Walmart and the $15 Wage

Walmart and the $15 Wage

Walmart is the largest business in the world with over 1 million employees, a gross income of $44.4 billion and a profit of $15.8 billion in 2012. In the classic strategy of drive to the bottom they are focused on relentlessly pushing all costs down. This strategy is exactly what you would expect from conservative, professional managers who are focused on the next quarter bonus check. In a conservative world no one would ever challenge the correctness of this strategy.

The fact that more and more people are viewing Walmart as a pararia company in of no real concern. Walmart owns (or rents) enough congresspersons that no ‘problem legislation’ could ever get passed. There are attempts to organize the workers but, at least so far, propaganda and intimidation are keeping labor at bay. So Walmart will continue its policies until one day the black swan will arrive. (Remember when Montgomery Ward, Sears and Kmart could do no wrong.) That will be the quarter that the management bonus checks will not be so large, but since next quarter looks OK, what me worry?

Now it is very unlikely that any one in the Bentonville headquarters will think outside the box, but just for fun let’s think about alternatives. Suppose a liberal thinker were to wander in to headquarters and propose that Walmart grow at a faster rate than the current plan. Let’s assume that the management was tired of the holidays and it was too cold for golf so they let him give his pitch.

Here is his presentation:

I propose that Walmart immediately set the wage for associates at $15/ hour. GASP! This will cost the company about $7 billion.

After the ‘are you crazy’ and ‘that’s impossible’ comments die down he continues.
Here are the reasons:

1) Take the moral high ground. In one stroke the business that has been the pariah company that everyone loves to hate will become the champion. The world will be hailing Walmart and probably even Pope Francis will be applauding. While Walmart doesn’t care a whit for the moral high ground this move would generate $100’s of millions in free positive publicity. It would also cause a significant group of middle class shoppers who care about human values to shop Walmart rather than picket its stores. This would be hard to quantify but some where between $100 million and a billion per year would be a good SWAG (Sill Wild Ass Guess).
2) Walmart would suddenly gain a growth advantage over its competitors. As the leader in positive labor relations Walmart could expect that a lot of the pay raise to employees would come back to the store. Employees, now with some money , would spend with their benefactor. This would be about 20% of $7 billion their raise represents, or $1.4 billion.
3) The big kicker is that if Walmart went to $15/hr there is no way the other low pay companies could not match or come close. This would create a lot of money for a lot of people. They would know that their raise came from Walmart so off to Walmart they would go. Based on the S&P Capital IQ Database there are 6,800,000 non-Walmart low wage workers in large US corporations. If we make a first order assumption that the median wage will rise to, say $14/hr. That would add about $48 billion to the available spending at the bottom where it will all be spent as fast as it comes in. Walmart, as the new leader in retail in the eyes of the poor will get 20% or more of that or about $10 billion per year in new business.
4) There are thousands of small businesses that have low wage workforce that would need to increase wages. The wage increase would likely be less, say $3 or $4/hr but it would still put money in a lot of hands. Here again that would drift to Walmart. Perhaps difficult to quantify but still in the billions through Walmart’s front door.
5) When you consider that if Walmart went to $15/hr there are also a lot of ‘light skill’ jobs paying $10 to $15/hr that would also need to increase by at least $5 to keep the employees from going to Walmart for a job. This would add another few billion to the Walmart income.
6) The sales growth would continue as the secondary effects of the Walmart raise flowed through the low income segment of the economy. Only Walmart could get this kind of return. It is the place all low wage workers will go and is big enough and profitable enough to make this kind of move. The result would really be a transfer of cash from all the other low wage employers to Walmart. For example, fast food workers with a $7 raise would not be likely to eat many more hamburgers but they would all spend more at Walmart.
7) This move would gut the competition. The low price brands would need to increase labor pay to meet Walmart but as a follower there would be little positive benefit for them. They would probably get an increase in sales but it would not cover increased costs so they would need to raise prices which would put them at a greater disadvantage to Walmart.
8) The current labor problems would disappear. Instead of having to close stores to stop unionization as they did in Quebec they could let the labor relations staff go and save some money.

