What should we do with low-skilled labour with measly wages?

The profits commanded by mega corporations such as Walmart are lightning rods when issues of low-skilled labours’ compensation are discussed. The popular narrative is that Walmart squeezes its low-skilled workers by paying them less;that it destroys jobs in counties it expands into; and it generates value to its shareholders at the expense of the taxpayers. Jason Furman(appointed by President Obama to fill up the position as Chair of the White House Council of Economic Advisers) had written an excellent literature review that examines the logic and data behind the discourse.

Just to add on to the discussion on tax reforms for those workers at the lower end of the income spectrum, I thought this post from Greg Mankiw’s blog is worth linking to again.

implicit tax rates 2

It appears that the tax code has created an inherent disincentive for low-income workers to expand their work hours, on account on the loss of benefits that would have increased the effective tax (you get slightly more income, but might lose Medicaid, which offsets the gain in income for instance). Expandable health care where the federal government picks up the bulk of the tab seems like a good direction, although it still befuddles me that so many attempts were made to repeal the Health Care Act.

The broader issue is does it make sense to “force” companies to compensate their workers with higher income? Well perhaps when you put the profit margins into context, what appears as a gigantic sum of profit on an absolute level is actually a razor thin profit margin (Walmart’s was at 3.7% in 2005-2006.). If you inflate the cost of workers compensation, will Walmart still exists?

I’d conclude by questioning why not affect these compensation through fiscal channels? Companies come and go, so why must Walmart or Costco bear the cross? Instead, why don’t we put in place mechanisms that prevents these poorly compensated workers from being penalised from their expanded work efforts? Why not help them take care of subsistence issues so that they can concentrate on moving their families up in the social ladder?

P/S Some Econometric Results on the “evils” of  Walmart, as summarised by the Furman’s literature review.

  1. Are Walmart workers underpaid?
    As the literature review pointed out, once you control for experience,job level, education etc, Walmart appears to have paid its employees at a slightly higher rate than the national median. (However, the researchers did not compare it by classes of occupation, so we are not sure if all jobs in Walmarts are compensated at a higher rate compared to the national median, or merely just a subset of them are so). This question is not that interesting if you ask me, after all, what concerns me is that these jobs don’t pay well.
  2. Does Walmart destroy jobs?
    The inconsistency in the econometric results (even with identical estimation strategies) suggest that the topic is bedeviled with endogeneity problems. For instance, perhaps counties with stagnant wages provide a good expansion opportunity for Walmart to expand into. Since Walmart’s entrance reduces prices (this observation is robust across studies) , it might systematically target counties with specific profiles to capture markets. If we attribute this selection-bias as a causal factor, we are drawing the wrong conclusion. After all, it is precisely because of the nature of the county that drives the decision to enter, and the “destruction” of jobs are not necessarily caused by Walmart’s entrance. My point is, this is a difficult topic and the consensus is we don’t know.
  3. Are people made worst off because of Walmart?
    Consumers are generally made better off, even if you net it on an aggregate basis, the “savings” from shopping at Walmart outweighs the burden on taxpayers like paying for social security programmes accessed by Walmart workers.
    As for the workers, suppose that nominal wages are stagnant. But Walmart’s entrance reduces grocery prices by some percentage points,and the end result is real wage increases. (You get more bagels for that dollar.) The economic model I solve are sometimes populated by agents who could distinguish (or at least, make probabilistic assessment of) between nominal and real wage increases. The criticism levied on Walmart (with well intentions, I concede) suggests otherwise.Disclaimer: I do not, nor intend to own any Walmart stocks. As a college senior, I am not sensitive to recessions (at least until after commencement), and I’d hate to pay a premium from my portfolio for the hedge against recession risks.

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