Economists are lambasting Maryland’s “Fair Share Health Care Fund Act”, which effectively forces Wal-Mart to spend at least 8% of its payroll on health care. While I’m happy to join in the chorus, I nevertheless believe that many opponents of the legislation – and more than a few economists – need to refine their predictions about its effect.

The story I’ve heard from most opponents is: Wal-Mart will simply cut workers’ wages to make up for the extra health-care cost. To be more precise, labor supply goes up and labor demand goes down, so the equilibrium wage must fall.

Figure 1


That sounds good, but I would be very surprised if Wal-Mart suddenly told its employees that, due to the new legislation, it was cutting their pay. That would be a sure way to alienate its whole workforce: “Unfair! Unfair!”

So does this mean that there are no ill effects for workers? No. The “don’t cut wages” fairness norm works like a funny kind of price control. As long as market conditions are stable, it has no effect. But if legislation reduces the market-clearing wage, the result is a labor surplus. How big? You have to look at the difference between the new quantity demanded and the new quantity supplied at the OLD wage.

Figure 2


What? Look carefully at dashed line on Figure 2. It represents the “don’t cut wages” norm, showing that wages cannot fall below their initial level. Now look at the red line. It starts at the intersection of the new demand curve at the old wage, and runs all the way to the intersection of the new supply curve at the old wage. Since the market-clearing wage has fallen, but the actual wage stays constant, workers now want to sell more labor than employers want to buy.

In the long-run, of course, Wal-Mart may circumvent the “don’t cut wages” norm by raising wages at a rate lower than inflation. With 3% inflation and 1% raises, Wal-Mart could covertly cut real wages by 2% per year, gradually eliminating the labor surplus.

Overall, the people who say “Wal-Mart will just cut wages to make up for the extra health care costs” are actually optimists. The economic effects are likely to be a lot uglier. And so are the political effects.

How so? If the legislation just led to lower wages, there wouldn’t be any “poster children” to put on the news. Affected employees would have less money and more health care – nothing to crow about.

But if my analysis is right, there will be some lucky workers who keep their jobs, don’t immediately see their wages fall, and get extra health care. It will be easy to run a story that starts: “Economists said it would hurt workers, but meet Fred, a cashier at Wal-Mart…” So even after they do great damage, the politicians who voted for the Fair Share Health Care Fund Act will still be able to loudly claim victory.