Saturday, December 08, 2012

An Assignment for Somebody: Wal-Mart Wages

Here's a job for which I am too old and sick and stupid and tired and lazy to do myself.  But it  society shouldn't be too hard.

Background: I've been boning up a bit on a particular notion of economics, once in fairly wide currency, now mostly unfashionable (excepting possibly Joseph Stiglitz).  That is: the idea that "spreading the wealth"--union wages, just better wages--might make the whole society richer in that you provide money to the people who will spend it.  Yes, it is akin to the current kerfuffle over Keynesian pump-priming: whether you can ever make the world richer by taking the money out of the hands of one and put it into another.  But I'm thinking of a a slightly different spin: the idea that the boss might  make make himself richer by raising the worker's pay insofar as it churns more money through the whole community.

It is a view exemplified, I think, by Henry Ford when he undertook to pay workers $5 a day so as to raise the general wage level and sell more Model Ts.  Reading Michael Lind,  I infer that it was, if not widely popular, still part of the common parlance in the 20s. Surprising how completely it has vanished from public discourse lately.

But here's my assignment for somebody.  Estimate Wal-Mart's payroll.  Multiply it by 1.5--i.e., give everybody a 50 percent raise.  Go to the P&L and adjust  bottom-line net income accordingly.  I.e., in terms of that holy of holies, "shareholder value," how much would it cost?  My guess is "not a lot," but if so, try it with 1.2--a 20 percent increase. Or just for fun, try 2--double the wages.  

For extra credit, identify a representative member of the class of Wal-Mart trust fund babies--i.e., the ones on the Forbes billionaire list.  Identifying (or estimating) their current shareholdings, estimate how many Mercedes they would be deprived of if the proposed innovation were put into effect.  My guess is: not a lot.  But if you come up with an answer, tell me and I'll blog it.


bjdubbs said...

Sg&A at Walmart is about 19% of sales, and gross margins are about 25%, for a 6% operating margin, and less taxes and interest, that leaves about 3.5% profit margin. I'd say about 80% of SG&A is lower-level employee wages, so about 15%. Multiply that 15*.20 and you get 3%, which more or less wipes out the 3.5% profit margin. Another way to look at the same thing is to compare Walmart with Costco, which does pay roughly 50% more than Walmart. Costco SG&A is significantly less than WMT, about 10% vs. 19%. So if Walmart were to get substantially more productivity out of its workforce, it's not hard to imagine a significant pay increase not cutting into margins. That assumes that Walmart employs significantly fewer people, however.

Buce said...

Fascinating, Bjdubbs, thanks. I don't spend much time at Wal-Mart but I do spend time at CostCo and I cannot get over how efficient their help seems to be--everybody is doing something every minute. Item: there is absolutely no relationship between the job title on the nametag and the job s/he is actually doing--is this just happenstance or is it some kind of marketing ploy? Another item, morale always seems to be high: you don't sense anything sullen or passive aggressive. Like Southwest Air at least in its glory days. Maybe they are just glad they are not working at Wal-Mart.

Contrast the legacy carriers where the employees all seem pissed off all of the time.