Some Economics of Wal-Mart
By David Henderson
Last month, I received an e-mail from a high school student named Kelsey Stolz and I took some time to reply. I think our correspondence would be of wider interest. Here it is.
Kelsey: I am a junior in high school researching Wal-Mart’s impact on United States retail and how they keep their prices low for my AP US History class. My research has lead me to find that the reason why Wal-Mart has been able to maintain their status is by exploiting their staff by violating labor laws and offering few benefits.
David: It is not accurate to say that that is “the” reason. There are many reasons. One of the main ones is that Wal-Mart has an amazing technology that allows it to get information about what items are in short supply quickly to its warehouses and thus gets huge efficiencies from this method. Related to this are large economies of scale. These have nothing to do with wages. It is true that Wal-Mart pays low wages and offers few benefits. This is another reason for their low costs. I doubt that their violations of labor laws are that important in keeping costs down, although your point about “few benefits” is well taken.
Kelsey: Do you believe Wal-Mart will be able to remain successful or will the worker strikes and violation of labor laws cause the corporation to raise their prices?
David: I don’t think that violation of labor laws will cause them to raise their prices. If, as you say, violation of labor laws is a factor in keeping prices low, then violating those laws would help them keep prices low. I guess I don’t get your reasoning here. Re worker strikes, most of what I have read on this suggests that most Wal-Mart workers, like most U.S. workers in general, do not see themselves as being better off with a union. So, no, I don’t see that as being a factor.
Kelsey: Does this mean it is unadvisable to invest in Wal-Mart stock?
David: I can’t legally give investment advice. What I can say, though, is that any information that you uncover is likely already to be capitalized in the price of Wal-Mart stock. Therefore I myself would not invest in, or disinvest in, Wal-Mart stock based on public information: the stock price already reflects that information.
Kelsey: In 10 years will Wal-Mart be more successful [or] will they fail to keep their status?
David: My guess is that in 10 years Wal-Mart will be less successful because imitators will chip away at their market share. But that’s just a guess.
One thing that you don’t mention is the minimum wage. Wal-Mart supported increasing the minimum wage a few years ago. The reason, I believe, is that they want to price out of business their lower-wage, Mom-and-Pop competitors. So if President Obama does succeed in getting the minimum increased, that will help Wal-Mart.