on workers, businesses and inequality beyond the overall impact on employment.

The first adverse effect concerns how much people work. If, for example, worker wages rise due to a government mandate, the employer may reduce the number of hours staff work, leading to lower paychecks even after the raise. That’s part of the reason why we’ve seen companies like McDonald’s increasingly try to automate tasks that were once held by people.

In addition, my research suggests one of the major ways people acquire new skills is by spending more time at work. Thus policies that lead to fewer hours could lower employees’ ability to improve their long-run earnings potential.

The second is an indirect effect on the way businesses invest in workers and design compensation and organizational policies. When companies are forced to pay higher wages, they may offset the cost by reducing how much they invest in workers. There is evidence that minimum wage laws have this effect.

This can result in weaker compensation contracts (e.g., purely salary-based), which provide employees with fewer incentives to accumulate skills. As a result, workers paid fixed wages suffer greater long-run earnings volatility than those receiving performance-based pay.

Put simply, if a recession comes and an individual loses his or her job, having more skills makes it easier to find a new position and return to the previous income level.

Minimal impact on inequality

Even setting aside all the plausible economic arguments against the minimum wage, under the best case scenario, what does it really achieve?

If the average full-time employee works 1,700 hours per year, then moving from $7.25 an hour to $9 an hour produces only about $2,975 in additional annual earnings. While some may argue that something is better than nothing, this would be at best a marginal solution to inequality.

Taking a look at the most recent 2015 Current Population Survey data and restrict the sample to full-time earners with over $10,000 earnings per year, Americans at the 90th income percentile (they earn more than 90 percent of their compatriots, or $80,000 a year) make 5.6 times as much, on average, as those at the 10th percentile ($14,200). Increasing the minimum wage to $9 an hour would put the ratio around 4.65.

In other words, even in the best of worlds—where the minimum wage has no unintended side effects—it appears to only marginally reduce inequality.

Alternatives to raising the minimum wage

Where does this leave us in trying to reduce inequality?

First, companies are welcome to raise wages at any time they want. And letting them do so may be more effective at reducing inequality than when they’re forced to because it avoids the adverse consequences such as reducing hours.

Businesses are well aware of their marginal costs and benefits—how much it costs to produce an additional unit of output versus the incremental gain. When governments set uniform wage regulations, they require all companies—each with their own and distinct marginal costs and benefits—to abide by the same rules. In contrast, when companies decide to change their own pay practices—as Walmart is doingthey do so in a more efficient way.

Second, as Stanford economist John Cochrane has remarked, instead of addressing the short-term problem of low wages, governments and companies can address the more structural problem: a lack of skills.

Companies and local governments can provide training programs and support for additional education, such as through community colleges, in order to equip workers with additional skills that translate into meaningful value for their companies. Investing in worker skills can lead to increased employee productivity and creativity, which in turn translates into sustained higher wages. And these benefits have broad spillover effects throughout the labor market and make sustainable gains in narrowing the gap between the richest and the poorest.

While the economic effects of minimum wage laws are very complex and a subject of scrutiny within the economics community, there are much better ways to deal with systematic challenges in the labor market. Getting more people to work, reducing the barriers for businesses to hire and encouraging the accumulation of new skills are all strategies for promoting sustainable long-term growth in wages.

Show This Column to Anyone Who Claims Bush Lied about WMDs in Iraq - John Hawkins - Page 1

Show This Column to Anyone Who Claims Bush Lied about WMDs in Iraq - John Hawkins - Page 1

...you have to be malicious or just an imbecile at this point to accuse Bush of lying about WMDs.

To begin with, numerous foreign intelligence agencies also believed that Saddam Hussein had an active WMD program. The "intelligence agencies of Germany, Israel, Russia, Britain, China and France" all believed Saddam had WMDs. CIA Director George Tenet also rather famously said that it was a “slam dunk” that there were weapons of mass destruction in Iraq.

Incidentally, it’s hard to fault the CIA for their conclusions when even, “In private conversations that were intercepted by U.S. intelligence, Iraqi officials spoke as if Saddam continued to possess WMD. Even Iraqi generals believed he did. In the fall of 2002, the Iraqi military conducted exercises in chemical protective gear – but not because they thought the U.S.-led coalition was going to use chemical weapons.”

Additionally, many prominent Democrats who had access to the same intelligence that George Bush did came to the same conclusion and said so publicly. If George W. Bush lied, then by default you have to also believe that Bill Clinton, Hillary Clinton, Al Gore, John Kerry, John Edwards, Robert Byrd, Tom Daschle, Nancy Pelosi and Bernie Sanders also lied. Some of them, like Hillary Clinton, even alleged that Saddam was working on nuclear weapons.

“In the four years since the inspectors left, intelligence reports show that Saddam Hussein has worked to rebuild his chemical and biological weapons stock, his missile delivery capability, and his nuclear program. He has also given aid, comfort, and sanctuary to terrorists, including Al Qaeda members, though there is apparently no evidence of his involvement in the terrible events of September 11, 2001. It is clear, however, that if left unchecked, Saddam Hussein will continue to increase his capacity to wage biological and chemical warfare, and will keep trying to develop nuclear weapons. Should he succeed in that endeavor, he could alter the political and security landscape of the Middle East, which as we know all too well affects American security.” — Hillary Clinton, October 10, 2002