by Gary M. Galles
Gary Galles is professor of economics at Pepperdine University.
Americans are used to viewing unions and Wal-Mart as entrenched opponents. So it made news when Wal-Mart announced last year that it would join a long-term union cause — raising the minimum wage. As Wal-Mart CEO H. Lee Scott Jr. put it, We simply believe it is time for Congress to take a responsible look at the minimum wage and other legislation that may help working families.
Unfortunately, in endorsing a higher federal minimum wage, Wal-Mart is uniting with unions in a false compassion whose common denominator is self-interest, not helping working families.
Higher minimum wages hurt most of those they are supposed to help. Some workers lose their jobs (illustrated by the fact that high minimum-wage states have among the highest unemployment rates in the nation; see this ) and others have their hours cut. It results in the least skilled workers getting competed out of the jobs that remain (which is why higher minimum wages have their most adverse affects on teenage employment). It crowds out on-the-job training, turning current winners into losers over time by impeding their ability to learn and earn their way out of poverty. And that is in addition to raising costs and prices all workers must pay as consumers.
If a higher minimum wage benefited low-skilled workers, the improved terms of employment would both increase their labor-force participation and reduce the rate at which they quit those better jobs. But higher minimum wages reduce low-skilled workers' participation rates and increase their quit rates, which only makes sense if affected jobs become less attractive as a result (Walter J. Wessels, Does the Minimum Wage Drive Teenagers Out of the Labor Force? Journal of Labor Research Winter 2005).
Despite minimum-wage laws' harm to low-income workers, they help union members by raising the cost using low-skilled, low-wage workers relative to using union workers. That in turn increases the demand for union workers, who receive higher incomes as a result. Thus higher minimum wages are a way for unions to show concern for other workers that is not only costless to them, but actually pads their pocketbooks.
The same mechanism explains why many in high-wage areas, particularly those with high state minimum wages, favor higher federal minimum wages, while low-wage states (with the greatest number of supposed beneficiaries) often oppose them. The increase would cost high-wage-area producers little since relatively few work for the federal minimum, but by comparison the increase would raise the cost of production in low-wage areas. That would benefit the high-wage areas at the expense of the low-wage areas.
Wal-Mart to Benefit
Wal-Mart stands to benefit from a higher federal minimum wage in much the same way as high-wage-area producers do. Wal-Mart already pays more than the federal minimum. In low-wage areas a federal minimum-wage increase would raise their competitors' costs but not their own. Other things equal, that could increase the demand for Wal-Mart's products and improve its bottom line. In high-wage areas, particularly where there are higher state minimum wages, raising the federal minimum wage would impose no costs, but it would give Wal-Mart a costless way to show its compassion for workers (which is why it does not support raising state minimum wages where that would directly affect its wages). That in turn could help deflate the primary argument made against allowing its superstores into high-wage areas — that Wal-Mart is anti-worker — facilitating its expansion where it currently faces the most opposition, such as in California.
Wal-Mart has been a boon to America's low-income workers by increasing their options and making their paychecks go further. But by joining the union-led push for a higher federal minimum wage, it is proposing to harm many Americans in pursuit of strategic advantage while mislabeling it compassion. If that proposal were a product on Wal-Mart's shelves, it would be removed.