Why Wal-Mart Pays Less

Economics professor Russell Roberts explains:

I think a lot of folks think that Wal-Mart doesn’t offer health insurance to all of its workers because Wal-Mart’s mean or greedy or too interested in profits. A lot of people are mad at Wal-Mart because they pay less than the average wage in the economy.

There’s a simple way to look at it. Wal-Mart doesn’t offer health insurance or pay more than they do because they’ve found that they can attract enough workers with the pay package they currently offer. Period. For other companies, they have to offer health benefits to attract workers. They reason they offer health insurance isn’t because they’re socially responsible or kind or altruistic. They find that to compete for workers they have to offer it.

Paradoxically, Wal-Mart doesn’t determine what it pays its workers or what benefits it offers any more than you can set the price of your house when you want to sell it. Suppose houses of similar quality and location sell for $500,000. You’re free to set any price you want, but if you set a price of $1,000,000, you’re going to wait a long time for a buyer. Oh, you might get a slight premium above $500,000 because you did such a nice job renovating your kitchen. Or maybe a little less if your taste in kitchen’s is real different from most people’s. You don’t set the price of your house.

Wal-Mart is in the same situation. They don’t determine the compensation of their workers in any real sense. The compensation of their workers is set by the market for people of a particular skill level and the alternatives in the work place available to workers of that skill level. What Wal-Mart does have some control over is the level of customer service and knowledge and skill used by their workers.

He also explains what is going to happen if you try to force Wal-Mart to pay more:

Attempts to force Wal-Mart and similar stores to offer benefits or raise wages is going to punish the people with the lowest skill levels because it will diminish the choices available to them. Wal-Mart will find ways to substitute capital and technology for people. The people who remain employed there will make more money. That will be seen. What will be unseen is the reduction in wages elsewhere in the economy.(emphasis added)

For those of you who still feel like this explanation has holes in it, this is a must read.

11 Responses to “Why Wal-Mart Pays Less”


  • it doesn’t have holes in it. like most pure economic arguments that contrast social goods with economic realities, the logic is airtight. and circular. and meant to justify situations that are obviously unjust.

    look, the fact that people can work full time at walmart and not make enough money to feed their family, and not be insured if they get ill, and be illegally required to work unpaid overtime, is fundamentally unjust. we need these people for our society to function, but we don’t want to pay them enough or give them enough services to really survive.

    your pundit wants to say that is perfectly just, because that is the logic of the market. there are more low or no skill people out there looking for jobs than there are jobs to fill, so they have to accept very poor conditions in order to survive. he has a point. but his point is this: the logic of the market is fundamenally unjust. america’s motto is e plurbis unum, not markets uber alles. fortunately, we regulate all kinds of market functions: we have minimum wage laws, overtime laws, laws that require health care benefits to full time employees, laws that protect the safety of the worker in the workplace. we enacted these laws because, at a certain point in time, we recognized that the power imbalance in employee – employer negotiations is so extreme that, left to its own, the market will dictate inhuman conditions at subhuman wages.

    unfortunately, the right has spent 40 years attacking our country’s protection on lower income workers (sadly, they were joined in this effort by many decisions of the clinton administration as well). today we see the results of their efforts: the lowest real wages since the 1970s, more people without health insurance than in any industrialized country in the world, and so on.

  • satya,

    One could make the argument that it is because of those laws that the market becomes unjust. The minimum wage, for example, primarily hurts the poor, not the wealthy. etc etc…etc.

    But I wont go there, and instead ask you this question, “What would you do to make the circumstances of the poor better”?

    To quote from the article I linked above, “Thomas Sowell likes to say that reality is not optional. But we oh so want it to be. We want to change outcomes without consequences with the ease of adjusting the thermostat on the wall of our house. We want to dial incomes upward and gasoline prices downward. We want to blame Wal-Mart for the fact that its employees earn below the national average. We want to blame China (or Mexico or Japan or India) for our trade deficit. We want to blame or honor the occupant of the White House for whether new jobs are high-paying or low-paying. This worldview that flies in the face of reality and that ignores the inherent complexity of the real world is the bread-and-butter of journalism and the breeding ground for unintended consequences”.

