What If Wal-Mart Is Bluffing

My post yesterday afternoon focused on why D.C. Mayor Vincent Gray should veto the living wage bill that the D.C. council passed a few weeks ago. As part of that analysis, I assumed that Wal-Mart will follow through on its threats to scrap plans to build six stores in the region if Gray signs the bill into law. I still believe that assumption is rock solid. As I noted in that article, if Mayor Gray signs the bill and Wal-Mart builds the stores anyways, it will set the precedent for every other city in America to enact similar laws. Wal-Mart could soon be paying a higher minimum wage than all of its competitors. So, I’m fairly confident that my assumption is correct.

But what if it’s not? What if Wal-Mart is bluffing? Should Mayor Gray veto the bill still?

The answer is still yes.

Under this assumption, Wal-Mart builds its stores no matter what, except in one scenario, it is paying significantly higher wages to its employees. In the current economy with unemployment high, the new stores would add 1,800 much-needed jobs to the District. Since we’re still not at full employment, the new jobs won’t impact wages for other firms in the area. That means Wal-Mart would be paying its workers at least $12.50 an hour while competing firms can pay them just $8.25/hour. The companies would be competing in the same market but forced to face different prices for labor. This gives smaller stores a big advantage over the giant retailer. Less efficient shops can compete with Wal-Mart thanks purely to favorable city policies.

D.C. Mayor Vincent Gray should veto the living wage bill.
D.C. Mayor Vincent Gray.

As we slowly get back to full employment, the living wage bill would start to affect other firms’ wages. At full employment, workers have more bargaining power and would want to work for Wal-Mart with its higher pay. This would force competing firms to increase their own wages to stay competitive in the labor market. When there isn’t excess supply of labor (as there is now), workers have more bargaining power. And when one firm is forced to offer wages at a 50% premium, workers have a lot more bargaining power.

This is fundamentally against free markets.

Wal-Mart would undoubtedly pass on some of the increased labor costs to consumers in the form of higher prices in the D.C. area. The same would be true at competing stores when they eventually face higher labor costs themselves. The 1,800 Wal-Mart employees would all earn more at the expense of consumers. And the market would still be distorted: Wal-Mart would still be paying higher labor costs and less efficient firms will be able to compete with it.

If the city believes that Wal-Mart’s entrance into the region will cause negative side effects (externalities) to occur, it can levy a tax against the firm and distribute the revenue to compensate those harmed. But distorting the labor market is not a smart way to correct the externality. The living wage bill does not compensate those who are harmed by Wal-Mart’s arrival, but instead helps the new employees of the company.

I also noted in yesterday’s article that D.C. council member Vincent Orange argued that Wal-Mart’s low wages forced the city to pay more in social services. But the same is true of any other minimum wage job in the area. If minimum wage jobs at Wal-Mart increase the amount D.C. pays in SNAP benefits (for instance), then every other minimum wage job does so as well. If the  council member is looking to help the city’s finances by enabling people to rely less on the government, it should raise the minimum wage for everyone. Doing so for Wal-Mart hurts the company, but doesn’t address the underlying problem.

So, no matter whether Mayor Gray believes Wal-Mart is bluffing or not, he should veto the bill.

It simply doesn’t make sense to sign it.

Mayor Gray, Veto the D.C. Living Wage Bill!

It’s been almost two weeks since the D.C. council passed it’s living wage bill and Mayor Vincent Gray will have to decide soon whether to veto the measure. The law would require large retailers – defined as having operating revenues of $1 billion or more and store size of at least 75,000 square feet – to pay their employees a minimum of $12.50 an hour. The current D.C. minimum wage is $8.25/hour. The law is aimed directly at Wal-Mart, which had been planning on opening six stores in the D.C. region, but has since threatened to scrap most of those plans if Gray signs the bill.

Wal-Mart may cancel its D.C. stores if Mayor Gray signs the bill.
Wal-Mart may cancel its D.C. stores. 

He should veto it.

The new stores will bring in 1,800 jobs to the region which still faces high unemployment. While D.C. proper’s unemployment rate is low (PDF), the entire region’s is still at 8.5% (PDF). Those jobs would be very helpful for those unemployed workers. And you should take Wal-Mart’s opposition to the bill seriously. They aren’t bluffing. If Gray signs the bill and Wal-Mart still opens the stores, it will be a sign to every other city in the country to follow a similar tactic. Wal-Mart simply cannot afford to be bluffing here.

So that leaves Gray with two options.

1. Veto the bill and Wal-Mart will open its stores.

2. Sign the bill and Wal-Mart will walk away.

On CNN this morning, D.C. council member Vincent Orange justified the law by saying that Wal-Mart’s low wages force the government to pay more in benefits and thus cost taxpayer’s money. But in Orange’s alternate scenario where Wal-Mart doesn’t open the stores in D.C., those 1,800 workers are unemployed and are entirely dependent on the government for food stamps, unemployment benefits, etc. That costs taxpayers more than if Wal-Mart opened its stores.

Now, if the labor market were at full employment, things would be different. Those workers could find jobs elsewhere, but they may be at the minimum wage ($8.25/hour) as well. The government would have to pick up the tab anyways. And if those jobs weren’t at the minimum wage? Well, then Wal-Mart couldn’t hire those workers at $8.25/hour even if there was no law against it. Any worker making more than the minimum wage isn’t going to switch to a minimum wage job at Wal-Mart. The company would soon find itself facing labor shortage when it opened its new stores and would have to offer higher wages anyways.

With unemployment high, the living wage bill eliminates 1,800 potential jobs and forces the taxpayers to pay more.

With unemployment low, the living wage bill causes those 1,800 workers to take jobs at a different firm at either the minimum wage (leaving the government with the same financial responsibilities) or at a higher wage (which would’ve forced Wal-Mart to raise wages anyways).

The choice is clear: Mayor Gray should veto the bill.