Cafe Hayek - Latest Comments in What determines wages

Re: What determines wages

John Dewey — Tue, 30 May 2006 09:39:43 -0000

"the point is that unions DO benefit the workers just as price fixing benefits any industry."

I see. So that explains why union membership has dropped from 34% to 13% the past 50 years, right? Or the job security that workers in auto, airline, steels, and textile industries have been enjoying?

I won't argue that unions don't benefit their members. But they no more engage in price-fixing than do the gasoline refiners. Both groups are at the mercy of the market.

Re: What determines wages

Half Sigma — Tue, 30 May 2006 07:55:15 -0000

Increasing worker productivity obviously, in the short run, reduces demand for workers and thus lowers wages. Workers don't get the benefit.

Imagine that a worker is a gallon of gasoline. There is a new invention that makes each car drive twices as many miles on a gallon. Each gallon of gas becomes twice as productive. But this new invention will cause the price of gasoline to decline because drivers won't need to buy as much.

But the imagine that all the producers of gasoline get together and decide that they will only sell gasoline at a price 100% greater than the pre-gasoline price. People will then be forced to pay the higher price. This is equivalent to workers forming a union.

Now the producers getting together to "fix" prices is considered illegal, while the workers getting together to fix their wages is endorsed by statues. Whether it's right or wrong for the law to favor one and not the other is besides the point--the point is that unions DO benefit the workers just as price fixing benefits any industry.

Re: What determines wages

JohnDewey — Sun, 28 May 2006 18:24:44 -0000

Spencer,

Here's my understanding of how productivity increases can lead to higher wages:

Often a worker acquires a skill or gains job knowledge that allows him to perform his work either faster or with fewer defects. When that happens, his value to his employer increases. In order to retain this more valued employee, the employer increases his wages.

Consider another situation: a worker who already possesses specialized knowledge that cannot easily be replaced. He might also become more productive if the firm acquires capital or adopts more efficient processes or even just increases that worker's utilization. In such cases, the worker's value to the firm may increase because of the lead time required to replace him. In this case, it is the skills and knowledge possessed prior to the productivity increase that become more valuable.

A third case is where capital or processes or utilization increases the productivity of a worker who could easily be replaced. That worker is no more valuable to the firm than before. The firm will not increase his wages.

I think WalMart retail employees fall into the third category. They can easily be replaced, as they possess few skills. WalMart has little incentive to pay the m more.

Surely economic theory that explains the relationship between wages and productivity must distinguish between skilled and unskilled labor.

Re: What determines wages

Zephyr — Sun, 28 May 2006 17:38:51 -0000

Walmart reduces retail jobs - just as larger more efficient farms have reduced farm employment over the past 100 years.

The labor resource is then available for other employment. Rarely is this visible to the casual observer in real time. It takes time for the adaptation to occur.

However, one thing is very clear, the fewer people it takes to perform a function, the cheaper that function becomes, and the more capacity our economy attains.

Re: What determines wages

JohnDewey — Sun, 28 May 2006 13:39:13 -0000

Spencer,

If you're going to cite earlier posts in which I participated, please be specific. I have no idea what posts you're referring to, and I cannot know what you may be taking out of context or misquoting.

If you are referring to my post earlier today, please note that it has two parts. First, as Walmart displaced mom and pop stores in small towns and in some suburbs, demand for retail clerks should eventually be reduced. But the second part of my post is equally important. WalMart's lower prices freed up consumers' dollars. Some of those dollars were likely spent at new retail businesses, especially those niche businesses that do not compete with WalMart.

Please be careful to distinguish between reduced demand for retail employees and a decline in the national number of retail employees. These are not the same thing. In a growing economy, we should expect demand for retail employees to grow. Assume that growth would be 4%. WalMart expansion might reduce demand so that retail employment grows only 3.9%. In this hypothetical example, retail employment still increased, though Walmart did reduce the amount of the increase.

Could you also be specific about the "good economic studies" you referenced? the ones that claim Walmart led to a decline in retail employment? I'd like to read these studies before accepting the conclusions you claim they made.

