Tuesday, January 17, 2006

Will You Shed A Tear With Me For Wal-Mart?

Here's an article Glenn Reynolds referenced; it deals with Wal-Mart in Maryland.



Although the motivation of the liberals was to raise the well-being of Wal-Mart workers, it is far from clear that this will be the consequence. Low-skilled workers cannot receive more in compensation than the value of their labor. If Wal-Mart is forced to increase the share of compensation that comes in the form of health benefits, then it will have to decrease take-home pay. If it cannot decrease take-home pay, then it will have to reduce its reliance on low-skilled labor or cut back on operations altogether.
If Wal-Mart were to raise prices by 1%, that would more than pay for health benefits for their employees. That would function almost like a tax passed on to the consumer, one we would pay without blinking- no one would even notice. No Wal-Mart shopper would be financially burdened by that; we would still walk out of there amazed at how little money we paid for our purchases. Either 1) The author believes that Wal-Mart's prices are determined by Immutable Laws of the Universe, and therefore any extra business costs can only come out of worker salaries, 2) He forgot that Wal-Mart does in fact have the ability to raise their prices by a fraction that nobody would even notice, which, due to their astounding business volume, would cover their employees' health insurance and then some, or 3) He willfully chose to ignore that possibility, and decided to go the drama-queen route: "Look at what this wonderful market mechanism Wal-Mart has to do to its employee salaries because of the actions of these cruel, misguided liberals; they have no choice but to inflict more suffering on the humble associates or go out of business! For shame!..." Why Arnold Kling and other libertarians gravitate towards false dilemmas like they do is beyond me.

That said, I think Maryland's plan was really ridiculous, forcing Wal-Mart to pay a certain percentage of their corporate income to employee health care expenses. It would make a lot more sense to me to place a sales tax of 1-2% on large businesses in the state, the proceeds of which would go to cover state public health expenses. Companies that are providing a certain level of coverage for their employees could file some paperwork and get an exemption from the tax due to their assumption of the costs of providing an acceptable level of health care to their employees.


Blogger Daniel said...

If it were so easy for Wal-Mart to raise prices by 1%, then why haven't they? We have to assume that Wal-Mart is motivated by profits and if they could increase their profits by increasing their prices 1%, then we can assume they would. So why haven't they?

7:36 AM  
Blogger Dan said...

They haven't because they're making a bad business decision. Businesses make bad decisions all the time, either because of imperfect information or irrationality.
George Will said a few days ago that when Wal-Mart enters an area, prices in that area go down by between 5 and 8 per cent. If businesses are bringing down their prices 5-8% to achieve parity with Wal-Mart, then Wal-Mart still has a cushion of a few percentage points in their margins, where they could raise prices and still be below their competitors. If you're going lower than you need to, then that's irrational.

1:26 PM  
Blogger Daniel said...

Huh? They are making a bad business decision? What exactly is the bad business decision?

That still doesn't answer my question of why Wal-Mart doesn't charge higher prices? Wal-Mart is trying to maximize their profits so why haven't they already increased prices as an easy way of increasing profits?

Also, who has better information, Wal-Mart, which literally has terrabytes of information about consumer preferences, or me an average joe. I might think Wal-Mart has more of a profit cushion than they do, but I don't have access to the information that they do.

12:23 AM  

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