Tuesday, June 27, 2006

Hot Off the Press

Wrestling With Wal-Mart: Tradeoffs Between Profits, Prices and Wages by Bernstein, Bivens and Dube. Find the report here(pdf). You probably need to be a trained economist to understand the math in the appendix of this paper. You can also read a news release about the paper called 'The Wal-Mart debate A false choice between prices and wages' here.

To get a feel for how much of a wage increase could be financed out of reduced profit shares, one can imagine Wal-Mart's profit margins falling back down to their 1997 levels, which would also cut half of the difference between their margins and a key Wal-Mart competitor, Costco (which posted a profit margin of 2.0% in 2005). Reducing the profit margin by this much would give Wal-Mart $2.3 billion to plough into improved worker compensation without the need to raise prices. In Wrestling With Wal-Mart, we calculate that this would translate into just under $2,100 per non-managerial employee. Simply returning to its 1997 net profit margins, Wal-Mart could give its non-supervisory workers 13% pay increases without raising prices, while maintaining higher profit margins than a main competitor.

Wal-Mart could definitely raise compensation for its workers and still have lower prices than its competitors. Note that labor costs for its non-supervisory staff account for less than 7% of its total sales. If Wal-Mart's price advantage relative to its competitors is even in the neighborhood of what its defenders claim, consumers would still find Wal-Mart's prices lower. To believe otherwise is to believe that Wal-Mart's price advantage comes completely from substandard worker pay and not through any cost efficiencies.

Wal-Mart does a lot right. It has expanded productivity by being more efficient and leaner than many other companies. Many of the benefits shoppers accrue from Wal-Mart's expansion could be preserved even if the retailer had to meet the expectations of its critics regarding fair worker compensation. Defenders of the company too often set up false dichotomies such as low prices vs. high wages when in reality, better compensation for workers won't negate Wal-Mart's competitive edge.

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