Minimum Wages

Saving people money so they can live better

Walmart helps people around the world save money and live better — anytime and anywhere — in retail stores, online and through their mobile devices. Each week, more than 245 million customers and members visit our nearly 11,000 stores under 71 banners in 27 countries and e-commerce websites in 10 countries. With fiscal year 2014 sales of approximately $473 billion, Walmart employs 2.2 million associates worldwide.

The above words are taken from the first page of Walmart’s website. Some have claimed that Walmart achieves this great feat by exploiting its workers. What might that mean?

A number of the gulf countries have workforces that are predominantly foreign. Qatar is the world’s wealthiest country on a per capital basis. In a recent article The Guardian reported that: “the Guardian visited a group of more than 60 workers from south Asian countries in a workers’ camp in the desert 25km west of Doha. They have had their passports taken from them, in breach of Qatar’s labour laws, which prevents them from leaving the country, and many of them have not been paid for several months. Most paid hundreds of pounds to agents in their home countries simply for the right to get a job in Qatar. Among them lives Ujjwal Thapa, 25, who left Nepal last autumn…. He has not been paid for several months despite working for 11 hours a day, six days a week, on building sites for an Indian contractor.

“Another worker was conned over the wage he would earn. His immigration document, stamped by the Nepalese government before his departure from Kathmandu, shows he had agreed to work as a foreman on a basic salary of £410 a month. But the contract signed with the employer on arrival was for £150 [US$ 240] a month to work as a carpenter “ “Qatar promises change-unpaid migrant workers”

Labor practices in Qatar are truly exploitive even though workers came voluntarily. Walmart has been accused of paying poverty level wages: “Walmart’s average sale Associate makes $8.81 per hour, according to IBISWorld, an independent market research group. This translates to annual pay of $15,576, based upon Walmart’s full-time status of 34 hours per week.” Should they pay more?

If the number of workers they now employ, about 2 million, were not willing to work for the wages offered, Walmart would have to pay more, but would almost certainly choose to get by with fewer workers. The demand curve for labor (wages on the vertical axis and number of workers on the horizontal axis) is downward slopping—lower wages brings larger demand. If a minimum wage law required them to increase their minimum wage to say $10.10 dollars an hour as proposed by President Obama, Walmart would hire fewer people. Some people working at the current minimum of $7.25 would enjoy an increase and some would become unemployed. Not only would the quality of Walmart service drop a bit with fewer employees helping customers but the customers would have to pay a bit more as higher wages were passed through to higher prices paid by customers. The Congressional Budget Office estimates raising the federal minimum wage to $10.10 an hour would eliminate 500,000 to 1,000,000 jobs. On the other hand, if customer demand for Walmart services increased and Walmart found it profitable increase its staff, it would have to pay more to attract them even without a minimum wage law.

It is obvious that if some one offers their services cheaply enough you will use more them than otherwise. If you could hire the neighbor kid for a dollar an hour to weed the garden and clean up the garage you might do so when you wouldn’t for $10.00 per hour. If he or she doesn’t want to do the work for a dollar an hour or has a better offer somewhere else, you might do it yourself. The supply curve for labor is upward sloping—fewer people are willing to work at lower wages. The intersection of the supply and demand for labor is the wage at which everyone wanting to work has a job.

But of course not every worker is the same as every other worker. You are happy (or at least willing) to pay the plumber $30 per hour because of his greater skills. In fact very few people earn the minimum wage or less and thus most workers will be unaffected by its prospective increase. Some jobs are exempt from the minimum wage to prevent closing off some services altogether (home companions for the elderly, newspaper delivery people, babysitters, disabled workers, etc.). Failing to win the economically obvious case for eliminating minimum wage laws all together, some have argued for sparing teenagers at least from its damaging effects. Young people just entering the job market from high school must learn skills on the job. They begin with very low productivity and employers are not willing to hire them at the same wage paid to more experienced (older) workers.In 2013, 16-19 year olds had an unemployment rate of more than 20 percent in the U.S. when total unemployment averaged 7.4%. “Minimum wage hike means more sub-minimum workers”

So why does President Obama (and George W Bush before him) want to raise the minimum wage? It seems to exploit the public’s ignorance of economics, with the feel good prospect that the government can make us richer by legislating it. The public is not really that dumb. It is frankly difficult for me to understand. Marc Linder argued for minimum wages, not because he believed that people could be made wealthier with magic wands, but because he believed that some (very low wage) jobs should not exist at all because they were beneath man’s dignity. He assumed (or advocated) that those unable to work as a result would be cared for by the state. At least I think that is what he is saying (he is a lawyer, not an economist). The abstract to his book: The Minimum Wage as Industrial Policy: A Forgotten Role, says: “In the welter of arguments being debated in connection with amending minimum wage legislation, the protagonists have lost sight of the original intent of such state intervention. That purpose was to help — exclusively — those workers whose wage formation process was subject to “market failure” by forcing their employers to internalize the minimum social costs of maintaining a worker, which they had succeeded in shifting onto the worker or society.

“Although the minimum wage was obviously also designed to create micro-welfare effects, its primary function lay in removing labor costs from competition, increasing productivity macro-economically by driving “parasitic” firms out of business and concentrating production in the most competent firms, and steering capital-labor relations.” “Marc Linder” I have no idea what that means, but the evidence is overwhelming that minimum wage laws harm the least advantaged if they set minimum wages high enough to make any difference.

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About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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