In Defense of the Wal-Mart Model, Part 2

At the end of my previous post on Wal-Mart, I promised to consider Daniel Davies’s third point against Wal-Mart’s alleged productivity improvements. So here it is.

3. Employment practices - transferring risks to those worst equipped to bear them
… When one adopts “flexibility” in labour practices, and gains an improvement in output/input ratios as a result, then it can be made to look as if a massive productivity improvement has been made for free. This is not always the case. A large part of this apparent improvement in the company’s ability to generate outputs from inputs has come about simply as a result of taking the cost of mismatches between inputs and demand, and shifting it away from the company onto the shoulders of some other bugger - either the worker or the taxpayer through the benefits system. As Jerome Levy pointed out in the 1930s, one of the historical functions of the corporation has been the provision of implicit unemployment insurance to the working class, allowing them to smooth the volatility in their incomes by taking fluctuations in overall demand as variances in the profit rate. When an employer decides that he no longer wishes to provide for this cost, it doesn’t go away. WalMart are, notoriously, one of the most aggressive employers out there when it comes to alleged off-the-clock working practices, union-busting, sending workers home or keeping them waiting for shifts, and having a surprisingly high proportion of their cost base subsidised by the welfare system. If this cost of higher volatility in labour incomes is taken up by Joe Soap the taxpayer through social insurance, then it shows up in the figures as an increase in corporate productivity and a swelling of the bloated government sector.

There are a couple of different arguments mixed together here, so I’ll take them in turn. The first is that Wal-Mart has essentially shifted costs – specifically, the costs associated with bearing risk – onto the workers. As with Davies’s prior arguments, there’s probably some element of truth here, in that productivity gains may be overstated if some reduced costs are actually shifted costs. But does that mean the workers are actually worse off as a result of Wal-Mart? Wal-Mart has to offer terms of employment that will attract workers away from their next best alternative – either unemployment benefits or other employers. I conclude that, for whatever annoyances may be associated with working at Wal-Mart, the workers they hire must consider the package of benefits and costs to be better than the alternatives, all things considered.

The perception seems to be that Wal-Mart’s profit-seeking management has simply demanded a reduction in labor benefits. But employers can’t simply command a reduction in wages or benefits any time they want; and they can’t simply command a greater amount of work for the same wages and benefits any time they want. If they could, they would have done it already, long before Wal-Mart. Sure, Wal-Mart would like to be able to be able to get more work for less money, because that means higher profits – no surprise there. But people have always been greedy, and businesses have always been profit-seeking. Are we to believe that people are just greedier now than they used to be? Any analysis that purports to show that “profit-seeking” or “greed” explains a change in economic outcomes must meet the burden of explaining why the same profit-seeking and greed didn’t lead to the same outcome much earlier.

Davies’s argument also raises the question of efficient risk-bearing. It seems logical that a large corporation, which can pool risks over many workers, is a more efficient bearer of risk than individual workers. But if that’s true, then there’s an obvious deal to be made: Wal-Mart could reduce or eliminate some of the risks associated with sudden layoffs, showing up for work and being told to go home, etc., and then reduce the workers’ wages slightly to cover the risk. If it’s truly the case that Wal-Mart is the more efficient bearer of risk in this case, then that deal should make everyone – both the workers and Wal-Mart – better off. The fact that this deal hasn’t been made is prima facie evidence that Wal-Mart’s employment practices must improve productivity in some way, rather than just shifting risk to the workers.

The second argument is that Wal-Mart is taking advantage of the public welfare system by encouraging its employees to sign up for benefits, implementing sudden layoffs, and so on. What’s interesting about this argument is that it casts public benefits for workers (such as unemployment insurance) as a form of corporate welfare – surely a novel argument. I wonder if the liberals who (rightly) rail against corporate welfare would be willing to eliminate the benefits in question? In any case, as far as I know, Wal-Mart has never lobbied for the public welfare laws. It has just provided its workers a service by telling them how to access publicly available benefits. At worst, then, Wal-Mart is guilty of responding rationally to a public policy that was created by others and justified on grounds of helping the little guy. (I’ll take the forgoing statements back if I’m shown evidence that Wal-Mart has indeed lobbied for the expansion of public welfare.)

If Wal-Mart is indeed shifting costs onto the taxpayer – and maybe it is – then Davies is correct to say that the productivity improvements attributed to Wal-Mart have been overstated. But then my question is, whose fault is that? If you give your teenage daughter a high-limit credit card, and she runs to the mall and blows scads of money at the Gap and Express, is that Gap’s and Express’s fault? The “external cost” of the stores’ transactions with your daughter is one that you’ve brought on yourself by putting your own pocketbook on the line. And the same goes for state policies that deliberately create public benefits which encourage changes in behavior. If people engage in greater health risks because of free state-run health clinics, that is a cost the state has brought on itself (and the taxpayers). And if workers more willingly take less-secure jobs because of state unemployment benefits, that is again a cost the state has brought on itself (and the taxpayers). To blame Wal-Mart for “chucking [its] grass cuttings over the fence” (Davies’s phrase for imposing costs on others) is to deflect attention from the policies that gave Wal-Mart a positive incentive to do the chucking.

And just to be clear, the “chucking” in this case takes the form of hiring people, laying people off, and providing the workers with information that makes it easier for them to access state benefits. The former two are standard practice for any employer, and the latter is something the state does itself on a regular basis.