More than a decade ago, under intensified political pressure to increase wages, Walmart CEO Lee Scott proposed hiking the federal minimum wage, despite previous opposition to minimum wage increases. Now, in a similar situation, including Bernie Sanders demanding that it pay a minimum of $15 per hour (its minimum is now $11) at its annual shareholders meeting, CEO Doug McMillon endorsed hiking the federal minimum wage in very similar language.
In both cases, Walmart was trying to publicly signal pro-worker compassion, to rebut anti-worker criticisms and political demands. Unfortunately, it demonstrates compassion for its own interests, not those of low-skill workers.
As Mark Wilson summarized the results, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.” There are several reasons, including the fact that some workers lose jobs and others have hours cut, particularly the least-skilled, it crowds out on-the-job training, impeding workers’ ability to learn their way out of poverty, and raises costs and prices that workers pay as consumers.
But how does a higher federal minimum wage improve Wal-Mart’s bottom line? By raising the costs of competitors, which increases the prices of substitutes for its products.
Walmart currently pays more than the federal minimum wage. In lower-wage areas, that means a higher federal minimum would raise many of their local competitors’ costs, but not their own. That would increase demand for Walmart’s products, raising its profits. And in higher-wage areas, particularly with state minimums higher than federal minimums, it provides them a plausible claim to being pro-labor, reducing political pressure, without raising its own costs. This can also explain Walmart’s opposition to raising state minimum wages that would force their wages up at the same time they are supporting higher federal minimum wages that would not.
That actually gives Walmart something in common with unions—the same mechanism by which higher minimum wages advance their own interests.
A higher minimum wage increases the demand for union workers by reducing competition from lower-skilled workers. If the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour hired. But increasing the minimum wage to $10 means employers give up 4 hours of low-skilled work for every union worker hour instead of 5. The demand for union labor increases as a result, increasing union worker incomes.
Similarly, non-union workers and employers in high cost of living areas, where virtually everyone earns above the federal minimum wage, benefit, by raising the cost of production imposed on rivals where wages are lower. Even if workers and producers there lose, they gain.
Because all those substitutes for minimum-wage workers will see increased incomes, businesses and politicians in those locations will also benefit, and join the bandwagon pushing for “doing good” in a way that directly benefits them, regardless of any harm to affected workers elsewhere.
Walmart has been a boon to America’s low-income workers both by improving their employment options and making their paychecks go further. That is why unions oppose Walmart—for offering trading partners better options than unionized producers did. But in joining the union-led push for a higher federal minimum wage, Walmart joins unions in proposing to harm many lower-skilled Americans to benefit itself. And that is a reason for heightened cynicism, not celebration.
Gary M. Galles is a Professor of Economics at Pepperdine University, an Adjunct Scholar at the Ludwig von Mises Institute, a Research Fellow at the Independent Institute and a member of the Foundation for Economic Education Faculty Network. His books include Apostle of Peace (2013), Faulty Premises, Faulty Policies (2014), and Lines of Liberty (2016).
