Wal-Mart wasn’t being hypocritical when one of its executives recently called for a higher national minimum wage, but the retailing giant may have been taking lessons from German industry. Nationwide standards may give big companies like Wal-Mart a strategic advantage over competitors.
Any business tries to keep its costs low. Wal-Mart is especially aggressive and successful in this regard. If it lets its costs grow and raises prices to maintain some profit margin, it will lose sales to its many competitors. If it absorbs the cost, returns to shareholders will shrink.
Critics argue Wal-Mart should just “do the right thing” and pay its employees more. That ignores the company’s position relative to Target, Kmart and other competitors. Wal-Mart would inflict a wound on itself.
If, on the other hand, all retailers have to pay a higher wage, Wal-Mart will have happier employees and more job applicants. And it won’t have to worry about any cost disadvantage relative to other retailers.
Yes, normal demand relationships do apply to retail goods. If all retailers raise prices because they are paying more for labor, total purchases of consumer goods by all households may drop a small amount. The drop will be minuscule, however, in comparison to the decrease an individual firm would face if it unilaterally raised prices so it could pay entry-level workers more.
The economics of this situation are similar to Germany’s industry wide wage agreements. Unions do not bargain or strike on a company-by-company basis. Instead, representatives from a federation of companies in a sector — steel, chemicals or financial services — bargains with the union. The agreed-upon wage schedule applies to all companies in that sector.
This benefits larger, older and often less-efficient businesses. They know that any competitors, especially small startups, will not be able to get workers any cheaper. The result is a sluggish German economy biased against innovation and entrepreneurship.
Specific units of government face analogous situations. St. Paul may enact a living-wage ordinance requiring all firms that are vendors to the city or that receive any city subsidy to pay wages above prevailing market levels. If so, its citizens will get fewer city services for the same budget expenditure than before. Companies will find St. Paul a less attractive place to do business.
If, however, a state law imposed an identical requirement on all municipalities, St. Paul would not incur this competitive disadvantage. Minnesota would be less attractive compared with other states, but all cities in Minnesota would be in the same boat.
Smoking bans are similar. When one city bans smoking in bars and restaurants, some patrons go to nearby municipalities. If, instead, the requirement applies to the whole state, border cities like Moorhead, Duluth and Luverne may complain, but eating and drinking places away from any state line will be on the same playing field.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.