Re: What determines wages

True_Liberal — Sun, 28 May 2006 12:02:33 -0000

Spencer says: "Unionization is just one method for the individual that works in a high productivity industry to capture some of the benefits of productiivty. It is how the pie is divided."

But if the company worked for is a low-productivity competitor in a high-productivity industry ... Well, it's not rocket science, is it?

Of course, there's another function of the union: when their job security and wage scale is threatened by people willing to work for a lower wage, the union can lobby for increases in the minimum wage, to take the interlopers out of the job market... Well, it's not rocket science, is it?

Re: What determines wages

spencer — Sun, 28 May 2006 11:21:33 -0000

William Wooseley -- I think you have it that it is more the supply-demand factors that drive retail wages then the productivity argument. Retail remains about the largest source of jobs for the unskilled in this economy so for all pratical purposes a retail firms like WMT faces a perfectly elastic supply curve -- witness the examples of thousands of people lining up for jobs at new walmart stores.

On the other hand I strongly disagree with Half-Sigma that unionization drives what

employees earn rather then productivity.

An employee at a firm must produce enough for it to be profitable for the firm.

Unionization is just one method for the individual that works in a high productivity industry to capture some of the benefits of productiivty. It is how the pie is divided.

John Dewey -- your analysis of a retail clerks productivity is internally inconsistent. productivity is output per unit of input. If the walmart clerk sales

five times as much merchandise in one day because of the walmart distribution system then the clerk in a small business competitor the wmt employee is five times as productive. The reasons are probably completely due to the capital wmt had put in place and their superior management, but that does not negate the fact that the clerk still sells five times as much as the competitors clerk.

Also John compare your comment in this discussion that because wmt is more productive that it leads to a drop in retail employment. You came to that conclusion yourself, remember.

But it is also the conclusion that numerous good economic studies have found and that you have refused to accept in earlier discussions at this blog. but is this a bad thing? I doubt it. What we want to do as a society is to eliminate low productive jobs

because that is the only way we can raise the standard of living of the entire population.

But see, we can all learn from open, honest discussions as I did by seeing that I needed to look at the question of real wages from a different perspective.

Re: What determines wages

True_Liberal — Sun, 28 May 2006 04:15:49 -0000

You gotta love it:

"Opponents of two proposed ordinances that would set a minimum wage for employees of big-box retail stores contended Thursday (5/18) that passage would hurt the very people the measures are intended to help, give Chicago a black eye in the business world and set the city up for a defeat in court."

See: http://www.chicagotribune.c...

Re: What determines wages

JohnDewey — Sun, 28 May 2006 02:30:12 -0000

William Woolsey,

Thanks for the explanation.

My guess is that WalMart's productivity increases initially reduce total demand for labor in the retail sector. If 10 WalMart checkout clerks can now do the work formerly done by 20 clerks at 20 mom-and-pop stores, demand for clerks drops by 10 workers.

Lower labor demand due to increased productivity is not the complete picture, of course. WalMart's lower prices lead to purchases of more goods by consumers. In some cases, the freed up dollars will generate new retail businesses that employ retail clerks.

Re: What determines wages

JohnDewey — Sun, 28 May 2006 02:15:30 -0000

True liberal,

I agree with the concept that workers should be rewarded for productivity improvements they cause. My guess is that management doesn't share completely the productivity gain, and I don't think they should. Some of the increased productivity gain should be passed along to the customer.

As I see it, workers and management should act as a team to improve the value provided to customers. They compete with other firms also seeking lower costs. In order to remain copetitive and retain jobs, workers and management alike should always try to stay one step ahead of the competition. Some productivity increases will arise from the worker ranks, some from the management ranks. The reward to both groups for productivity gains is simply retention of employment.

Re: What determines wages

True_Liberal — Sat, 27 May 2006 06:38:36 -0000

"I'm not familiar with the economic theory that wages must follow productivity increases. I'd prefer that a real economist explained the theory, but go ahead and take your shot if you wish."

I don't think it's an "economic theory" so much as a contractual deal between a piece-worker (or an incentive plan) and an employer.

If a worker can turn out more goods per hour, and is paid by the piece, then he should be paid per that deal. If the COMPANY institutes a better, faster process and the guy can now produce faster, the pay rate per piece may be decreased, but the guy's average paycheck should not suffer.

