An economist argues that the recent campaigns launched against the chain are not just exercises in soft-hearted conscience soothing, but have solid economic and political rationales.
By L. Josh Bivens
A recent edition of Slate magazine featured a debate on “Is Wal-Mart Good for the Working Class”? The affirmative position was argued by Jason Furman, a chief economic advisor to John Kerry's presidential campaign. Barbara Ehrenreich took the opposing view, shaped in part by her experiences working undercover at the company as part of her research on how Americans stuck in low-wage labor markets make ends meet; research that culminated in a best-selling book, Nickel and Dimed.
It was a little strange reading the Slate contest. I’m firmly on Ehrenreich’s side, but I’m a professional economist so have much sympathy for how Furman argues. The former acknowledges early in the debate that there’s a culture clash, noting that pitting an economist against a non-economist regarding the merits of Wal-Mart is unlikely to be satisfying. Slate may have feared the esoterica that would have resulted from pitting two economists against each other, or may have just thought that no economist could be found to argue the negative side. Furman implicitly supports this latter interpretation at one point, saying:
"I don't find my views on Wal-Mart quite as counterintuitive as you seem to. Most economists who call themselves liberal, progressive, or Democratic probably feel the same way I do."
Furman’s right. Most economists who call themselves liberal, progressive, or Democratic would be with him (as, of course, would all of those who call themselves conservative, libertarian, or Republican, but that's no puzzle). Lest that close people’s minds regarding the hard-headedness of the brief against Wal-Mart, I thought I’d offer a sketch of why the recent campaigns launched against it (both public pressure and state and local legislation that would mandate improved pay and benefits for its workers) are not just exercises in soft-hearted conscience soothing that will result in more harm than good.
Most of those economists who call themselves liberal, progressive, or Democratic generally argue that the market should be allowed to churn out what it will, even if the results are a highly inequitable distribution of rewards. After the fact, they then would have a decent, compassionate government lean against this inequality through progressive taxes and transfer payments. This is eminently defensible, and if I could design an economy from the ground up, I’d rely on this approach almost as much as they, as I share with them a deep respect for the efficiency-enhancing quality of (most) markets.
Given the above, this crowd adopts a stance toward the Wal-Mart debate consisting of, well, telling its critics to back off and to rely on expanded government largess to help its workers claw their way to a better living. The benefits of Wal-Mart’s expansion (lower prices leading to consumer savings) are too valuable to be jeopardized by soft-headed special interest pleading.
This just won’t do, for three reasons. First, as a card-carrying economist, I have a hard time recommending the abandonment of one of the tools used by those concerned trying to aid the lot of the low-wage work force. After all, one of the great insights of the discipline is about the benefits of diversification, and the need for multiple instruments seems especially obvious right now given that the present government seems determined to reverse all inequality-fighting aspects of economic policy. Last month saw an attempt to repeal the estate tax (that falls only on the richest 0.5 percent of inheritances) while also voting down an increase in the minimum wage (that now has been beaten down by inflation to its lowest purchasing power in 51 years). Asking workers to sit tight and wait for more enlightened national leadership is requiring far too much patience on their part.
Second, I think we all need to think more seriously about how exactly we’re supposed to force our representatives to enact equity-supporting policies. The primary, and most effective, constituency for these policies is, unsurprisingly, organized labor. It’s hardly a secret that much of the funding for the anti-Wal-Mart groups comes from unions. (Nor is it a secret, for those who care to visit the homepage of the organization where I work, that a good, if minority, chunk of our funding also comes from unions. While people often assume that we adopt pro-union positions because we receive funds from labor, I think it puzzling that the reverse causality is never assumed.)