Is there any president for this? Yes, it turns out there is. In 1914, exactly 100 years ago, Henry Ford was producing cars but he wanted to sell more. He knew he could reduce the price of the car if volume increased. Marketing could only do so much and competitors were making gains. So he announced he was more than doubling wages to $5 day for workers. At that rate the workers could afford to buy Fords and buy them they did. He was attacked as a Communist and he was vilified by the business community, but he sold his Fords to the workers and he laughed all the way to the bank.

Now it is safe to say that there is no one in Bentonville that would suggest following in the footsteps of Henry Ford and that is the difference between entrepreneurs and professional managers.



Blog #1 Why This Blog

I have watched what is now the history of the second half of the Twentieth Century unwind, searching for the reality behind the facade of bluster and bullshit that was the ‘official’ reason for things.

As a teenager I was trying to understand the world around me. I found that, particularly where money and power are involved, things are rarely what they seemed. I am still trying to make sense out of the world and this blog is my attempt to pass on what I see. I hope that you will find something useful whether you agree with my conclusions or not.

My area of interest revolves around technology and its impact on economics and the role of government and free markets in technology. My ideas are not from being an economist but someone on the inside, living and working as an engineer in the chaos of electronics development between the 1950’s and 2000. It was a ring side seat as technology created the new world we now inhabit.

Today’s world is so different from the world of post WWII! So indulge me now as I make some observations on how it happened and what we need to learn from that post WWII time of great dreams.

One of my primary themes is the impact that technology has had. Most people acknowledge that technology has had an impact but economists still tend to minimize or ignore the impact of technology. Economists seem to be ideologues, their ideology drives them to think economic gimmicks are most important. They focus on various details while mostly ignoring the elephant in the room, technology. Currently the role of government is in focus. The ‘free market’ economists seem to think that minimizing government is the answer to all questions. Supposedly the free market will solve all problems and the government just gets in the way. That may work in an Ann Rand novel but in the real world there are few really free markets and if you want a market economy then there are many issues that must be addressed that are outside the ‘market’. While there is a long list of these issues that lie outside the market I would like to look at one that is critical to our future, technology development.  The common view is that the free market is the technology developer and that all the tech leadership the US has enjoyed is because of the free market.

I tested those ideas against the reality that I had lived with for 50 years as an engineer doing advanced technology. The evidence showed that it was the government, not ‘free enterprise’ had delivered the technology that accelerated the GDP of the US. I know that sounds blasphemous but the evidence supports it. If we look at the major technologies of the 20th Century the fingerprints of the government are all over them. The more critical the technologies the more government involvement. To understand why this is true it is necessary to look at how technology is developed.

Modern technology is a multilevel effort that typically starts with basic science. This work is done at universities, and to a limited extent in government laboratories.  The science gets translated into a technology or technologies which then are matured to provide workable solutions to needs. If the technology is an improvement or is less expensive then it will likely become a product we use or that helps the infrastructure that supports us.  The problem with this evolution from science to applied science to advanced technology to mature technology is, who is going to pay for it?  The free market is focused on the current quarter profit, if it doesn’t help the bottom line then there is little support. When you consider that maturing a technology can take a decade it is easy to see the mismatch.

So how do we get all these fabulous new technologies? It turns out the government funds development. From the time the technology is just a gleam in a scientists eye to the time that the technology is mature the government funds much if not all the work through government laboratories, university laboratories or company development. The more basic the technology the more likely the government support.  When the technology is mature then the free market starts making products.  In the second half of the 20th Century many of the super products were converted military items.

A classic example is GPS. This was military technology that morphed slowly into an indispensable commercial/consumer item.  The GPS receiver you have in your car is dependent on a constellation of satellites designed, built, flown and maintained by the US military. The government gets no compensation but was responsible for the development of all GPS technology. In addition to the satellites the government funded all the design of the electronics up to the final consumer packaging. Without constant government involvement there could have been no GPS.  GPS not only gets you to your destination but is critical to integrated logistics transportation, just in time delivery systems and a many other free market enterprises. GPS adds more than $10 billion/year to the economy yet I have never heard the free enterprise proponents mention a word about it.

In future posts I plan to prove my case with a number of other examples of government leadership in technology and why government, far from being the problem, is critical to the solution and our leadership in technology.