Wal-Mart is the largest private-sector employer in the United States. It employs more than 1.4 million workers here, but pays them an estimated 12 percent less than average retail workers in the country. Many argue that, while unfortunate, such low wages help poor families by allowing them to purchase goods cheaply.
That argument was most famously articulated by the current National Economic Council Deputy Director, Diana Farrell, who before she joined the White House published a paper in 2005 titled “Wal-Mart A Progressive Success Story.” It argued that Wal-Mart could not raise wages without raising prices, which would hurt poor and low income communities.
However, a study released on Monday by University of California, Berkeley’s Center for Labor Research and Education found that increasing wages to $12 per hour would cost Wal-Mart $3.2 billion if applied to all workers across the United States. That amounts to about 1 percent of the company’s annual sales of $305 billion. Even if Wal-Mart were to pass on the total cost of the wage increase to consumers, researchers estimate that shoppers would pay about $12.50 more per year – or 46 cents per shopping trip – to cover the cost of the pay raise for Wal-Mart workers.
UC Berkley researcher Ken Jacobs doubts that all the costs of a wage increase would be passed on to consumers in the form of increased prices, because increasing prices would lower the amount of goods Wal-Mart would sell.
“Wal-Mart is the largest private employer in this country and it’s dragging down wage job standards for retail and grocery workers. It can clearly afford to pay workers a well wage,” says Jennifer Stapleton, assistant director of Making Change at Wal-Mart, which is run by the United Food and Commercial Workers union.
“Even if the company passes on that cost to customers, it would be the same cost as a pack of gum. Consumers would be open to that, instead of feeling guilty for shopping at Wal-Mart.”
Indeed, such a wage increase could really help workers. A $12 an hour wage would mean average annual pay increases of $3,250 to $6,500 for workers making less than $9 an hour, and $1,675 to $2,930 for workers making between $9 and $12 an hour. 41 percent of the pay increase would go to workers in families with total incomes of 200 percent of the poverty line — less than $21,660 a year for a single worker and $44,100 a year for a family of four.
And the cost for the wage increase would not come out of the pocket of poor workers, but 72 percent of the costs of this substantial benefit would be borne by people making above 200 percent of the poverty line.
Despite statistical evidence saying that raising labor prices has very little effect on consumer prices, advocates of low wages claim wages must be keep low to keep consumers good cheap. We hear this same argument applied to free trade: Goods are cheaper from China and other low-wage countries because these countries pay workers a lower wage.
“Even for most manufacturing, the labor cost is a very small percentage in all but some of the most rudimentary manufacturing, like textiles. For things like steel high tech or most manufacturing that is heavily capital intensive the labor impact is minimal,” says Scott Paul, executive director of the Alliance for American Manufacturing, an alliance of businesses and organized labor. “Labor costs in China amount to less than 10% of overall cost, labor cost differential washed away by productivity in the United States.”
Paul points to other countries where workers make higher wages than Americans but have no trade deficit with the U.S. “Average factory compensation for a worker in the United is $32 dollars an hour. In Germany, the average factory worker makes $48 dollars an hour. Despite this, the United State has a $275 billion trade deficit, while Germany has balanced trade with China. How is it that when our labor costs are $16 an hour cheaper than Germany?“ asks Paul. “It has everything to do with our trade policies, infrastructure policies, tax policies and investment in skills, and very little if anything to do with the cost of labor.”
The new attacks on public-sector workers’ salaries and benefits in Wisconsin and other states have triggered a debate about whether labor costs place too much of a burden on taxpayers. Hopefully this debate over paying workers good wages won’t spill into tired old debates about free trade.