On the other hand, if the WORKER comes up with a better, faster method, the worker should enjoy the fruits of his creativity, and the piece rate SHOULD NOT decline.

(This from an Industrial Sociology text 40+ years ago - Don't know if I can track it down precisely...)

Re: What determines wages

save_the_rustbelt — Sat, 27 May 2006 06:27:42 -0000

Wal-Mart is cutting purchases in order to trim inventories, because growth and profits are slowing.

Apparently the bulwark of the new American retail/service economy is slowing.

Are we in big trouble now? Time will tell.

Re: What determines wages

True_Liberal — Sat, 27 May 2006 06:27:21 -0000

"I read about a woman making 60k per year for driving cars from the end of the assembly line to a parking lot. To me, the existence of such jobs suggests that the "box" theory has some value."

Not necessarily, WW. To give credit where credit may be due - she may be part of the quality control system too, and she checks out all the driver-controlled functions and writes up defects. Depending on her fault-analysis ability, she might be a critical link in delivering a top product at reasonable cost. Driving could be only a small part of her job.

(Yes, I'm speculating here... we just don't know enough yet.)

Re: What determines wages

William Woolsey — Sat, 27 May 2006 03:33:49 -0000

If workers in various firms or industries can do the same work, the increases in productivity in a single firm or industry won't cause wages to solely rise in that firm or industry.

In particular, large improvements in productivity in retailing doesn't necessarily lead to proportionately higher wages in retailing.

If the improved productivity in retailing results in an increase in the demand for labor in retailing, then workers will be pulled into retailing from other areas. This dampens the increase in wages in the retail sector. Efforts of other areas in the economy to keep their workers results in an increase in wages there as well.

The notion that wages reflect differential productivity requires an assumption that labor provision is monopolized and incumbent workers use their monopoly power to force wage increases that prevent firms from hiring more and hiring away from other industries.

In fact, the "box" theory makes the most sense if we assume that wage differentials involve successful exploitation of monopoly power by labor. For example, suppose the steel industry is such that a labor monopoly can generate high wages for unskilled workers. Workers stuck in jobs where there is no such monopoloy power make lower wages. If the industry migrates elsewhere (to excape the labor monopoly,) then the "good" jobs are gone.

I read about a woman making 60k per year for driving cars from the end of the assembly line to a parking lot. To me, the existence of such jobs suggests that the "box" theory has some value.

Of course, being an economist, I don't believe that labor monopolies are good for people in general or for workers in general.

Re: What determines wages

JohnDewey — Sat, 27 May 2006 01:55:03 -0000

"Walmarts distribution and automation are integeral parts of the reason they can get the turnover they do. But without the turnover the big investment in distribution would not pay off. "

Spencer, it's not the high inventory turnover that made WalMart the most successful retailer. Many other retailers adopted the low margin, high volume strategy. Some were successful while others failed. But only one retailer has revenues exceeding $300 billion. If you are trying to understand Walmart, I think you'll need to understand what made them unique.

So what is unique about Walmart? I've given the answer already:

- a company culture and work ethic derived from their 25 year small town focus;

- a massive automated distribution network;

- an extremely well-designed inventory control system, including its sophisticated management information reporting.

Walmart's in-store productivity gains are, for the most part, derived from their high volumes. They are able to fully utilize checkout clerks, eliminating deadtime, as you pointed out. But that's just because the sales are higher. It's not because their checkout clerks are significantly more productive at performing their simple tasks.

I'm not familiar with the economic theory that wages must follow productivity increases. I'd prefer that a real economist explained the theory, but go ahead and take your shot if you wish.

As I see it, a task as simple as customer checkout work should always be the lowest paying job. If millions of teenagers and high school dropouts and English-speaking immigrants can do the job, the labor supply must be nearly unlimited. For me, that's the reason in-store retail wages remain low relative to all other occupations.

Re: What determines wages

Russell Nelson — Fri, 26 May 2006 22:06:34 -0000

Half Sigma: please admit that you're not an economist:

"Pre-Walmart, a low wage worker might have made $10/hour, but post-Walmart the same worker makes only $8/hour with the $2 difference enriching the capitalist class."

