Wages, prices, "profit", and productivity…and Black Friday too
Black Friday around here in New England begins to night in stores about 8 P.M. On the internet Black Friday’s discounts began last week as the competition heats up between companies with stores and internet based sales. Stores have responded with aggressive discounts, especially visible is Walmart.
This post is relevant to the issue of wages at Walmart, and points to deeper economic issues one has to keep in mind when reading about the economics overall versus a company policy. This becomes especially poignant as some Walmart workers attempt to draw attention to wages, benefits, and hours the company paints as necessary.
Demos has some figures for thought in How Raising Wages Would Benefit Workers, the Industry and the Overall Economy. Here’s a summary of the study from Demos:
This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies, those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families. This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status.
“There is a flaw in the conventional thinking that profits, low prices and decent wages cannot co-exist,” says Catherine Ruetschlin, study author and Demos Policy Analyst. “The findings in the study prove the country’s largest retailers are in an ideal position to launch a private sector stimulus, leading the way towards a new model for American prosperity.”
Robert Reich offers his viewpoint below the fold:
Most new jobs in America are in personal services like retail, with low pay and bad hours. According to the Bureau of Labor and Statistics, the average full-time retail worker earns between $18,000 and $21,000 per year.
But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the think tank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1 percent price increase for customers.
And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8 billion — about one percent of the sector’s $2.17 trillion in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional retail sales.
I saw this Robert Reich piece. And boy oh boy is it appalling.
“But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the think tank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1 percent price increase for customers.
And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8 billion — about one percent of the sector’s $2.17 trillion in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional retail sales.”
Hmm. What’s the total cost of a 1% increase in consumer prices? GDP is around $15 trillion, consumer sales make up 70% of that (as Reich tells us in the piece) so a 1% price rise is $105 billion.
For which 700,000 are taken out of poverty? That’s a cost to consumers of $150,000 for each person taken out of poverty. That’s not an efficient poverty reduction program.
And the next paragraph is even more absurd. In the original piece he calls this a “good deal”.
I’m sorry? You increase retailers’ costs by $20 billion to increase their sales by $5 billion? What? This, this! is a good deal?
The entire idea is absurd.
Please note, I’m not talking at all about inequality, low wages, high Walton family earnings or anything else. Just the actual numbers that Reich uses. It’s almost as if the man is innumerate.
worstall, consumer sales dont make up 70% of GDP; PCE (personal consumption expenditures) roughly does, which you can find reported in the monthly “Personal Income and Outlays” from the BEA…of that 70%, about two thirds is outlays for services, such as health care & education…the remaining “retail sales” includes a number of items not purchased at general merchandise stores, such as cars and gasoline…
“Consumer spending is 70% of economic activity”
That’s what Reich actually said in his piece.
And as for his second idea?
if that’s what reich said, then he was accurate, and it was you who conflated retail store sales with all of PCE, in accusing him of being innumerate…
i’m on record in support of a $10 or $12 minimum wage in lieu of higher taxes on the rich as a means of addressing inequality; with a higher minimum wage, many of the 47% will begin paying taxes again, which will help on the revenue side, also, both social security and medicare will stop drawing down their trust funds, as they will once again be funded entirely out of payroll cashflow; in addition, once the everyone working at a decent wage, young people will be able to move out of their parent’s basements, and those who’ve doubled up will again be in the market for housing, which will ultimately put a floor under falling real estate prices, and may even save the banks from having to mark those depressed home loan assets to market…
Tim:
What part of a retail store selling physical product does the Direct Labor make up percentage wise? When measured against the cost of product sold and the fixed costs and overhead of the business; the cost of increased Labor would be relatively small percenatge wise and would represent a marginal increase if wages were increased. Your basis is one sided.
tim
i am prepared to believe Reich is innumerate as appear to be about 99% of everyone else. including Worstall.
not to mention functionally illiterate. i think a fair reading of “raising the wages of workers at large retailers… would raise the prices to customers 1%”
means the customers of the same “large retailers.”
But like you I don’t know what any of this actually means if true, if true.
Unlike you I am not jumping to any conclusions.
oh,
a fair reading of the 20 billion increase in costs as against the 5 billion increase in sales… might be that the costs, being paid for by the 1% increase in prices, are exceeded by another 5 Billion in extra sales.
again, i don’t know about this, but, etc.
Studies show, over and over again, that money given to people at the low end is much better for stimulus than money to those at the high end, because the poor spend all their money, and the rich do not.
Money is a funny thing, isn’t it? A dollar can be spent over and over again; its worth over time is so much greater than the face value. At least, until someone socks it away in an investment. And even then, it’ll get spent again someday, most likely.