    In other words, if we followed your suggestions, the problems would be worse, not better.

  • The author of the post is correct…no one is forced to work at Wal Mart, no one is forced to shop at Wal Mart. If there is such concern for the plight of the underpaid, then why not beat up Congress and your elected representatives and get the pay of all enlisted personnel in the military raised? Those that fought and fight for the US allow you all to be morons about a topic like unfair labor practices at Wal Mart – wake up, people…there are heavier issues than Wal Mart you should be paying attention to! A Dios Mio!

  • There’s just no point in arguing with some people. Logic is denied and name-calling ensues as if it were some trump. It’s almost disappointing to see no reference to Hitler or Nazi’s.

    Thanks for highlighting Roberts’s clear and concise column.

  • Oh, and don’t forget the other side of Wal-Mart while you bash their “unjust” wages. While no agency public or charitable seemed to satisfy, according to the New York Times:

    “But if you visit the Wal-Mart and the Sam’s Club stores here, you hear shoppers who have been without power for weeks marveling that there are still generators in stock (and priced at $304.04). You hear about the trucks that rolled in right after the hurricane and the stuff the stores gave away: chain saws and boots for rescue workers, sheets and clothes for shelters, water and ice for the public.

  • Oh, and don’t forget the other side of Wal-Mart while you bash their “unjust” wages. While no agency public or charitable seemed to satisfy, according to the New York Times:

    “But if you visit the Wal-Mart and the Sam’s Club stores here, you hear shoppers who have been without power for weeks marveling that there are still generators in stock (and priced at $304.04). You hear about the trucks that rolled in right after the hurricane and the stuff the stores gave away: chain saws and boots for rescue workers, sheets and clothes for shelters, water and ice for the public.

    Generousity? Maybe. Earning a little good will? Probably. They will likely be rewarded in spades by the loyalty of those who benefitted from the availability of much needed supplies.

  • read: http://news.bbc.co.uk/2/hi/business/4276302.stm

    The Walton family [Walmart owners] makes up 5 of the top 10 wealthiest people… and not just wealthiest in America. You’re telling me that they are so hard pressed to make a profit that they can’t change their pay scale? Pahlease!!

    You’re argument will follow that gov’t enforced minimum wage laws aren’t the solution. Why can’t the Walton’s share their profits more equitably with their employees? They don’t work a longer work week. In their life-time they won’t spend all of the money they are making. I’m all for competition & profit-rewards, but excess & greed (see earlier comments here) is unjustified by economic logic.

    In the same way that the constitutional framers identified certain “inalienable rights” – there exists a moral code for humanity that does trump this kind of individual profit or even the “HP-swears-by-it” value for economic growth.

    🙂

  • Scott,

    Loving the gravatar brother, but I must say, when I asked you to add one, I didn’t think you would add a picture of you in your pajamas, but hey, whatever floats your boat. LOL.

    You’re telling me that they are so hard pressed to make a profit that they can’t change their pay scale? Pahlease!!…Why can’t the Walton’s share their profits more equitably with their employees? They don’t work a longer work week. In their life-time they won’t spend all of the money they are making.

    The Waltons are not synonymous with Wal-Mart, just because they are rich, does not mean that Wal-Mart is, and just because Wal-Mart tanks, does not mean the Waltons would. Pushing Wal-Mart to pay for higher employment would not hurt the Waltons, but would hurt the stockholders, often middle class citizens themselves, of Wal-Mart.

    But here, lets address the core of what you’re saying. The question one must ask is, why, in the first place, are the wages as low as they are? The short answer is that Wal-Mart knows that at its current wage rates it got as many workers, of the quality desired, as it needed. So in essence, to pay more would be an act of charity to the workers and not an act of commerce.

    Well, if you look at it from this perspective, than a whole range of problems come in. For example, how much charity should they give? For example, lets say there were two workers doing the exact same thing, however, one was a single mother of two, and the other was a student at the local college, living perfectly fine with his parents. In this case, should they both receive the same extra wage in salary, or should the single mother receive more? Or to ask the question a different way, if charity is what we are doing, is it really a good use of charity money to use it on people in industrialized countries when there are people starving to death in underdeveloped countries who need it much more? For example, why give extra pay to those in the United States when Wal-Mart could use the money for extra pay in Mexico? Or why give extra pay at all, why not instead give it to seriously poor people in sub-Saharan Africa?