What if Walmart has passed those savings on to the consumer, with the $2 difference enriching the (largely) poor who shop at Walmart. You seem to be presuming that Walmart didn't do that. An economist wouldn't make that mistake.

Re: What determines wages

Half Sigma — Fri, 26 May 2006 12:51:50 -0000

"It is why wages in manufacturing are higher then wages in the hospitality industrty"

Manufacutring is unionized. The unionized workers have more bargaining power, so they are able to bargain for themselves higher wages.

Re: What determines wages

spencer — Fri, 26 May 2006 11:52:28 -0000

Walmarts distribution and automation are integeral parts of the reason they can get the turnover they do. But without the turnover the big investment in distribution would not pay off.

Yes, Wmt start in rural less competitive areas played a role originally, but by the early 1990s that was no longer significant. And the shift in productivity for all retail started in the mid-1990s -- after WMT became a national force.

But when I look at the productivity data I am looking at data for all retail productivity -- the data problems have more to do with the point that the retail data includes things like auto dealers, food service, gas and fuel dealers, etc that we don't usually think of as retail .

I'm comparing apples to apples when I'm discussing retail wages and productivity.

But when you look at wages across sectors you find a very strong tie between relative wages in a sector or industry and relative productivity in that industry. It is why wages in manufacturing are higher then wages in the hospitality industrty, for example and why the highest wages are in the information tech area.

The reason retail wages are low is that retail productivity has been low. but over the past decade we have seen a strong surge in relative productivity growth in retail

that has not been accompanied by an increase in relative earnings. Theory says we should.

I am not knocking WMT. they are a great business model that has made a significant contribution to higher standards of living in the US. I'm just looking at the issue as just a curious economic development that I have problems understanding.

Re: What determines wages

Half Sigma — Fri, 26 May 2006 11:45:10 -0000

response to liberty:

The reality is that skilled workers who lose their occupation because their skills are no longer needed are screwed. It may have taken them their whole life to get as skilled as they are. They will never recoup the lost income.

This doesn't mean that we should halt progress. I don't want to go back to a world where everyone was a farmer. I'm just saying that people should stop pretending that it doesn't suck to be a victim of change, or that these people will ever recover because they probably won't.

Re: What determines wages

liberty — Fri, 26 May 2006 10:22:02 -0000

>Also note I did not say retail wages have not increased, I said that relative retail wages have not increased and main stream economic theory and even the economics they teach at GMU says it should. As a matter of fact every time you have made your arguments against the minimum wage you have used that theory.

I don't. Why would we look at relative retail wages - retailers compred with the other sectors as you suggest ("average hourly earnings in retail has been very stable at some 76% to 78% of total average hourly earnings.")?

Instead, I would look at Walmart wages against thier competitors wages and the wages in their sector over the past twenty years. I'd look at growth in their wages as compared with growth of wages of non-productive industries. I would run a regression to see how productivity correlates with wage growth.

But I would not simply compare "retail wages" agains "average wages in all sectors" because not all retailers have been as productive and we don't know how productive the rest of the sectors have been.

What I am suggesting would give you insight specifically into how this growth in productivity has affected wages - what you are suggesting is vague and simply compares how retail compares with "everybody else."

Re: What determines wages

John Dewey — Fri, 26 May 2006 09:53:08 -0000

Spencer,

I see now that you are not measuring the entire WalMart business and its productivity, but merely the retail customer service portion.

Your lengthy description of low margin discounting does apply, of course, to all four of the retail giants that started in 1962: Target, K-Mart, and Woolco as well as WalMart. Anyone who reads an economics blog should have already understood the concept, but I guess it helps to lay it out.

From what I've read, the heart of WalMart's story is not the discount retail model you described.

The initial strategy that drove WalMart's success was their decades-long focus on small markets. By not directly competing with the other three giants, they were able to expand and gradually achieve economies of scale already enjoyed by K-Mart, Woolco, and Target.

Two later factors allowed WalMart to eventually emerge as the retail winner:

- a completely automated network that cuts distribution costs and times to absolute minimums;

- an inventory control and information system that far surpasses anything yet tried by its competitors.

