This Wall Street Journal op-ed by CKE Restaurants CEO Andy Puzder is a useful illustration of economic concepts and their real-life application in labor markets and business decision-making, using Walmart’s wages and recent store closures as its example. Explicitly, Puzder emphasizes the importance of marginal analysis: How does a change in one cost variable (e.g., labor) change the financial performance of Walmart’s least-profitable stores? Given that change, how must Walmart’s portfolio of stores change so that profits earned at some store locations aren’t lost at others that have been pushed into the red? Implicitly, Puzder commends the reader’s attention to the importance of opportunity cost: Even at a still-profitable store location, how much profit is Walmart foregoing by maintaining this store location rather than redeploying the assets committed there to another, more profitable store-opening opportunity? Recent or impending local minimum-wage increases thus affect Walmart’s ability to employ people in the affected locales in two ways: (1) at the margin of profitability, minimum wage increases may turn profitable stores into unprofitable ones; and (2) away from the margin of profitability, minimum wage increases in one locale may make other locales unaffected by minimum wage increases better profit opportunities. Consequently, a yes answer to the question “Are we profitable at this store location?” may not mean a yes answer to the question “Should we continue operating at this store location?” The point, in the context of the op-ed, is that minimum-wage increases aren’t a free lunch. For some employees they may amount to a raise in pay; for others, a pink slip. >>>
LINK: Killing the Working Class at Wal-Mart (by ANDY PUZDER for Wall Street Journal)
Every retailer has locations that are profitable, but only marginally. Increased labor costs can push these stores over the line and into the loss column. When that happens, companies that want to stay competitive will close them. That’s one of the reasons that substantially increasing the minimum wage poses real risks for working-class Americans.
This reality apparently came as a surprise to “Making Change at Wal-Mart,” a union-backed group that has heckled the retailer to raise its entry-level wage. After the closure announcement, the outfit warned in a news release that this “could very well be just the beginning” and that it sends “a chilling message to the company’s hardworking employees that they could be next.” Yet many of the job losses are the direct result, to borrow the outfit’s branding, of making change at Wal-Mart.
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In the face of increasing competition from online retailers such as Amazon, traditional stores like Wal-Mart are minimizing expenses to stay competitive. Substantial minimum-wage increases make the belt much tighter. But businesses that fail to adjust to a changing environment might cease to exist or shrink to mere shadows. This is a reality that progressive groups and legislators may choose to ignore, but businesses do so at their peril. Ask Borders bookstores or Blockbuster video.
What do you think?
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Why shouldn’t wages tend asymptotically toward zero to forestall store closures given opportunity costs in a global economy? Is there no humane minimum compensation above zero? Oh wait, there is: the legal minimum (whose value has been declining in real terms since the 1970s).
David: thanks for your comment. But it doesn’t seem to respond to the worry about the effect that raising minimum wage has (or can have) on workers in marginally-profitable stores. I take it that the worry is that raising the minimum wage (to bring it to parity, in real terms, with where it was in the 70’s) isn’t necessarily going to be good for workers overall.
The standard of “marginally profitable” suggests only that a store is less profitable by an unknown amount than another. Wages represent one of many possible sources of variation in profits. If one regards employees as agents in themselves rather than merely instruments, one can easily conceive of higher wages coinciding with higher productivity and higher profits, as appears to be the case in the firms Zeynop Ton profiles in her work on “the good jobs strategy” (and is anticipated in the Webbs’ original conception of efficiency wages).
Thank the prophets for the sabbath and the labor movement for the weekend!