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WebMemo #899 on Jobs and Jobs and Labor Policy

October 28, 2005

Wal-Mart's Perverse Strategy on the Minimum Wage

By

For those conservatives who are still unclear on the distinction between big business and the free-market, consider exhibit #1: Wal-Mart CEO Lee Scott's rallying cry on October 24th for a higher federal minimum wage. Wal-Mart has been a target of liberal activists in recent years, and so Scott's announcement may cause some cognitive dissonance. It should not.

 

Big labor is on one side. Big business is on the other. And then there is the typical American consumer and taxpayer. We should not confuse these three.

 

The free market works to the advantage of the typical citizen and suffers relentless assault from special interests that profit from its disfiguration. Big labor favors taxpayer-guaranteed benefits, curtailed competition, and protection from cheap labor (at home and abroad), while the strategy of many big businesses is to lobby for corporate welfare, tax breaks, and ways to stifle competition. Small businesses are forced to play the market purely and without any favors, lacking the power to lobby politicians. Until its latest move, Wal-Mart was more of a pure player, making profits by innovating in the marketplace.

 

Most people would agree with the principle that in a free society, Wal-Mart should be free to engage employees with whatever compensation package the two parties both accept. When Wal-Mart recently came under fire (wrongly) over its health benefits, it unwisely responded by suggesting a number of so-called socially conscious policies, including calling for a government role regulating the compensation of its competitors.

 

No single issue is more confusing to legislators who want to do the right thing than the minimum wage because on the surface it symbolizes "justice for the little guy." But truth is rarely superficial in economics. In fact, the poorest of the poor are kept out of the labor market when the price of low-skilled labor is set artificially high through minimum wages. A minimum wage of $6 an hour makes it illegal for a single mother to work for $5 an hour, even if she wants to.

 

Why would a government deny an individual the freedom to work? Because she deserves more, some argue. But regardless of what a low-skilled worker deserves, unemployment is what she gets when a minimum wage is imposed. There is no debate among serious economists that this is true.

 

A higher minimum wage also forces higher costs on small businesses in small towns. Yes, those mom-and-pop stores are exactly the American institutions that Wal-Mart is competing against. This means that the corporate strategy of manipulating the price of labor is more than a PR stunt, as some critics claim.

 

Scott's most egregious statement is this one: "We can see first-hand at Wal-Mart how many of our customers are struggling to get by. Our customers simply don't have the money to buy basic necessities between pay checks."

 

That is a surprising statement, given the 9.4 percent rise in Wal-Mart sales over the last 5 years. As for poor customers, surely Scott knows that the number of people living below the official poverty line is roughly the same as it was in 1996, the last time the minimum wage was raised, even though the population has grown by millions. The result is a poverty rate that's a full percentage point lower, even though the minimum wage hasn't changed.

 

Only 2 percent of America's workers make the minimum wage, but 5 percent of the workforce is unemployed. Which group needs the most help? Consider also that most minimum wage workers are part-timers and under 25 years old and that half are bound for a raise within a year. Clearly, raising the minimum wage won't help the unemployed at all and will only make their job opportunities scarcer.

 

Wal-Mart often honors its rural roots and maintains its headquarters in small-town Arkansas. But the idea of a national wage is actually hostile to rural communities. Small towns have lower costs, meaning that its workers don't need a "city" wage to pay for the exact same things that urban residents buy-especially real estate. So in effect, when the national government imposes a national price on hourly labor, cities and big companies are given a competitive advantage at the expense of small, rural employers.

 

After a private internal memo on controlling medical insurance costs was leaked, Wal-Mart is now being hammered anew by critics. These are exactly the kind of people who want to control the private affairs of employers and employees. But American firms from GM to Delphi to Northwest are becoming hamstrung by their exploding health care costs, potentially harming American competitiveness. The lesson should be that businesses-which are not obligated to provide any health care to employees-should be free to compensate employees however they and their employees see fit. Congress could remedy the mess in a single stroke by treating benefits as income under the tax code.

 

What is lost in this debate is that Wal-Mart has been a major factor in enriching America's poorest consumers. Americans can buy more goods (including medicines, clothing, and fresh food) than ever before thanks to Wal-Mart's effect of lowering prices in real terms. It is a shame the firm has chosen to muddy this legacy as a poverty fighter with this misguided attempt to raise every employer's labor costs.

 

The Wal-Mart endorsement of a higher minimum wage should not give comfort to any senator or congressman who thinks that he or she can now support it as a conservative. In the end, it doesn't matter who is calling for a higher minimum wage. It is a bad idea whether it comes from the AFL-CIO, a Fortune 500 company, or the North Pole. Congress should never pass legislation that artificially controls wages or prices.

 

Tim Kane, Ph.D. is the Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

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