Tuesday, February 07, 2006

Wal-Mart's Odd Obligations

Say John Smith is poor and unemployed. Or maybe he is employed, but not by Wal-Mart. In this situation, no one would claim that Wal-Mart has any special obligation to Smith. Quite a lot of people would claim that all of us collectively owe something to Smith: a minimum standard of living, healthcare, whatever. And Wal-Mart, as a corporate citizen, owes taxes as much as any other corporation. We might even say Wal-Mart has a moral obligation to help the poor through charitable giving. But Wal-Mart owes nothing to Smith that it doesn’t owe to every other poor person.

But now suppose Smith goes to work for Wal-Mart, with compensation that both apparently consider preferable to the alternative (for Wal-Mart, not having Smith as an employee; for Smith, unemployment or employment elsewhere). At this point, many people are of the opinion that Wal-Mart does have a special obligation to Smith. And not just the obligation they agreed to (the agreed upon compensation package), but something more: a “living wage” high enough for Smith to support himself and, according to many, his family as well (however large or small it may be), plus healthcare, maybe even retirement benefits. Somehow, Wal-Mart’s hiring of Smith has transformed a collective obligation owed by all into a particular obligation owed by Wal-Mart.

Now, I’m trying to dope out the underlying theory of obligation here. Why does Wal-Mart owe a special obligation to its employees, above and beyond what has been contracted for, that it does not owe to anyone else? Seriously: what is the argument here?

The answer I hear most often is simply, “Wal-Mart can afford it.” But Wal-Mart could afford to support Smith before it hired him. It could afford to support numerous non-employees. So the “Wal-Mart can afford it” theory cannot explain Wal-Mart’s special obligation to Smith-the-employee.

Another possible answer is that Wal-Mart is paying Smith less than he’s worth. This is not obviously true; if Wal-Mart competes in a competitive labor market, it has to pay compensation approximately equal to Smith’s marginal productivity. But let’s say the labor market is not fully competitive. If so, then one could plausibly argue that Wal-Mart should pay him more. But how much more? Is there any reason to think Smith’s true contribution to Wal-Mart’s profitability just so happens to equal the cost of buying Smith food, shelter, clothing, and healthcare (at some specified level of quality)? Of course not. The Wal-Mart critics' notion of the “right” compensation cannot possibly correspond to Smith’s actual productivity, given the same critics' insistence that Smith should be able to support his family as well – unless for some reason you think someone with five kids is necessarily more productive than someone with just three.

Another possible answer is that Wal-Mart’s position in the business world has allowed it to change the labor market for the worse – driving out small businesses, etc. Empirically, this is also questionable. But again, suppose it’s true. This is still just a variation on the previous answer. It indicates that Wal-Mart’s position allows it to pay Smith less than he would allegedly have earned if Wal-Mart didn’t exist. But how much would Smith have earned? The amount would presumably correspond in some way to his productivity. There’s no reason to think it would just happen to equal the amount of money it would take to sustain his and his family’s lifestyle.

The attempt to define a “living wage” in a manner divorced from one’s productivity suggests that many Americans have (perhaps unconsciously) absorbed a Marxian ethic: from each according to his ability, to each according to his need. Okay, I disagree, but I can believe people believe that. But this is still just a variant of “Wal-Mart can afford it.” It cannot explain the particular need-based obligation people think Wal-Mart owes people simply because it has hired them.

I am genuinely curious to know what the underlying theory is here. If I knew the answer, I might also know the response to this hypothetical: Suppose Wal-Mart caves in to progressive demands and pays all its employees a “living wage,” complete with healthcare, et al. And suppose that Wal-Mart hires fewer workers as a result, or hires a different set of workers to account for the fact that some workers are more expensive than others (because they have larger families). As a result, some people who would have been Wal-Mart employees are not. Does Wal-Mart owe any special obligation to them?


Untenured Sociologist (R-CA) said...

Not that I believe this myself, but I believe the argument is that subsidies to the working poor (EITC, medicare, food stamps, etc.) are really subsidies to employers since absent these subsidies from the state, employees would insist on greater compensation packages from their employers. Think of it this way, you can pay lower RA wages to grad students who already have fellowships than to grad students who don't.

