Observations on Walmart, Women, and Wages

After my earlier post on Walmart, I got to thinking about a number of Walmart-related topics.  My brain is a bit too fried on Friday night to organize these thoughts too much, so here they are, roughly following my stream of consciousness:

Exxon may have finally handed off the Great Satan title

The socialists of this country (who now generally call themselves progressives but its pretty much the same thing) usually need a company they can focus their attention on.  In the 1960's, this was probably General Motors, though defense contractors in the Vietnam War made a run at the title.  After the oil embargo of 1972, that title clearly moved to Exxon. I remember in one month in the early 1970's, the head of Exxon got called into Congress twice in a few weeks, once to combat the urban myth that oil companies were greedily holding oil off the market to drive up prices, and once to explain to Congress why they were greedily trying to expand oil production in Alaska.  My family and many of my friends worked for large oil companies, and we had several friends who were injured by letter bombs from domestic leftist terrorists (though the media did not call them terrorists then).

Exxon held the great Satan title for a long time.  It probably could have shed the title with low oil prices in the 80's, but the stupidity of the Valdez mess in the mid-80's and the vociferous opposition to the politically correct Kyoto accords in the mid-90's help them retain the title for a record number of years.

Finally, however, it appears that a new contender is at hand.  Walmart, so recently the most admired corporation in America, has become the new socialist whipping boy and lawsuit magnet.  Just search for Walmart in Google and you will get pages and pages of Wal-mart bashing sites.  Its kind of an amazing story how the former blue collar low-price hero of the working man trying to make ends meet has suddenly become a class enemy.  However, coming from a family that had many members who worked for Exxon, it comes as some relief to pass the Great Sata title on.

I wish everyone at Walmart could make $100,000 per year

In this, I am exactly in the same boat as Walmart detractors.  I would love for everyone at Walmart to make a ton of money.  Whether this is realistic is another story.

In America, people take jobs voluntarily

I would generally class this as a blinding glimpse of the obvious, but it appears that it has to be said.  And, if you accept that people are operating in their own rational self-interest (by the way, this is not a given -- many on the left do not think the average American is smart enough to make decisions for themself and that they need smart technocrats to look after them).  Anyway, were was I?  Oh yes, if you accept that people operate in their own rational self-interest, then by definition the job for Walmart employees is their best option, and any other option is worse.

This is the logical fallacy of those who attack Walmart (or offshore companies) for paying too low of wages.  Their concern is that these wages are lower than they, as an outside obviously smarter than everyone else observer, think they should be.  The reality is that these wages are higher than that employee's other options, and therefore is an improvement over that job not existing at all.  Note this story I told in an earlier post:

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might face a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what opposition to globalization is all about - a deep seated
conservatism that distrusts the decision-making of individuals and
fears change, change that ironically might finally pull people out of
untold generations of utter poverty.  (update:  good post in the Mises blog on Taco Bell and wages here)

It's Wages vs. Prices, not Wages vs. Profits

In aggregate, because they have so many stores, Walmart makes about $10 billion a year in pre-tax net income.  Which is a lot.  But when looked at as a percentage of sales, it is pathetic.  Given its nearly $300 billion in sales, this is about a 3.5% return on sales, which while not unusual for retailers, in the grand scheme of American business is pathetically low.  I would have to shut down my business tomorrow if I only made 3.5% of sales -- I couldn't support the investments I have to make.

Its illuminating to compare this to all those small family owned boutique
businesses that Walmart supposedly shuts down.  So here is a little
example.  Lets say that the alternative to Walmart in Smallsville, USA would be a series of boutique stores, like
the mythical Nan's Clothing Shop.  Lets
say Nan does $250,000 a year in sales,which
would actually make her shop more successful than average, particularly for smaller town mid-America.  If Nan had to live with Walmart's profit margin of 3.5%, she would end up with an annual profit of  ... $8,750.   And, if Nan is working full-time trying to make the store work, and assuming 2300 hours a year, which is probably low for a small business person, she would be making a whopping  $3.80 an hour running her store, such that she would be much better off (leaving out the personal satisfaction of running your own business) working for Walmart at the average wage there of $6.50 an hour. 

