Economic Sophism #876457864 (totally made that number up, but not the sophism bit):
A belief that a warm and fuzzy employer will pay his employees more, while a cold-hearted exploiter will pay his employees less. Wal-Mart is an unusually malicious cold-hearted exploiter that gained a large part of its advantage by immorally "squeezing" money out of its employees. This will encourage other companies to start squeezing their employees, and thus an epidemic of meanness to employees and lower wages will occur throughout the economic system.
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But first, some definitions: Income is typically thought of in nominal terms. Nominal income is the quantity of monetary units (e.g., dollars) of income. Real income is the amount of wealth that can be acquired with income; it is the ratio of nominal income to prices. So, for example, if a person makes $50,000 a year and the prices of everything he buys fall by 50%, his nominal income has not changed, but his real income has doubled since he can buy twice as much wealth. If he gets a pay raise from $50,000 to $100,000 and the prices of everything he buys also double, his nominal income has doubled, but his real income has not changed since he can't buy any more wealth.
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An employer is not a caretaker of his employees; he is a purchaser of the services they are selling. Companies do not have arbitrary power over the wages that they pay their workers. Any rational company should want to pay its employees as little as possible to adequately perform the job, and any rational employee should want to be paid as much as possible. If an employer does not offer enough money to a potential employee, the potential employee will choose not to work for him. If an employee insists on more money than the employer can find another qualified worker for, the employer will choose not to hire him. An arrangement that is acceptable to both parties is where they must end up in order for them to agree to work together. The level of pay is determined by all the factors that go into supply and demand, just as with all other goods.
"The fact that human beings 'always want more,' no matter how wealthy they become, is often cited as if it were a sad fact of human nature. But it is this fact that guarantees that we will never run out of employment opportunities."
The economics of selling labor services can be accurately compared with the economics of selling a used car. When selling a used car, the relevant factors in determining market price are the supply of the type of car for sale, and the demand for that type of car. Individuals who are interested in selling their cars wish to receive as much as possible, just as individuals selling their labor services wish to receive as much as possible. At any given point in time there is a certain number of used cars of any specific type available for sale. The supply of that type of car is a given, and the sellers desire to maximize their selling price is a given. So how is the market price determined? It is determined by the competition of buyers for that limited supply of cars. In some circumstances, that competition will be more intense, and in other circumstances it will be less intense. When a person sells his car, he gives it to the party that makes the highest offer, just as people do when selling their labor services. To successfully purchase a car, even though a buyer wants to pay as little as possible, he must bid higher than every other potential buyer of that car. It makes no difference how nice or mean a potential buyer is; his bid is what counts. He must be the highest bidder to acquire the car.
Wal-Mart's critics worrying about Wal-Mart driving wages down, is as preposterous as worrying that some group that buys cars will decide to drive the prices of cars down. Every car buyer would love to drive the prices of cars down, but they can't. If some buyer tried to be mean to sellers of cars by refusing to outbid other potential buyers of those cars, the sellers of those cars would cease selling them to that buyer. The same thing can be said about employers purchasing labor services. They don't pay their employees a certain amount because they're nice or mean. They pay their employees the least they can to outbid competing businesses. If their offer isn't enough, the potential employee is free to try getting a higher offer somewhere else.
Wal-Mart's critics get the economics of the labor market confused when they see examples of Wal-Mart paying employees less than competitors for similar type positions. They mistakenly believe that this proves Wal-Mart has arbitrary power over wages and chooses to pay less. If it is the case that Wal-Mart workers receive lower wages than workers with similar positions at other businesses, it doesn't mean that it is "squeezing" its employees' incomes. A number of market forces can cause this to happen. It can mean that there are too many employed in the industry and that the lower wages are a signal to workers to do something else, or that Wal-Mart has simplified the necessary jobs to run a Wal-Mart store and can use less qualified job applicants. In the case of Wal-Mart, simplified jobs are probably at least partially responsible. As Wal-Mart has advanced technologically and organizationally, on average, its employees' jobs have become less complicated than its competitors. Because less qualified individuals need to accept lower wages to be able to compete with more qualified individuals, Wal-Mart can pay less than competitors if it is able to use less qualified workers.
For example, by using an elaborate computer system integrated with suppliers, Wal-Mart has radically simplified the demands on employees to track and order new inventory. Every time a cashier processes the sale of any product, the exact effect on store inventory is instantly recorded electronically, and a computer program manages reordering. Imagine what it would take to manage inventory in a store like Wal-Mart without the aid of computers. It would no doubt require the efforts of many far more capable people working around the clock. To attract such people it would have to offer much higher wages, but Wal-Mart has made the system ingenious so its employees don't have to be. This is why it's very common to see individuals with modest qualifications working for Wal-Mart, such as teenagers and those with little education or experience. In spite of their modest qualifications, they can still be relied upon to perform the relatively simple jobs that Wal-Mart requires.
This does not represent a driving down of wages, but a driving up of less qualified individuals' ability to accomplish more productive tasks. Wal-Mart's simplification and automation of processes could go so far as to one day eliminate the need for most of the human labor presently employed in Wal-Mart stores. Cashiers will probably be the next position to be completely automated. One day machines may even take over the stocking of inventories. This would be beneficial in the same way that eliminating our need to expend labor on horsewhips and buggies was beneficial. The workers who no longer worked at Wal-Mart would then quickly find more productive things to do and total wealth would thereby increase.
It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.
"Progressively rising capital accumulation is responsible for our rising levels of productivity and standard of living."
At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.
It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn't previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren't able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.
The critics grand idea for fixing the non-existent problem of economy-wide falling wages is essentially the same as that of labor unions, namely, to harass, intimidate, or force companies — in this case Wal-Mart — into handing over higher nominal wages to their employees. Not only is such a practice morally repugnant, it is ineffective as a way to improve the lot of wage earners. Artificial increases of nominal wages cause unemployment, and by attacking the producers, the labor unions and Wal-Mart critics attack the economic system's ability to accumulate capital and produce wealth. They may succeed in getting certain favored groups more wealth in the short-term, but this is at the cost of less wealth for everyone in the long-term.
Wal-Mart's critics are far too focused on nominal wages when they should be focused on production, for it is the capacity of businesses as producers that can make us all richer, and not their capacity as employers. As stated before, there are two parts to real income, nominal wages and prices. Just as Wal-Mart's critics are ignorant of the possibility of creating more total wealth and of the existence of potentially unlimited employment opportunities, they are also ignorant of the fundamental effect of prices on real incomes. The part that they myopically focus on — nominal wages — is the part that it is useless to focus on changing. Prices are the part that can change in a significant way to make us all increasingly richer. While increased production can cause prices of goods to fall, raising everyone's real incomes potentially without limit, it is impossible to make every wage earner wealthier by causing everyone to receive higher nominal wages. Everyone cannot get a raise without an increase in the total quantity of money. But an increase in the total quantity of money does not increase real incomes one bit. No extra wealth has been produced by such an increase. Prices would rise as much as dollar incomes and thus real incomes would be left unchanged. If the critics want to help wage earners, they should find ways to increase production. Probably no company has accomplished this in recent years to a greater degree than Wal-Mart.
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Superman wears Jack Bauer pajamas.
07 Feb 2007, 5:17 pm