The argument is curiously parallel to the craven rent-seeking of GM, Ford, United, and other dinosaur firms who think the taxpayer should assume responsibility for their decades of reckless capitulation to union demands on benefits. Curiously, in the Walmart case the left thinks that the firm should responsibility for health care from the state, and in the GM case that the state should take it.

Glen Whitman said...

Interesting argument. But it founders on the same objection as the other "not getting paid enough" arguments: even if it shows compensation should be higher, it does not show why the "right" compensation would just happen to be Smith and his family's cost of living.

Also, some welfare benefits might lower the amount that Wal-Mart needs to pay to attract workers, but other welfare benefits raise it. Any subsidy that the poor can receive without working will tend to raise their reservation wage. It's an empirical question how these effects net out.

Matti said...

The Marxist argument is that the employer is a monopolist because it has capital and the worker does not and therefore the employer exploits its workers in capitalism. I believe such socialist reasoning is behind it. Another source is the conservative patronalism.

Ben said...

Let’s look at the typical answer.

“Because they can afford it”

This is obviously foolish in the economic sense. I feel uneasy just thinking about it. It makes all the economic models in my head crumble and melt and leaves me appalled that anyone would use such a childish argument. And I’m not even an economist!

I think it has the same effect on you Glen. You have no real enquiries in the above post, the questions you pose are rhetorical an almost satirical of those who have such inconsistencies in their theory.

However, the “they can afford it” argument has to be viewed orthogonally to the economic perspective of the situation. It can’t be debated on economic grounds therefore let’s stop this futile attempt at talking past each other right here and now.

Now, it doesn’t mean the argument is void. People can’t verbalise a logical and rational explanation for it, so what? Given the Wal-Mart situation, it is very instinctual for people to use it anyhow. Why is that you think? Why this instinct?

My guess is that it stems from people’s sensitive radar to cheaters. As you probably know, being a reader of Steven Pinker, people have developed responsive instincts for warning them about unfair situations. They sense it deep in their insides, this bureaucratic barrier to treating people respectfully and fairly stemming from a huge organisation like Wall-Mart. It’s about the facelessness. It’s about being treated like a number. It’s about respect. Mr. Smith probably will never meet the person that determined his wages or the wage scale. If someone is going to enter in a contractual relationship with Wal-Mart and if a superior is going to have a substantial control over this person’s career, he ought to be entitled to deal for his wages and conditions with a supervisor who knows him, considers his worth as whole and takes responsibility for decisions that affect him. Not one who hides behind faceless policies that rain down the organisational chart.

I don’t think people using “they can afford it” base it on the fact that they feel people are always entitled to specific wages. However people feel an entitlement for consideration, respect and being treated fairly. This applies on both sides and is something which can only be done in a small or decentralized organisation where the people who make decisions know the worth of each individual employee that is affected by them. I think, good employees, the one’s organisations would strive to keep if they would try to get to know them, in the context of a transparent and humane business would understand that it is not the time to ask for a raise when locally there is financial difficulty, especially if the employee trusted his superior to consider him for reward if ever the opposite arises instead of letting the investors skim everything above the marginal cost. Capital investment is not the only think that deserves reward, hard work of each individual is as important.

Unions or government regulations are just very imperfect ways to fight back. It is people regrouping and saying “You are impersonal with us? Then we are going to use the same strategy on you and deal with you as a faceless organisation” or “You ignore my individual worth and situation? Well I’m going to do the same to you, regroup and ignore your financial requirements. You’re having financial difficulty? Well that doesn’t concern me as long as I have milked all the wages I can before you go out of business. Afterwards, I’ll work for the next one that springs up in the region”.

It’s arrogant to think that the corporation’s side should be allowed to act as a big centralised inhumane entity with few competitive alternatives for employees to go to and not expect the employees to claim the same kind of oligopolistic leverage that regrouping bestows.

In the end it does follow economical principles. It’s the very suboptimal way put there by the invisible hand where each side confrontationally and egoistically does what’s best for them but bad for the whole, in this case: regrouping, centralizing and ignoring each other’s real individual situation.

Glen Whitman said...

Matti -- Is that different from the uncompetitive labor market arguments I made in the original post?