While socialists and progressives are programmed in the deepest recesses of their DNA to blame everything on profit, the wage savings Walmart may get are not going to profit.  Their profit margins are low, in fact lower than most of the smaller stores they are replacing.  If there is a wage trade-off going on, it is between lower wages and lower prices to consumers.  Which obviously makes socialist demagoguery a bit less compelling, since it means that in some sense consumers and not Walmart are to blame if wages are too low, since presumably it is consumers who make the choice to switch from the higher cost traditional boutique alternatives to Walmart.

Walmart detractors have one good point - Walmart gets far too much preferential tax treatment

I don't know why it is, but Walmart is a magnet for taxpayer subsidies.  Not only does the government love to hand out tax breaks to Walmart, it local governments go so far as to use eminent domain to put together land parcels for them.  If I was a local retailer and had my tax money used to subsidize a new competitor, or worse got my land siezed to hand over to Walmart, I would be pissed off too.

I have not really studied Walmart's tactics in this, but my sense is that they have gotten good at getting neighboring communities competing with each other.  This is a crock and a waste of taxpayer money, and nearly as bad as subsidizing sports teams.  I have a long post on the sad practice of subsidizing business relocations here.

A final thought on the most unpublicized economic miracle of the last century

Since many of Walmart's attackers focus on their treatment of women, in part due to numerous accusations of discrimination in pay and promotions, it led me to a final thought about a great economic miracle that occurred in this country in the last decades of the 20th century.

Check this data out, from the BLS:

  • In 1968, the unemployment rate was 3.8%.  22.9 million women were employed in non-farm jobs, accounting for 34% of the work force.
  • In 2000, the unemployment rate was 4.0%.  62.7 million women were employed in the work force, accounting for 48% of the total
  • In these years, the number of women employed increased every single year.  Even in the recession years of 1981-1983 when employment of men dropped by 2.5 million, women gained 400,000 jobs

This is phenomenal.  After years of being stay-at-home moms or whatever, women in America decided it was time to go to work.  This was roughly the equivalent of having 40,000,000 immigrants show up on our shores one day looking for work.  And you know what? The American economy found jobs for all of them, despite oil embargos and stagflation and wars and "outsourcing".

I would love to see women at Walmart making more money, and some day they probably will.  Even so, though, the fact that so many have found work there is a miracle unto itself. Remember that the alternative to a $6.50 job at Walmart if the left is successful in eliminating these jobs is probably not new $15.00 jobs - it is no job at all.  Just ask the French.  Also see my recent post on the minimum wage.

Update:  This is some pretty smart PR by Wal-Mart to deflect the sprawl argument often used against it.  By the way, I challenge someone to define sprawl adequately for me in the context it is used by people who are decrying it.

  • Knox

    Great post! Thanks

  • http://ashishniti.blogspot.com/ Ashish K Hanwadikar

    I think a firm's profitability cannot be measured by return on Sales or operating profit margins and so on. The real measure of profitability is return on equity. For Walmart the figures are:
    Market Cap (intraday): 205.60B
    Enterprise Value (9-Apr-05)³: 231.56B
    Profit Margin (ttm): 3.65%
    Operating Margin (ttm): 5.93%
    Return on Assets (ttm): 9.37%
    Return on Equity (ttm): 22.98%
    Total Assets: 120,223,000
    Total Current Liabilities 42,888,000
    Total Liabilities 70,827,000
    Total Stockholder Equity 49,396,000

    Thus, WalMart generates only 9.37% return on the total assets that it has invested in the business. But as for shareholders are concerned it generates a whopping 22.98% return. How? By having non-interest bearing current liabilities (read the money collected from the customers but not yet paid to its suppliers) almost 1/3 of its total assets. Roughly less than 1/3 of its assets are contributed from other interest bearing liabilities and the rest is contributed by the shareholders as a equity.

    In other words, WalMart's speciality is squeezing its suppliers not only for low prices but also in delaying the payments. It is not surprising it is one of the major complaints against WalMart.

  • http://chrisyeh.blogspot.com Chris Yeh

    Great post, as always, but there is one minor quibble that you should address, lest the socialists attempt to hold it against you.

    Wal-Mart's profit margin already accounts for the cost of labor under SG&A.

    If Nan does $250,000 per year in sales, the theoretical 3.5% she earns should be after salaries are taken into account.

    Part of Nan's earnings from her store stem from her labor (the wages she forgoes as the owner). The other represents a return on her invested capital.

