Productivity vs. Distribution
By Arnold Kling
Jeff Madrick is not impressed with Wal-Mart.
Critics are compiling evidence that Wal-Mart’s success, while entrenched in the brilliant management of new technologies, is dependent on low labor costs…
A new study by Arindrajit Dube and Ken Jacobs of the University of California, Berkeley, has produced clear evidence of Wal-Mart’s comparatively low wages. The researchers calculate that in the San Francisco Bay Area, the company’s average wage, about $11 an hour, is roughly 30 percent below what unionized workers get in local grocery chains.
…most Wal-Mart critics say a crucial way to improve conditions is to change laws to make labor unions easier to organize. Mr. Lichtenstein says a substantial raise in the minimum wage – back to its 1980 level, before inflation eroded it – would have still more impact.
I think that this approach to looking at wages at Wal-Mart is almost a textbook example of bad economics.
Economic theory would say that low-skilled workers are not going to earn high wages. If you force employers to pay low-skilled workers high wages, then employers will higher fewer low-skilled workers. They will substitute highly-skilled workers and capital.
Economic theory also would say that Wal-Mart’s use of low-skilled workers as a way to hold down costs has benefits for others in the economy. Consumers benefit from lower prices. Shareholders benefit from profits.
Madrick says that other companies could try to imitate Wal-Mart, and he implies that this would be bad news for low-skilled workers. But it would be good news for low-skilled workers! The more competition for low-skilled labor, the higher will be their wages.
What low-skilled workers and everyone else needs is more Wal-Marts.
For Discussion. Consider four types of industries: Unionized with productivity growing (e.g., manufacturing); unionized with productivity not growing (e.g., hospital workers); nonunionized with productivity growing (e.g., Wal-Mart); nonunionized with productivity not growing (can’t think of a good example at the moment). What are the economic benefits of each category?