Ben -- I would condense your explanation as follows: "We don't like Wal-Mart. We think it treats people badly. So we will therefore support any anti-Wal-Mart position." I think that sentiment is indeed a pretty good explanation for many of the criticisms made against Wal-Mart. But as you imply, the position is basically instinctive and doesn't stand much logical scrutiny. Specifically, it cannot bridge the chasm from "Wal-Mart should treat people better and pay them more" to "Wal-Mart should pay people enough money to support their lifestyles and families [independent of their productivity]."

Ben said...

Well... it’s not exactly that. I was focusing on the fact Wal-Mart considerers human resources as a somewhat homogenous pool of labour that deserves pre-defined salary and benefits instead of evaluating each employee’s worth individually. If it wants to deal with individuals it ought to treat them as individuals, otherwise it’s only natural that people regroup into unions or try to regulate them through governments.

It’s not really about supporting any and every anti Wall-Mart positions it’s about people trying to level the field on particular issues where Wall-Mart doesn’t play reasonably. It only relates to economic principles in that both sides are simply ignoring them (or only following the ones to their advantages but not to the advantage of the community à la “A Beautiful Mind “). Wall-Mart crushing competition and treating people and situations as a homogenous group while people unionizing (thus acting as the homogenous groups they are treated like) or regulating to demand unreasonable pay and benefits.

Wall-mart has to decentralise, de-homogenize and have respect for individuals or face people regrouping against them. They can’t have their economies of scales and eat it too.

Untenured Sociologist (R-CA) said...

I think there is a lot to the idea that this debate has less to do with economic rationales than with intuitive notions of fairness. Note that Ben referred to "levelling the playing field." Curiously, this is the same language that GM uses when explaining why it should shirk its (voluntarily assumed) health care responsibilities.
Aside from the irony of GM vs WM, the "level playing field" thing doesn't really work with Walmart either since (with the exception of grocery stores) it offers comparable or even superior compensation packages relative to its competitors, such as the fabled mom and pop businesses.

mike said...

Perhaps the reasoning is something along the lines of: 1. society owes all its members a "living wage". but 2. government is not currently providing this (by way of welfare or something); ergo 3. let's use employers as a way of providing this wage, rather than direct government largesse, by setting a minimum wage, requiring health care benefits, etc.

This seems silly on its face, but I think it may be somewhat unconscious, the logic being that employers are already providing a wage, why not just goose them a little bit to make the wage better?

Glen Whitman said...

Mike -- I think you've nailed it. I disagree with the sentiment, of course, and I think implementing would create (indeed, has created) big economic problems. But as a description of the mindset at work, I think it's right. It may be bolstered by an unconscious association between government and other big faceless entities -- a vague suspicion that they're all the same thing.

Mike said...

I think we are missing one of the major lines of thought that I have detected in the living wage campaign. I think that people see work not as a trade of money for specific valuable services, but more like mutual pledges of loyalty. That is to say they see a trade not where a worker benefits a company by a specific amount and the company compensates them, but where a worker donates his/her productive hours to a company and the company then pledges to take care of them.

I can't quote anyone on this, but i think this is the thrust of the living wage idea.

Chris Fulmer said...

I don't think you can separate the whole Walmart Living Wage/Healthcare argument from the wider complaints about Walmart -- mainly that when it moves into an area, it forces local smaller stores out of business. The argument goes that those stores paid their employees better than Walmart does and thus Walmart owes something to those employees. There's a presumption that those employees, having lost their previous job when Walmart drove their employer out of business, are then forced to work for Walmart where they are paid less than they were before and don't get the nice healthcare benefits that they received before. Walmart therefore owes those employees the difference between what they got before and what they get at Walmart.

This view seems to be completely divorced from reality -- the presumption is that the mom-and-pop toy store that was driven out of business not only paid its employees better but also paid their healthcare! In reality, Walmart's buying power allows it to offer benefits, including health care, that mom-and-pop stores never could.

Ben said...

I don't like that attitude, Glen and Mike. Up here in Canada we are much more on the left than you guys and I don't think many people think society _owes_ anyone a living wage. You have to earn it.

That image of entitlement is usually a straw man characterisation by the right of the left to hurt their image.

Matti said...

The Marxist argument I mentioned indeed is related to imperfect competition. But the Marxists don't believe that perfect competition is good for the workers but bad.