    I think you are seeing where I am going with this. The point here is that charity is a good thing, but charity should not be a part of corporations, or atleast handled separately (see here and here).

    To incorporate it in its wages, or in its daily work activity, is to make both, charity and commerce, less efficient, something that on net balance doesn’t accomplish either the goal of charity or the goal of commerce.

  • OK. Well-stated. Though I do believe charity & commerce can go together (I’ll read your “here, here”s later, so I’ll go with you on this), meritocracy & a rewards system is a part of commerce & running a business. Why can’t Wal-Mart improve its rewards system? You’ve stated – in basic terms – it pays the wages it pays b/c it can get away with in the market. Since when does what we can get away with provide a solid foundation for growth.

    Take a company like In-N-Out (Which I personally love for purely appetite reasons). In-N-Out has historically paid its employees above-average wages & provided performance based rewards that are also above-average for its industry. These have not been gov’t enforced (not min.wage so that you can be happy), but they have had a net effect on the profit & economic growth of In-N-Out.

    I believe that In-N-Out is combining good business practice with “charity” (if you want to call it that – I would use the word “conscience”) to the effect of economic growth & profit.

    Also, though you are right in pointing out that Wal-Mart & the Walton’s are seperate entities, the wealth of the Walton’s IS directly linked to the profits of Wal-Mart, ie. they didn’t get rich from some other business. The enormous profits that they’ve been able to turn into a personal wealth base only supports the profitability of their company to provide more “charitable” (again, your word, not mine) rewards to their productive employees.

  • P.S. – That is a “Tigger” outfit from a costume party. (Notice Winnie the Pooh)

    My Pj’s wouldn’t get a G rating from gravatar.

  • Scott,

    I knew it was a costume party; I was just trying to give you a hard time. Thanks for not putting your Pj’s up though; I wouldn’t want to see you in anything more than G rated. 🙂

    First, about In N Out (Btw, I eat there atleast once every other day, LOVE the place), it is not a valid comparison because In N Out has a different business model. For example, look at In N Out compared to Mc Donald’s, both have a wide difference in quality and a wide difference in pay. Secondly, how many In N Out’s do you see in the hood? In Compton, I don’t remember there being a single one, but there definitely were Mc Donald’s.

    The difference in business model is what is commonly missed when people compare Wal-Mart to another company (like Costco, to give another example), and that difference in business model makes all of the difference in the world. Wal-Mart, as opposed to In N Out and Costco, has the poor as their primary market share, and poor areas.

    Which is why I constantly come to the defense of Wal-Mart. With regard to wages, Wal-Mart is not doing anything different than any other company. In N Out, Costco, Mc Donald’s, Wal-Mart and all other companies, want to pay their employees as little as possible. But each company is restricted by their business model and market forces, if for example, they cater to the higher levels of society, they will have to pay their employees more to get the quality of service that they need to satisfy that level of society. This is not their choice; this is dictated by market forces, given their preferred business model, their preferred market share, and their preferred operating areas. If In N Out could get the same quality service paying a lower wage, trust me, they would. All of capitalism, all of economics, is based on the simple premise that companies want to pay as little as possible and employees want to get paid as much as possible, the equilibrium point is set by these two forces, along with market forces and business model.

    So if Wal-Mart is no different than any other company when it comes to how it sets its wages, what is different about Wal-Mart? As I alluded to above, Wal-Mart is unique, not in its wages, but in its business model. Wal-Mart, unlike In N Out, unlike Costco, has a business model that both, allows it to offer cheaper prices and allows it to operate in high crime, high poverty areas. When you look at it from this angle, from the angle that makes Wal-Mart truly unique, Wal-Mart comes through in a very different light. As someone who has lived in such high crime poor areas, who has witnessed the high unemployment and the lack of businesses and with them job opportunities in these poor areas, I see Wal-Mart not as a curse, but as a blessing. We need more companies with this business model, not less.

    As economist Arnold Kling says, “I always say that what low-skilled workers need are not fewer Wal-Marts, but more of them”.

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