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  • http://www.theglitteringeye.com Dave Schuler

    I agree with you that the story of the mass entrance of women into the workplace in the United States is remarkable. I disagree with your interpretation. Women entered the workplace for many reasons but a very significant leading indicator was stagnant median incomes. At least in part women entered the workplace so that families didn't have to accept a lower standard of living.

  • http://lazax.com/blog Zoran Lazarevic

    Nice post. I am learning economics, so my comment here might be a bit ignorant:
    1. "In America, people take jobs voluntarily". If we look at an underdeveloped region with only one industry (e.g. a chicken-plucking factory or an automobile-plant), there is only one employer within a decent driving range. Unlike the Vietnamese farmer, an American worker has no farm to fall back to (even if he wanted to). Workers of Flint,MI did not have much choice before the auto industry shut down, as we saw from the aftermath.

    2. The Left picks one target company because that simplifies their marketing message. But the major complaint of the Left is not Wall Mart per se, but the fact that the minimum wage is not a living wage. As Dave Schuler noted above, women (and men too) now have to work much more then they did in the 70's in order to achieve decent living (median-income family cannot afford a median-priced house, etc.) When you are defening Wall Mart, you are thus defending all huge corporations (Exxon included).

    The problem of the Left is that they see that something is wrong (i.e. workers' income is too low), but do not know how to fix it except blame it on profits. From all I know, creating more efficient method of selling (e.g. Wall Mart store) should create more jobs.

    In many of the Wall Mart defense articles, however, I hear the message "our current economy is perfect" and "the workers are doing great". My personal observation is that this country is not doing as well as it can and should do.

  • http://mysticcowboy.org Michael McKee

    I suppose that you need a token comment from the left. I am not a socialist, though you might consider me one. I simply don't think that the only, or even most important measure of human activity is the bottom line.

    Some time ago I RIF'd in a merger, though the term hadn't been coined yet, and chose to spend a couple of years volunteering for V.I.S.T.A., the stay in America version of the Peace Corp. When I returned to the job market I had a surprisingly hard time finding employment. After one interview with a Fortune 100 company, which I thought went well, a V.P. took me aside and told me that I was the most qualified applicant but my time doing good made me look like a 'communist'. He recommended that I downplay my volunteer time saying something like, "I had to get it out of my system," instead of considering it a positive.

    What a revelation. I knew business was about making money but never understood the kind of religious fervor capitalism invoked in corporate America. I took the kind advice, albeit in a reverse manner. I applied to the non-profit sector and got two offers out of my next three applications.

    In small town America, there may not be an alternative to the minimum wage that WalMart offers. I know. I grew up there. Had I not had the grades and entrance scores to attain a scholarship, I might still be there. Not all of us attended HBS, gaining the attendant open doors that such a degree offers. Choice is wonderful if real. For too many it isn't. The playing field was never level, nor will it ever be.

    There is a great deal of value in maximizing profits, but wanting to consider other types of 'good', including championing the less fortunate, of equal value does not make one a socialist.

  • Bob Ruth

    Do you ever take in concideration that there are Wal-Mart employees getting government help like food stamps. Doesn't that make them a government subsidized co.

  • Joseph Miranda

    My problem with Wall Mart is it's practice of forcing American companies to ship jobs overseas to keep their contracts and of using taxpayer subsidies.Here in Riverside,Ca they recently announced the closing of a store one week after the last payment of a $26,000,000 taxpayer subsidy.I can't stand Socialism but using the American taxpayer in this way is nothing but Corporate Socialism.Funny how Target is able to make a profit without resorting to this kind of practice and still offer benefits to it's employees.

  • Mighty Mike

    Very interesting blog either way one stands on the WalMart issue. One thing the detractors have to admit is WalMart & companies like them will NEVER go away as long as your friends and neighbors want their $39.00 T.V.s & $79.00 mountain bikes. Who wants to be the first to protest by bravely standing in front of his neighbor's car on his way to the Supercenter? ANY TAKERS? I didn't think so.We all should realize there is a trade-off to bargain buying and people have already voted with their pocketbooks. I daresay many, many more than do at the voting booth!
    I run a photography business & could honestly say that a certain percentage of my customers have abandoned me for Walmart's portrait studio. But I realized picket signs just weren't going to do a thing for MY bottom line. I simply created a new niche with which WalMart can't compete. Today I actually rejoice when certain customers who I know can't afford me go to WalMart & Sears. That way I don't have to waste my time in a session for a deadbeat and they're happy with the hideous
    bargain portraits they get there! It's a win! win!