Edward Copeland said...

I had a Wal-Mart related post on my blog today if you are interested.


Blar said...

Glen, since you found the work of Fiske and Tetlock so illuminating last time I brought it up, I'd be remiss not to raise their view again here. Many of the people who think that Wal-Mart owes the worker a living wage seem to be thinking about the relationship between Wal-Mart and its employees using the logic that Fiske & Tetlock call "equality matching". That means that they expect a reciprocal exchange, judged by the standards of fairness in a relationship, rather than a market exchange governed by supply, demand, and the precise level of productivity. This is pretty much what Mike just said. You compare this to a Marxian ethic ("to each according to his need"), but I find it more reminiscent of the mutual obligations owed between lords and vassals under feudalism, or between apprentices and their masters. People have been thinking of employment relationships in this sort of way for a long time.

For evidence of this kind of view, watch Roger and Me - my recollection is that Moore's argument is that GM abandoned its workers and failed to live up to the obligations that supposedly went along with their relationship.

People also tend to think that businesses have similar sorts of obligations to their customers, with concerns of fairness placing a constraint on profit seeking (Kahneman, Knetsch & Thaler 1986). In that case as well, "they can afford it" is a powerful argument to people. It is generally seen as acceptable when businesses protect their profit by passing along new costs to their customers, but once the business's standard profit is protected then consumers are thought to be entitled to their "reference price", which means that it's unfair for businesses to raise prices to profit off of circumstances (think price gouging).

If this explanation is correct, then the answer to the question at the close of your post is "no".

Kahneman, D., Knetsch, J., & Thaler, R. (1986). Fairness as a constraint on profit seeking: Entitlements in the market. The American Economic Review, 76, 728-741.

Glen Whitman said...

CF -- "There's a presumption that those employees, having lost their previous job when Walmart drove their employer out of business, are then forced to work for Walmart where they are paid less than they were before and don't get the nice healthcare benefits that they received before." This does seem to be part of the sentiment, but it doesn't explain the whole living wage position. The problem is that even if we buy the empirical point (which, as you note, is highly questionable), it only shows that Wal-Mart should pay more than it does, not that the correct compensation should equal Smith and his family's cost of living.

Glen Whitman said...

Blar -- "That means that they expect a reciprocal exchange, judged by the standards of fairness in a relationship, rather than a market exchange governed by supply, demand, and the precise level of productivity." This does indeed seem to be the mindset. But it's also a little question-begging. What are these standards of fairness? Where determines them? Does fairness require being taken care of in all one's needs? I still feel like my original question hasn't been answered.

Jadagul said...

I think that Blar and Mike together are completely right. If you think about this in the "I'm a GM man and I'll work for GM all my life and GM will take care of me" vein, the argument makes perfect sense.

Suppose you accept not only the (not unreasonable) premise of an imbalance of bargaining power between Wal-Mart and its employees, but also the claim that Wal-Mart is, I don't know, "part of the system" and one of the groups running the country, etc. Then you might treat it as a vassalage system: employees agree to work for/serve Wal-Mart and do whatever the company wants, and in exchange the company agrees to take care of them. Not compensate them, but take care of them.

Then the living wage movement can be seen as a claim that Wal-Mart has committed breach of faith: Wal-Mart is not caring for its serfs and peons as well as it should, and is therefore defaulting on its obligation. Wal-Mart doesn't have the same obligation to the people who don't work for it, because they aren't Wal-Mart vassals. On the other hand, it does have an obligation not to lay anyone off, since that breaks the deal that Wal-Mart will take care of them in good times and in bad. It's sort of like if a Baron had accepted the work and taxes of his serfs for years, and then when they were threatened by barbarians ran off with his gold and food and stuff and left them to get slaughtered. It's breaking the agreement.

We, on the other hand, see it as fundamentally an agreement between equals, even if Wal-Mart has way more bargaining power. Since we don't see it as a feudal relationship, we don't think Wal-Mart has obligations beyond those stated in the contract. This actually makes a lot of sense to me, now that I think about it; it explains a lot.

Jonathan Rees said...

I've tried to answer your question about what the argument is here:


Be forewarned that I have an entirely different attitude about Wal-Mart than anyone else commenting on this post.