We Can't Reduce Inequality By Forcing WalMart To Pay Like Costco

It’s not unusual to find people making the point that WalMart pays its workers quite a lot less than Costco does. Something which is true, they do. Costco pays around $20 an hour and WalMart more like $10 an hour on average. So the observation itself is obviously true. Unfortunately we then get people leaping to a conclusion, which is that we could reduce inequality, poverty even, if only we could force (or persuade) WalMart to offer its workers the same sort of deal those at Costco get. While attractive that’s not actually a plan that would work in reducing either poverty or inequality. The reason being that the two employ entirely different labour policies. And if we forced (or persuaded) WalMart to pay those higher Costco wages then we would be forcing (or persuading) them to take the other half of the Costco labour policy, which is to employ very much less labour in relation to sales.

There’s a nice example of this gosh gee whizz isn’t Costco a great employer line over at Bloomberg:

Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, Walmart said its average wage for full-time employees in the U.S. is $12.67 an hour, according to a letter it sent in April to activist Ralph Nader. Eighty-eight percent of Costco employees have company-sponsored health insurance; Walmart says that “more than half” of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employees well in the belief that a happier work environment will result in a more profitable company. “I just think people need to make a living wage with health benefits,” says Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

All of which is just great. But we do have to note the other thing that comes with this idea: that many more people don’t get jobs at all because of Costco’s labour policy and structure. The other way of saying the same thing is that many more people get WalMart’s lower wages than if WalMart had Costco’s labour structure.

At which point here’s a few fun numbers culled from the recent annual reports. WalMart has some 1.3 million US associates. WalMart US sales are some $280 billion (as ever with numbers here we’re not trying to be accurate, just within range of accuracy). $215,000 in sales per member of the (non-management) workforce then.

Costco doesn’t seem to break out US sales in quite the same manner but total sales are $102 billion and 451 of 634 stores are in the US. Assuming, incorrectly but possibly accurately enough, that sales are equal per store whatever the geography we can then say that US sales are 451/634 x 102 billion. $73 billion then: and they’ve 184,000 employees, of whom we’ll assume the same portion are in the US. 451/634 x 180,000 is 130,000. That’s $560,000 in sales per member of the workforce.

The number of part timers to full timers is not greatly different between the two companies. And even if it were we’ve a big enough difference here to make it obvious what is going on.

Costco gets more than twice the sales per member of staff than WalMart does. Another way of saying this is that Costco uses its staff more productively. A third way to say the same thing is that Costco is an intensive user of labour and WalMart is an extensive user of labour.

There’s nothing wrong with either business model either. Not in business logic, not in theory nor even in morality is there anything wrong with either of them.

However, it’s not possible to mix and match the two business models. You cannot double the pay for the WalMart workers, maintaining the same number of them, and still be hitting the same selling price points that Costco has. Nor, of course, could Costco double the number of people it employs at those $20 an hour and up wages and still maintain either its own prices or profit margins. It’s very much an either or set there, you can have less and better paid labour or you can have more and worse paid.

So, to bring ourselves to the big question of whether we’d reduce inequality, or even poverty, if we forced or persuaded WalMart to pay like Costco does. We couldn’t just pass a law of course, that would be much too like an Act of Attainder which the Constitution prohibits. But we could do something like DC did and write a law that said that “big box stores that employ more than 1 million people must pay wages of $x per hour or above”. That might well pass legal muster.

So what would happen if we did do this? If WalMart had to pay labour like Costco does then we’d expect them to also employ labour like Costco does. That is, we’d expect them to reduce their workforce by more than half: that’s what they would have to do in order to get to roughly the same sales per head of staff, that thing which is the determinant of how much they can pay people.

This, in turn, would obviously reduce inequality among people who were still in the workforce. Those 650,000 still employed would be making twice what they are now and that would, indeed, reduce inequality among those who have jobs. But our rough, very rough, calculations also indicate that we’re going to see 650,000 people end up with no job at all. And that’s most unlikely to reduce inequality, or poverty, in the country as a whole. Which, presumably, is the thing we’re trying to achieve.

By the way, we can’t just say “take that extra pay out of the profits”. That would cost $20 billion a year (1.3 million people at $10 an hour, 30 hours a week, 52 weeks a year) which is more profit than the company actually makes, some $6 billion a year more than the company makes in post-tax profits.

We also can’t just say that WalMart should increase worker productivity to meet that extra cost of those higher wages: actually, no, we can, but that’s exactly the same as stating that WalMart is going to raise sales per head of staff. That’s what increased labour productivity means, so increasing productivity is exactly the same as stating that they should fire a bunch of people.

Insisting that WalMart pay higher wages just isn’t going to reduce poverty and or inequality. For forcing them to pay higher wages would also mean that, like Costco who do pay higher wages, they will employ fewer people. Which makes this statement from Costco a little suspect too:

“I just think people need to make a living wage with health benefits,” says Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

That’s great and of course you’re entirely free to run your organisation your way. But it is worth noting that while you pay double the wages you also employ less than half the staff in relation to sales. Meaning that the actual amount of money your paybill puts into the economy is smaller, proportionately, than WalMart’s. And a living wage is also great: but there’s a certain truth to the idea that any wage is better than none. So it’s also not obvious that Costco’s labour strategy is better for the country as a whole either. It’s certainly better for those workers who do get jobs, that’s for sure. But equally it’s not obvious that it’s better for all of those who would like to have a job.

But the bottom line remains the same. Insisting that WalMart pays higher wages would lead to their employing less labour, as Costco does. And it’s unlikely that we’re going to solve either poverty or inequality by destroying 650,000 jobs.