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Tuesday, February 24, 2015 12:56 PM

Crash Course in Free Market Economics and Income Inequality

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On February 19 Doug McMillon, President & CEO, Walmart, announced higher pay in a Letter to Associates.

Bloomberg columnist Barry Ritholtz, a higher minimum wage advocate, pounced on the news, calling the wage hike Wal-Mart’s Crash Course in Labor Economics

Last week, we learned that Wal-Mart was giving the lowest paid of its hourly employees a raise. In a blog post, Wal-Mart Chief Executive Officer Doug McMillon said that as of April, the company will pay a minimum of $9 an hour. That is $1.75 more than the federal minimum wage of $7.25, which has been unchanged for almost six years. Next February, Wal-Mart's lowest hourly rate will rise to $10. All told, about a half-million Wal-Mart workers in the U.S. will be affected.

In the years since the last federal minimum-wage increase, many of Wal-Mart’s employees had fallen below the poverty level and the strengthening economy has made it harder to attract and retain employees.

Although many factors contributed to the move, the simple reason for the increase is because Wal-Mart has stopped growing. Same-store sales have been little changed or declining for some time now. When we look at the underlying causes, the company’s workforce, and how it is managed, are the prime suspects.

Cutting on salary and benefits, however, didn't necessarily lower costs. About 44 percent of Wal-Mart's hourly staff turns over each year. That's a lot of people, because the company employs 2.2 million workers worldwide. Hiring replacements is a costly and time consuming process.

Consider competitors such as Costco: It has average hourly wages of $20 and a turnover rate of “17% overall and just 6% after one year's employment,” according to the Harvard Business Review.
Staff Turnover

Barry goes on and on with some things I agree with and many other things I don't. However, I believe we can all reasonably assume that staff turnover was a major factor in Wal-Mart's decision.

If so, what does that say?

It says that the free market wage for Wal-Mart employees is $10.00 an hour, not $9.53, not $12.28, not $15.00, not any pulled out of the hat government mandate.

Wal-Mart decided on its own accord it could not attract the quality of people it needs at $7.25. That says nothing about Costco or McDonald's.

Simply put, the free market worked, not pressure from protesters, not whining from Obama.

Wal-Mart is Not Costco

On August 29, 2013, I wrote Wal-Mart is not Costco; So Why Should it Pay Like Costco?

Bloomberg writer Megan McArdle also hit the nail on the head with her 2013 analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.
Costco has a tiny number of SKUs in a huge store -- and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.

Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older).

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages.
Minimum Wage Nonsense

The idea that government can dictate the right minimum wage that maximizes overall employment is nonsensical.

Wal-Mart decided on its own that its turnover was too high and/or the quality of its employees too low. Perhaps McDonald's makes the same decision, perhaps not.

Battle Over Hours

Another grievance of workers is flexible shifts that frequently change, and with short notice. The Financial Times details the problem in Walmart Pay Rise Obscures Shift in US Labour Market
Almost 7m US part-time workers are seeking full-time work in spite of a strong recovery in the jobs market.

Rising insecurity is driven by sophisticated technology that allows retailers and restaurant chains to adjust work rotas at short notice to respond to their own needs.

Zara and Urban Outfitters, the retailers, and Popeye’s, a fast-food restaurant, are among those to come under fire for the notice employees are given on hours. Starbucks, the coffee chain, responded to a New York Times story detailing how workers were given schedules just days in advance with promises of improved working conditions.

Kory Lundberg of Walmart, which has witnessed protests from workers over pay and conditions, insists employees are given their schedules at least two-and-a-half weeks in advance “so they can plan their lives”.

Part-timers who want additional work can sign up for extra hours online, Mr Lundberg adds. While this system has been praised by some workers’ groups, others complain that shift availability varies from store to store.
Meddle Here, Cause Problems There

A primary cause of the rise of part-time hours (and more recently, uneven part-time hours and a rise in manager hours) is none other than government regulation called Obamacare.

In the last two years, hours worked by managers at discount and department stores are up 86% while hours worked by nonsupervisor employees is down.

Why? Supervisors, don't get paid overtime. It's yet another artifact of Obamacare.

I discussed that in Discount and Department Stores Boost Manager Ranks by 46% in Two Years, Hours Up 88%

The free market lesson at hand is "meddle here - cause problems there". The proposed solution by meddlers is always "more meddling".

Union Group Mobilizes "Against" Pay Hike

Just yesterday, I wrote Union Group Mobilizes "Against" Pay Hike.

I believe this is the first time in history a union group rallied to protest against a wage hike.

All in all, it should be perfectly clear that the minimum wage hike to $15 that McDonald's workers seek is absurd. Actually, any government mandated minimum wage is absurd.

Those who don't like their job can find another. If enough do, then wages will go up naturally, just as they did at Wal-Mart.

Crash Course for Ritholtz

Barry, please throw away your Soviet-style central planning model where governments set prices of wages, interest rates, crops, etc. It doesn't work.

Instead, embrace something that does work. It's called the free market. This economy would not be in such miserable shape, and wage inequality would actually be far less if we had more of a free market!

Crash Course on Income Inequality

For a discussion on the real cause of wage inequality ....

Mike "Mish" Shedlock

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