I had assumed you were referring to these more important business factors when discussing WalMart productivity.

Re: What determines wages

spencer — Fri, 26 May 2006 08:57:05 -0000

To discuss the impact of WMT and the other big boxc retailers you have to understand their model and what they are actually doing.

What WMT has done is apply the grocery store low margin, high turn-over model to the other retail sectors.

I'll describe the most simple aspects of the model.

If you start out with a $100 in capital

and buy a $100 in merchandise in period one and sell it for $101 you have made a profit of $1 on your original investment of $100.

This does not look like a great rate of return. But if period one is only one week and you can turnover your merchandise every week and make a $1 profit every week at the end of 52 weeks you have made a $52 profit -- a very nice return on your $100 of capital. this is the grocery store business model.

The typical retailer manages to turn their

merchandise some 5 to 10 times a year. If they buy $100 of merchandise and sell it for $105 dollar some ten times a year they will have $50 in profits at the end of the year.

What WMT, and some of the other big box retailers like Home Depot developed was a system where they turned their merchandise

some 20 to 30 times a year. Ok, if they sell $100 worth of merchandise for $102

some 26 times a years at the end of the year they will have profits of $50.

But note they are selling the goods at an

average price of $102 so they can undercut the $105 the other retailers are charging.

So if you are a clerk or a stock boy, or whatever at a big box retailer that turns its inventory 26 times a year as compared to a typical retailer that turns inventory

10 times a year you are selling 2.6 times as much merchandise as the same clerk or stock boy at a traditional retailer. So your productivity is 2.6 times the traditional store clerk.

If you walk into the typical retailer you see that its employees have a lot of downtime where they do nothing but wait for a customer to show up. But at WMT that downtime is massively reduced.

Now I know when you add back in overhead and everything else the model gets more complicated, but this is the heart of the WMT story and everything else flows from it.

Re: What determines wages

spencer — Fri, 26 May 2006 08:30:33 -0000

The data I use is for all production workers and the wage data is for the

same group of workers.

It would not include supervisors and management -- that is why I call it a

first approximation. In my regression model of the relative performance of the

S&P index of retail stocks my index is a

very powerful variable.

I have talked to the experts at BLS and they agree that my measure is a good first approximation.

But if you are talking about a clerk at WMT you are completely wrong -- their productivity has risen massively.

If you doubt this go talk to WMT management or read their Annual reports or 10-K fillings.

I do not do the wholesale sector, but the productivity data shows that the wholesale distribution sector has also had very strong productivity growth. The growth in these two sectors is the primary difference between US and European productivity growth rates . There is a strong body of respected economic research on this.

Also note I did not say retail wages have not increased, I said that relative retail wages have not increased and main stream economic theory and even the economics they teach at GMU says it should. As a matter of fact every time you have made your arguments against the minimum wage you have used that theory.

Re: What determines wages

Neal Phenes — Fri, 26 May 2006 07:34:26 -0000

I worked in one professional discipline of an industry for almost 20 years. I switched to a different discipline within the same industry 5 years ago. It differed substantially in the day to day functions and subject matter. However, my new employer saw the bar code on my forehead and recognized my ability to produce. The point all employees must recognize is that we are all entrepreneurs running our own businesses called "Me Incorporated" (actually it is a sole proprietorship but you get what I mean). We can thrive by developing attractive skill sets and talents that can be exploited. The key is thinking "outside of the box" for employers and employees.

Re: What determines wages

John Dewey — Fri, 26 May 2006 07:03:46 -0000

Spencer,

What measures do you use for retail employee hours? Would it include all employees involved in distribution and sales of retail products?

Has the work of stock clerks and checkout clerks changed much in 20 years? Their worktools are still box cutters and scanners, though scanners have improved. They still stack merchandise, accept currency, and bag purchases. If all else were equal, including labor supply, I wouldn't expect their wages to increase.

My guess is that wages have increased for some jobs performed for retail companies. These would include:

- buyers responsible for dollar transactions a hundred times larger than 20 years ago;

- computer programmers developing international inventory and purchase order software; and

- engineers designing giant automated warehouses.

I don't think all the technical workers are employed by the large retail companies. So their wage increases might not be included in retail industry wage rates.