Higher Wages Work for Workers, but Not So Far for Walmart

Some argue Walmart should pay higher wages as a matter of justice. Others argue Walmart should pay higher wages as a matter of profit: Walmart is missing out on labor productivity gains that will redound to its bottom line, as the example of Costco suggests.

In this BloombergView column, Megan McArdle considers the implications of Walmart’s recent experience with raising average wages. Her conclusion is that this works well for the workers, but not for Walmart: higher wages are a cost center, not a profit center. She pursues an interesting discussion of the way labor costs interact with business models, taking to task those who maintain that Costco’s labor model could be copied profitably by Walmart based on shallow similarities (“Costco and Wal-Mart look a lot alike to the sort of people who write articles comparing Costco and Wal-Mart: large spaces filled with stuff, both of which are visited at best infrequently by the writers.”).

This piece could be used in the classroom to introduce a discussion about how wages contribute to or undermine business models. It invites consideration of questions like: Would it be better if Walmart paid higher wages, even if that meant adopting a business model not catering to the needs of lower-income customers?
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LINK: Wal-Mart’s Wage Experiment Works … for Workers (by Megan McArdle for BloombergView)

[T]his morning, [my professor acquaintance] e-mailed me to ask what I thought about Neil Irwin’s latest piece in the New York Times on the outcomes of the company’s fairly recent foray into higher average wages. Irwin’s conclusion: Paying higher wages has allowed Wal-Mart to attract better workers, resulting in cleaner, nicer stores. My conclusion: All is proceeding as I have foreseen.

That is, I predicted that workers would like making more per hour, rather than less (who wouldn’t?), and that this would allow Wal-Mart to attract a better class of worker, or at least keep the workers it had around longer, reducing turnover costs and allowing the company to deliver a better customer experience. But I was less sure that this would actually deliver increased profits; indeed, Irwin notes that it hasn’t. Revenue is up, as are ratings in customer surveys. But so far, that’s not translating into enhanced profitability. “Operating income for Walmart’s United States stores was down 6 percent in the most recent quarter,” Irwin writes, “reflecting higher labor costs and other new investments.”
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Though they didn’t realize it, the people who were arguing that Wal-Mart should adopt Costco’s labor policy were also arguing that Wal-Mart should adopt Costco’s business model, because the two are inextricably tied together. Unfortunately, Costco was already executing Costco’s business model brilliantly, which limited the upside to Wal-Mart crowding into its market (when it tried, with Sam’s Club, it didn’t do very well). And if you wanted to create Costco II, it wasn’t clear why you’d decide to reconstruct a massive legacy retailer in Costco’s image, rather than starting over with a new group of people who hadn’t spent decades of their lives learning to operate “big stores in small towns.”
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So far, however, it seems, if anything, [Wal-Mart is] trimming back toward “big stores in small towns,” closing down many of the smaller, more urban locations that didn’t do as well as the company had hoped. It was never clear that it’s actually profitable to run that kind of business model by hiring and retaining better people, as opposed to simply hiring more warm bodies to put things on shelves at the lowest wage you can get away with paying. The most recent results certainly don’t offer huge encouragement to those who hoped it could.
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So far, my verdict on Wal-Mart’s experiment with higher wages is, as I wrote to my professorial pen pal: “Great if it works, but I’m not sure it works.” And as he wrote back: that “would be a great slogan for 90% of public policy.”

What do you think?

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