The Walmart experiment: Determining whether what goes around comes around.
From a very interesting article by Neil Irwin in the NY Times:
. . . Sales at stores open at least a year fell for five straight quarters; the company’s revenue fell for the first time in Walmart’s 45-year run as a public company in 2015 (currency fluctuations were a big factor, too).
To fix it, executives came up with what, for Walmart, counted as a revolutionary idea. This is, after all, a company famous for squeezing pennies so successfully that labor groups accuse it of depressing wages across the American economy. As an efficient, multinational selling machine, the company had a reputation for treating employee pay as a cost to be minimized.
But in early 2015, Walmart announced it would actually pay its workers more.
That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?
It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. “Efficiency wages” is the term that economists — who excel at giving complex names to obvious ideas — use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.
Walmart’s experiment holds some surprising lessons for the American economy as a whole. Productivity gains have been slow for years; could fatter paychecks reverse that? Demand for goods and services has remained stubbornly low ever since the 2008 economic crisis. If companies paid people more, would it bring out more shoppers — benefiting workers and shareholders alike?
Deep in a warren of windowless offices here, executives in early 2015 sketched out a plan to spend more money on increased wages and training, and offer more predictable scheduling. They refer to this plan as “the investments.” . . .
Later in the article:
An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up, compared with people who feel they are in a dead-end job. A person has more incentive to work hard, even when the boss isn’t watching, when the job pays better than what you could make down the street.
Economists have found evidence of this in practice in many real-world settings. Higher pay at New Jersey police departments, for example, led tobetter rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.
And at last someone gets it:
Employers have succeeded at holding down labor costs. The “labor share” of national income — the portion of the national economic pie that goes to workers’ pay, as opposed to corporate profits and elsewhere — has fallen. And average pay for nonmanagerial workers has grown more slowly than the overall economy.
This has coincided with disappointing results for the economy. Worker productivity has been rising slowly for the last decade, and prime working-age Americans are staying out of the work force in droves. This implies that plenty of people don’t see jobs out there that offer sufficient pay or opportunity to make the jobs worth doing.
Individually, employers may think they are making rational decisions to pay people as little as possible. But that may be collectively shortsighted, if the unintended result is less demand for the goods and services they are all trying to sell to these same people.
Just maybe, in other words, employers across the country are pushing down labor costs like Walmart, circa 2014 — and this is one of the major culprits behind disappointing economic results since the start of the 21st century.
It’s not the supply side that should be coddled and protected, it’s the demand side. If there’s no demand, then nothing can be sold, however many are produced. So put the big investment in the demand side—e.g., better salaries, better benefits, better opportunities: a better present and a better future. Then the demand will grow and the supply side starts to be profitable.