Always Low Wages? Wal-Mart’s Other Choices

Always Low Wages? Wal-Mart’s Other Choices
Wal-Mart’s holiday public-relations headache began when a Canton, Ohio, store decided to hold a food drive for needy local families for the holidays.
Bloomberg, December 18, 2013

Yesterday, we looked at the benefit to McDonald’s of having its workers subsidized by state and federal aid. Today, its Wal-Mart’s turn. Recall our discussion last month on the related subject of “How McDonald’s and Wal-Mart Became Welfare Queens.” We learned that employees of these two companies are often the largest recipients of aid in their states.

McDonald’s recently found itself in the spotlight courtesy of its “McResource” line — the company help line that helps its poverty-level, full time employees enroll in various welfare programs. A recording of that McResource line sparked outrage, driving this issue into public view.

More recently, Wal-Mart’s holiday public-relations headache began when a Canton, Ohio, store decided to hold a food drive for needy local families for the holidays. What made this a PR nightmare was that the needy families were full time Wal-Mart employees who were working in the store holding a food drive.

Thus, our questions over the arc of these columns about some of the largest retailers in America — Wal-Mart is the single largest private employer in the country; McDonald’s, the largest fast food chain – are simply this:

What should it mean to be employed full time in America?

What would it mean if higher salaries were mandated by an increased minimum wage?

Wal-Mart has 2.2 million employees, including 1.3 million hourly workers. It employs 1.2 million people in the U.S. alone. Gross revenue is $475 billion, generating profits of $17.20 billion. It dominates the discount retail space, and according to Bloomberg, has a 66.70 percent market share.

The size of Wal-Mart is sometimes difficult to visualize. To put it into some context, consider the following: 100 million U.S. shoppers patronize Wal-Mart stores every week. Wal-Mart has twice the number employees of the U.S. Postal Service, a larger global computer network than the Pentagon, and the world’s largest fleet of trucks. Americans spend about $36 million dollars per hour at the stores. Wal-Mart now sells more food than any other company in the world, capturing one of every four dollars spent on food in the U.S. The average American family of four spends over $4,000 a year there. Each week, it has 200 million customers at more than 10,400 stores in 27 countries. If the company were an independent country, it would be the 25th largest economy in the world.

Given the sheer size of Wal-Mart, how it pays “associates” is likely to have an outsized impact on their local and state communities, according to a number of studies.

Wal-Mart’s low wages have led to full-time employees seeking public assistance. These are not the 47 percent, lazy, unmotivated bums. Rather, these are people working physical, often difficult jobs. They receive $2.66 billion in government help each year (including $1 billion in healthcare assistance). That works out to about $5,815 per worker. And about $420,000 per store. But the federal and state aid varies widely; in Wisconsin, a study found that it was at least $904,542 a year per store. (See the accompanying chart.)

Why, I keep asking myself, do we effectively want to subsidize a private company’s employees? Wouldn’t it make much more sense to raise the minimum wage to a level that a full-time worker could support the average American family of four? Just $11.33 puts a 40-hour employee over the poverty line. The costs of this increase would be borne by the company and its consumers — not the taxpayer.

Perhaps the most ironic aspect of this are the advantages to the retailer of higher associate salaries. Some stores have discovered that raising wages provides a competitive advantage. Retailers like Trader Joe’s and Costco pay significantly more than their giant competitor. At Costco, employees earn 40 percent more than at Wal-Mart’s Sam’s Club. Average employees wages at the warehouse retailer are $21.96 per hour, and most of Costco’s U.S. employees are eligible for benefits.

The “underinvestment in labor” is part of the reason Wal-Mart has such enormous turnover. Estimated as high as 70percent, the retailer incurs enormous costs for recruitment, administration and training.

A Harvard Business School study found higher wages decreased employee turnover, increased morale, and improved customer satisfaction ratings. This adds up to increased sales and improved profitability for the retailer.

Can Wal-Mart afford to increase employees’ salaries? Let’s crunch the numbers. The retail giant does $474.88 billion a year in sales; across their 2,200,000 employees, that nets out to $213,255 sales per employee. Given a 5.93 percent operating margin, that nets out to $12,646.02 profit margin per employee. Adding $3 per hour per full-time employee would consume almost half of that profit. But that before any potential increase in productivity, reduced turnover costs and higher revenues.

The question before us is not whether or not Wal-Mart should voluntarily increase its wages to capture these benefits. That is a business decision for the owners and management to make.

Rather, the present issue is whether or not we as taxpayers should be funding private companies paying below-poverty wages. My view is we should put the full costs of shopping at Wal-Mart back where they belong: On the customers and the company itself.

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I originally published this at Bloomberg, December 18, 2013. All of my Bloomberg columns can be found here and here.