Monday, August 12, 2013

James Surowiecki, Unions, Jobs, Minimal Wages

James Surowiecki

Mad Dog knew there must be more information out there and that information would help everyone understand the problem with the protests against Walmart and McDonald's paying poverty wages.

This information is provided by James Surowiecki, writing in this week's New Yorker.

It turns out Walmart was founded on the premise of paying low wages--the idea was these stores would employ underemployed married women who would be supplementing a family income. The profit margin of Walmart is 3-4 cents on the dollar; the profit margin for McDonald's is 6 cents on the dollar.

The profit margin at General Motors and Ford, in their heyday, is unspecified by Surowiecki, but presumably it was several orders of magnitude higher. 

The reason people are flocking to Walmart and McDonalds for jobs is there are no other jobs out there, so now instead of teenagers working for pocket money and housewives working for movie money, we've got breadwinners working one 8 hour shift at McDonalds and a second as security guards and still struggling to meet the rent, pay the doctor and day care.

In Germany and the Netherlands, these low paying jobs may suffice because so much else is paid for by the government--there is a stronger safety net in those countries.

What we really need is for "the economy as a whole to grown faster, because that would both increase the supply of good jobs and improve the bargaining power of low-wage earners," Surowiecki notes.  He cites Jared Bernstein (an economist at the Center for Budget and Policy Priorities) "The best friend that low-wage workers have is a strong economy and a tight job market." As Surowiecki notes, "It isn't enough to make bad jobs better. We need to create better jobs."

So, aiming the outrage at McDonalds or Walmart for providing only low wage jobs is misguided. If the government put lots of people back to work on infrastructure building jobs, Walmart and McDonalds would have to raise wages and nobody would feel at all sorry for them when they go begging for employees. Nobody should then be talking about cutting these companies any tax breaks.  We can quote free market theory right back at them then.

The profits from the combined profits of all the major retailers, restaurant chains and super markets in the Fortune 500 are smaller than the profits of Apple alone, Surowiecki notes. But Apple employees just 76,000 people while those combined low margin enterprises employ 5.6 million people. Nobody is walking around with picket signs in front of Apple saying, "Hire a million more employees."  

"The grim truth of those numbers is that low wages are a big part of why these companies are able to stay profitable while offering low prices."

Consumers want low prices for commodities--they don't shop in the small, Ma and Pop stores with the big mark ups on sweaters any more--they don't want to pay more for a smile and sales clerk who knows their names. They want an object for a price. The consumer is every bit as ruthless as the bosses at Walmart--they want low prices and don't talk to them about loyalty or worrying about whether the woman who rings you up at the register has health insurance. All I want to know about is: how much does the shirt cost?

The problem you run into when you start trying to inject loyalty and social consciousness into the transaction at the register is the same problem we had when we were talking about buying shirts with Made in the USA labels--nobody cares where the shirt was made. If the shirt from China looks good, and it costs $5 less than the shirt made in Peoria, forget Peoria.

Mad Dog's grandfather, who labored away in sweat shops making less than minimum wage before there even was a minimum wage, joined a union and his life was improved. But with the global marketplace, that union saw "Made in the USA" sweat shops close down, and ship out to China. 

There has been a sea change in the American economy.  We used to make things here and people were paid more to make them: Bethlehem Steel, Ford, GM made things here and could pay high wages. Now those things can be made by low wage earners in China and Mexico. What is America to do? Should we insist entrepreneurs open shirt factories in the USA and pay their workers well and try to sell their shirts at $30 when the same shirt is selling for $15 at Walmart?

What would Mad Dog do? 

Mad Dog likes public works: Until the private sector can figure out how to create companies like Apple which can employ 5 million people making whatever, then the government can employ those 5 million restoring bridges, building cell phone towers, laying down cable, delivering water, building bicycle trails, high speed railroads, building windmills and solar panels. 

Will that increase the deficit and the national debt? Maybe. Maybe not: with all those people paying taxes, maybe it will not . 

But if the debt goes up, so be it.  Call Paul Krugman; he can figure out what to do with it.



  1. At long last, MD seems to be developing an understanding of a "free market" economy. Why it took an article in the New Yorker to bring him around is an interesting question (since the basic concepts are widely known and discussed). The fundamental problem is that we now live in a global economy, not a regional or national one - and price will definitely drive consumer behavior. This will also happen in health care when consumers (patients) have to pay more for their health care directly (co-pays). Hang on Mad Dog when that happens!

  2. Anon,

    Mad Dog posted a response earlier which seems to have gone down some black hole.
    To reiterate: No economy dependent on farm bill subsidies and ear marks is anything close to free market.
    Medical economics have never obeyed the standard economic laws--neither supply and demand nor rational price based behavior in the setting of third party payers apply.

    Mad Dog

  3. MD is correct that, in the past, medical economics have not followed standard economic laws but that is largely because people had insurance and were covered or were poor and didn't pay anything anyway. However, with more and more people paying co-pays, and the new exchanges offering insurance at different levels of coverage(with more obligation to pay falling to the individual) you will begin to see people become more cost conscious and migrate to settings in which their out-of-pocket expenses are less. "The times they are a'changing" - for sure.

  4. Mad Dog,
    The times they are a changin-just not fast enough for the low earning workers hit hardest by corporate America's con job that high tech and IT jobs, suitable for low skilled and entry workers, would be there to replace what was being lost through globalization and outsourcing. Yah right-still waiting. The best we can offer is the "living wage"-i.e. $12.50 in D.C. Those folks must be just dripping in dollars, whatever will they do with all that extra cash? Don't you think the term "living wage" has to be tossed-it gives the public the false impression that these people are now all set. "Barely living wage" would do a far better job of conveying the truth...I agree a public works program is necessary, both to assist the under-employed as well as make overdue improvements to the infrastructure,it just seems there won't be enough funds to help nearly as many people as need it, but it's a start...