Contemporary microeconomic issues and challenges

Microeconomic Analysis

Why Government must set a minimum wage, provide worker benefits, and a safety net for the upturns and down turns of the business cycle in Wal-Mart's America

The need for a social safety net, and for the government to use legislation to cushion to shocks of the business cycle is particularly evident in the unprecedented influence of the retailing giant Wal-Mart upon the health of the American economy. According to the so-called liberal view of welfare, public assistance provides a much-needed form of social insurance, to cushion American workers against the ups and downs of the business cycle. The conservative view stresses that welfare provides a disincentive to work at low wage jobs when a worker can do nothing and gain income from the government. (141) However, although there may have been abuses of welfare in individual instances, a complete lack of government intervention is difficult to support. One potent example is that of minimum wage policy, whereby if demand and supply balanced out at equilibrium to keep the minimum wage growth consistent with inflation, it would have been $8.46 an hour in 2003. (155) Another example is how, in the absence of the ability of the free market to set a fair equilibrium of wages and benefits, low-wage workers will eventually lack the financial resources to buy goods, and thus cause the economy to begin to spiral downwards.

The need for government intervention to provide a sustainable minimum wage garnered unusual support in 2005 when Wal-Mart CEO H. Lee Scott Jr. called on Congress to raise the country's minimum wage from its current status of $5.15 an hour. (Joyce, 2005, p. D3) But isn't Wal-Mart almost as legendary for paying the lowest wages, all of the time, almost as much as it is famed for providing its customer with the lowest prices, all of the time? Because it often dominates the areas where it is located, providing the only source of jobs for individuals without a professional education, Wal-Mart can set its wages at the minimum with little competition, and because of the retailer's size it can sell its goods for very low prices because it deals in high-volume sales. It also provides few health care benefits for its workers, again because it has minimal competition, since independent and smaller retailers cannot compete with its prices. But even Wal-Mart now has a problem, namely that its penny-pinching consumers are the very persons whose wages it has helped to cut by lowering the asking price of labor. Over time, even its CEO has had to admit that the company's customers are "struggling to get by." (Joyce, 2005, p. D3)

One of the keys that Wal-Mart consumers were struggling was evidenced in the fact that Wal-Mart balance sheets showed that the stores showed sudden spike in consumer spending on the 1st and 15th of each month and a decline spending at the end of the month. This showed that customers simply did not have the money to buy basic necessities between their paychecks -- paychecks often provided by Wal-Mart. (Joyce, 2005, p.53) This also indicated that the minimum wage, rather than paying a real living wage, was only enabling customers live virtually from hand to mouth, and that a sudden worsening of the economy could be catastrophic, and cause an even sharper dip in buying patterns, and thus prove quite harmful to Wal-Mart, which relies upon frequent, high-volume sales of everyday items.

Of course, the sound of a Wal-Mart executive calling for a higher minimum wage was met with a caustic response. "One can't help but think if they [Wal-Mart] want people to have more money, how about paying your workers more?" said one economist. (Joyce, 2005, p. D5) Wal-Mart is able to sell its goods so cheaply not just because of volume sales, but also because of its low labor costs. If the minimum wage is raised, and all competing businesses with Wal-Mart raise their wages and thus the prices of their goods, Wal-Mart can be assured of a more level playing field, theoretically, even if it must raise the prices of its goods by a few cents. Scott himself said his company could not change its own wage structure without government assistance because of tough competition from competitors like K-Mart and Target. "Even slight overall adjustments to wages eliminate our thin profit margin...because we are so big, people forget that we have to compete." (Joyce, 2005, p. D5) Scott noted that Wal-Mart actually paid above the technical national minimum wage, and said he was thinking more of the customers of the store, rather than the store's employees. However, one might note that there is quite a great deal of overlap between the two, Wal-Mart employees and Wal-Mart shoppers. Which consumer base is likely to care about saving a few cents on cereal, or worry about the cost of gas going from one store to another, week to week, looking for the best bargains? A minimum-wage worker who works at Wal-Mart, of course, is the customer most likely to have to engage in such economizing.

The classical theoretical analysis of supply and demand that suggested workers have seemingly infinite choice where to ply their labor never met the economy of scale that is Wal-Mart. The only check has thus been the media: "the toll that Wal-Mart has taken on working-class living standards here in the United States, are receiving increasing scrutiny -- enough to impede the company's growth." (Meyerson, 2005, A14) Interestingly, the government actually has a hand in Wal-Mart's free-market dominance. Although it is the symbol of everything that is capitalist and American, because only 44% of Wal-Mart's nearly 1.3 million U.S. employees are covered under its health insurance, thousands of Wal-Mart employees must use the state Medicaid program for the indigent. The insurance the company does offer comes with a $1,000 annual deductible, "a hefty chunk of change considering that the average Wal-Mart employee makes less than $19,000 a year." (Meyerson, 2005, A14)