May 20, 2005

May 20, 2005 | Commentary on Social Security

State Should Stop Targeting Wal-Mart

Gov. Robert L. Ehrlich Jr. surely will catch flak for vetoing the "Wal-Mart bill."

The General Assembly hoped to force the giant retailer to pay 8 percent of payroll toward the health care of its workers, but the veto and its aftermath will be watched closely around the country. At stake is the extent to which a government can dictate the terms of work - such as the proposed $1 minimum wage increase and the new benefits requirement - but everyone who understands unintended consequences will cheer Mr. Ehrlich's leadership.

Andrew L. Stern, head of the Service Employees International Union (SEIU), is the force behind the bill, which is part of his $25-million-a-year crusade against Wal-Mart. In a recent debate, Mr. Stern railed against company profits and singled out the Walton family's wealth. True, Sam Walton's widow and children control roughly 39 percent of the company's stock, worth about $90 billion, but is Mr. Stern the last guy in America to understand that profits are a good thing? Only profitable companies grow and create more jobs.

With membership in a steep decline in America's private sector, labor unions have targeted Wal-Mart as their whipping boy. Hostility toward the creator of 1.2 million American jobs may seem odd, but many Wal-Mart jobs pay minimum wage and don't come with health benefits. Nobody disagrees that the poor need good health care, but the notion that a job is worthless without benefits is like saying a car is useless without a sunroof. When expensive options are mandatory, poor people get priced out of the market.

In a larger sense, is it valid to analyze the social effects of an entire company by looking only at the work side of things? Technically, Wal-Mart produces retail service. It serves customers by moving goods from wholesalers to accessible big-box stores. From an economist's perspective, big boxes make sense: There's much more efficiency in shopping for five things in one store instead of across seven. That means less traffic, less time wasted, even less fossil-fuel use, right?

Wal-Mart's innovations range from a large roof to a lean supply chain, which enable the company to charge less than do many competitors. American consumers, including a majority of union households who shop at Wal-Mart, will testify how low prices make them effectively richer.

At the macroeconomic level, the chain's impact is even more impressive. The existence of Wal-Mart dented the rise in overall inflation so much that Jerry Huasman, an economist from the Massachusetts Institute of Technology, is calling on the federal government to change the way it measures prices. Translation: Wal-Mart is fighting poverty faster than government accountants can keep track.

Surely, keeping the cost of labor down is an essential part of its price strategy, but that too comes with an upside, even for workers. Maximizing labor efficiency involves higher productivity, enhanced training and job satisfaction. Turnover is impressively low at Wal-Mart, which flies in the face of critics who say it's a lousy place to work.

So far, SEIU has been unable to win the votes of Wal-Mart workers, so it's trying to manipulate the votes of local legislators. The unions hope legislation against Wal-Mart will start a trend of government intervention into private labor contracts. It's a tripwire. How long before Annapolis bureaucrats tell other Maryland entrepreneurs where to sell, whom to hire and what to produce? One must begin by questioning the premise: Why should a state government have any say in a work contract between free, consenting parties? And one must end by thinking about the likely consequences.

In a globalized economy, companies have tremendous flexibility about where to locate. When a state enacts "labor-protecting" laws, it drives employers away. If enacted, the Maryland bill probably would kill a planned Wal-Mart distribution center in Somerset County. It also would jeopardize many of the 15,000 Wal-Mart jobs in the state.

The negative impact of labor protectionism isn't idle theory. A new cross-country study by a team of MIT economists led by Ricardo Caballero finds that "job security regulation clearly hampers the creative-destruction process" by which old, low-paying jobs are replaced by newer, safer, higher-paying ones. The research confirms what we know about Europe, where countries such as France pat themselves on the back for generous social benefits while citizens suffer unemployment rates double the U.S. average.

If Maryland wants to create good jobs, the legislature cannot play vanguard. Free companies, not concerned governments, create good jobs. What good is it to create a worker's paradise that has no workers?

Tim Kane is a research fellow in the Center for Data Analysis at The Heritage Foundation. He is a veteran Air Force intelligence officer, and former San Diego software entrepreneur.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

Related Issues: Social Security

First appeared in the Baltimore Sun