Another non-secret is the rapid decline in union membership that has occurred over the past two decades (the share of workers represented by a union has fallen from 23 percent in 1979 to under 13 percent today). Behind this decline is the fact that sectors traditionally most amenable to unionization (for structural reasons, not beneficence on the part of corporations) are declining in importance (manufacturing) while new jobs are being created in those sectors (retail) with little to no union history. The union-funded campaign against Wal-Mart is driven by the recognition that broad new sectors of the U.S. economy have to be organized for the labor movement to remain effective in coming decades. This retail organizing just cannot be done without engaging Wal-Mart, the largest single private employer in the U.S. economy. As long as Wal-Mart is allowed to remain union free and a relatively cheap employer, this will hamper new organizing drives at other retailers, and will put pressure on already organized sectors as Wal-Mart expands (consider, for instance, the California grocers strike of 2004).
So, wishing for, and arguing for, a decent government that leans against inequality is one thing. And, arguing that reliance on this government intervention alone provides the most effective and efficient outcome is defensible. But undercutting the efforts of the largest and most effective voice for exactly this kind of government in labor's most important campaign to retain a firm toe hold in American politics is something else entirely. The government programs countering inequality that are valued by progressive economists didn't just happen. They were fought for by a coalition whose vanguard was organized labor. Even if forcing Wal-Mart into paying better was inefficient in an economic sense (I don't really think it is—see more below), the long-run political benefits of having a strong labor movement are large enough that I just can't see value in hamstringing labor's attempt to retain and newly organize the retail sector.
Lastly, and, here's the type of esoterica that Slate probably feared in finding an anti-Wal-Mart economist, I disagree with the premise that enforcing wage and benefit mandates on Wal-Mart will inexorably reduce market efficiencies. That premise is rooted in the belief that labor markets are like markets for groceries—lots of sellers, lots of buyers, and enough competition among both employers and workers that neither side has any market power over the other. In labor markets like this, a price floor (say, a binding minimum wage or mandated compensation offer like that contained in recent Wal-Mart-directed legislation) leads to unemployment, as employers desire fewer workers at the higher wages while workers want to offer more labor at the higher wage.
It's fair to say that this is the predominant view of labor markets in the profession. However, a sizable (and growing, I think) minority think that low-wage labor markets like those inhabited by Wal-Mart actually behave more like a monopsony than a competitive market. Monopsony labor markets, strictly speaking, are those with only a single employer (think Old West company towns). Such employers have substantial market power over potential workers and set wages far below what economists would deem efficient. Wal-Mart obviously isn't a strict monopsonist, but, a host of real-world frictions that keep low-wage labor markets from operating competitively (commuting costs, information problems, and differing preferences about non-pecuniary job characteristics) give employers like Wal-Mart a degree of market power over potential workers.
There's a quick and dirty test to see if this vision of labor markets seems more convincing than the competitive one: What do you think would happen if Wal-Mart cut their wages by one cent per hour? Competitive labor market theory predicts that the company would instantly lose every single employee. Remember, employers allegedly have no say in what the market wage is, and paying under the competitively determined wage will lead to wholesale quits of their workforce. Monopsony theory says that they'd lose some workers, but not all, or even close to all.
Defenders of Wal-Mart love to argue that the public's voting with its feet proves that the corporation offer good jobs, and they frequently offer up stories like, "When Wal-Mart opened in X, 500 applicants came forward for 50 jobs." How does this not argue for their ability to wield some degree of monopsony power?
I don't expect to change colleagues' minds in this debate—my view wasn't decided by reading an op-edish piece, but, by thinking long and hard about these issues; presumably theirs were as well. But, it is important to explain to a wider audience that the anti-Wal-Mart campaign is not soft-headed. Too many people defer to what they assume is the unanimous sense of economists in debates like this, and, people need to realize that there's dissent within the profession both about the technical economics and the political reasoning that lies behind which policy interventions can be reasonably supported. It's also time that lefties realized that the discipline of economics isn't inherently hostile to them. The profession may be, but, the subject itself provides sustenance for all manner of political beliefs.
L. Josh Bivens is an economist at the Economic Policy Institute in Washington, D.C.
