CHICAGO UNIONS CRACK OPEN DOOR…
Don’t look for any great session of back slapping and exchange of rude party jokes anytime soon, but there does appear to be some light showing through a barely cracked door in Chicago over the living-wage issue. From WMAQ:
The détente between Mayor Daley and Chicago Federation of Labor President Dennis Gannon — which helped seal a concession-filled labor agreement at the CTA — could lay the groundwork for an ambitious Wal-Mart expansion in Chicago.
Now that they’re on speaking terms again instead of at each other’s throats, Daley and Gannon could open a dialog about a living wage that Wal-Mart could swallow because it covers more than just big boxes while exempting mom and pop stores.
If a deal can be reached, Wal-Mart would be free to forge ahead with its plan to build as many as five South Side supercenters over the next year without fear of union opposition or another City Council donnybrook.
“I would be open to anything dealing with a living wage. … If government, business and unions come together, you never know what kind of framework can be hatched,” Gannon said Thursday.
If Wal-Mart wants to crack the last untapped market in the United States — urban centers, particularly in the Northeast — it is going to have to sit down to these kinds of talks. Whether or not it can turn away from it’s long-held anti-union stance remains moot.
I guess I don’t understand economics. The claims that employers can’t pay a decent wage has never made sense to me. If all employers are subject to the same rules that there is no competitive disadvantage to one firm vs another.
So the argument that a firm can’t “afford” to pay the higher wages implies that they can’t raise their prices to cover their added costs. But if every other firm has the same costs than they will all be forced to raise prices as well.
If a living wage is to be imposed on big box stores why not on mom and pop stores as well? The only argument that I could see against this is that customers will shop in a region where these wage laws don’t apply and thus prices are lower. Given the local nature of mom and pop markets this doesn’t seem likely.
It also indicates that wage laws need to apply over larger areas.
In the case of the outsourcing it looks like the laws need to have a global component.
Bill Moyers discussed this on his most recent TV show – it is available online.
Shalom Robert,
Here’s how I understand the difference.
Store A is a mom-and-pop, single location operation with say $500,000 in gross sales. In addition to mom and pop, it employs one clerk who gets paid $7.50 per hour for 40 hours/week or $15,600/year gross.
For the employer’s portion of Social Security, benefits, etc., add an additional 50 percent of that salary or $7,800/year for a total employee cost of $23,400/year.
Say Store A has a profit margin of 10 percent or $50,000/year.
If we raise the wage paid to that employee to a living wage of say $12/hour, the employee now gets $24,960/year gross plus taxes and benefits or a total cost of $37,440 to the employer.
That additional $14,040 comes out of the profit margin of the employer and represents a 28 percent decrease in the profits of the store. That is 28 percent less money the employer has to invest in store improvements and perhaps the education of their children.
Now, lets increase everything by a factor of 10.
Store B has annual sales of $5,000,000 and 10 employees. It also has a profit margin of 10 percent or $500,000/year.
Assuming the same changes in employee costs, Store B has an annual cost of $234,000 per year. Again increase the wages to $12/hour and the employee cost goes to $373,400/year.
Now that cost increase still represents a 28 percent decrease in the profits of the store.
However, the profit available to the employers — $35,960 for Store A v. $359,600 for Store B is dramatically different.
And keep in mind that a store with 10 employees and annual sales of $5,000,000 might still qualify as a mom-and-pop operation in some circles.
I’ve worked as a magazine editor for a publishing house with hundreds of employees and sales measured in the hundreds-of-millions and a family-owned publishing house with 25 employees with sales of less than 10 million. The slightest increase in costs at the lower level could threaten the existence of the latter while only disturbing the stock holders of the former.
The mom-and-pop exclusion makes the same sense as our present system of progressive income tax. At a certain point on the profit curve the meeting of expenses for business and personal necessities ceases to become an issue.
Ramp my figures up to Wal-Mart scale — a factor of 690,000 (690,000 x 500,000 = $345,000,000,000) — and the mind must boggle about why a company can’t pay a living wage.
Granted, I’ve used ball-park figures here and I’d be very interested if someone wants to break down real Wal-Mart numbers of profit versus employee costs, but I still feel that there is an obscenity of global proportions involved in this issue.
B’shalom,
Jeff
To recoup the higher labor costs of $14K the store has to raise its prices by 2.8%. So the store has to raise the price of a $1.29 bag of chips by 4 cents to $1.33.
If this is going to make a difference to the viability of the store then there is something wrong with it to begin with. I think this is actually true in more cases than we appreciate. Owner run business and farms don’t account for the labor costs of the owners properly. If they paid themselves at a suitable rate they would find that they are actually not worth doing. How many small farms yield $100K per year, but don’t factor in that the farmer is working 15 hours a day, 365 days a year? That’s about $18 per hour. Considering that the farmer should be treated as using managerial skills (at least part of the time) this isn’t much.
The same is true for the small store owners. Using your family as unpaid labor just makes the comparison worse.
You could argue that larger enterprises are more efficient, and this is exactly what we know is true. That’s why family farms and mom and pop stores have been disappearing since the beginning of the industrial age.
There may be a role for small enterprises, but it has to be in niches where size is not important. Isn’t that what you have been arguing for years Jeff?
If one wants to argue that there is some reason to encourage inefficient businesses to continue then it can’t be on an economic basis. In the third world, for example, subsistence agriculture is defended as a way to keep rural communities viable and peasants employed. Even there this argument seems to be failing as the boom in urban populations demonstrates.
It would require a rethinking of the entire concept of “economic efficiency” to make society support small enterprises.
Jeff-
Using Wal-Mart’s reported average full-time hourly wage of $10.51/hr and assuming health benefits expenses of 7% of salary for half of the associates, Wal-Mart could pay each associate $13/hr in wages and health benefits (the original Chicago bill’s requirement) by raising prices on all items by roughly 1.5%. One can estimate that this means it would take no more than a 3% price increase to do the same for all workers.
However, when talking about raising prices, one must consider that Wal-Mart’s business model is reliant on low prices. If its price advantage erodes, the retailer is finished unless it makes serious changes.
I think the thing that most people are missing here is that it isn’t the government’s job to make Wal*Mart or any other large company pay “more” than a Mom and Pop store “just because they can”.
Personally, I firmly disagree with Government Mandated minimum wage laws to begin with and feel that they both create less jobs and make it harder for “unskilled” labor to get a basic job, but that’s a whole different issue. To create laws that make different rates of employee pay based on how successful a company is? The entire concept is just crazy and it’s just more government sticking its nose where it doesn’t belong. Or, in this case, the government being weasled into sticking its nose where it doesn’t belong.
Oh, and John, I know the numbers in your post were made up off the top of your head, but they’re not correct to begin with. You based all your figures off the Mom and Pop store only having one employee – the clerk. Yet, in reality, they have three employees – the clerk, Mom and Pop. Which means that you’d have to increase the workforce of Store B to 30 employees, not 10.
So, 30 employees at $12 and your additional numbers, you come up with Store B paying out $1,123,200/year for their 30 employees. Take that out of their $500,000 profit and Store B is suddenly $623,200 in the red.
Or more than the Mom and Pop’s stores sales for the entire year.
But I guess it’s all moot since those numbers were pulled outta… where was that again?
I kid, I kid…
UncleBob-
Are you the same UncleBob from WWS?
Yes, that would be me…
[...] CHICAGO UNIONS CRACK OPEN DOOR… Don’t look for any great session of back slapping and exchange of rude party jokes anytime soon, but there does appear to be some light showing through a barely cracked door in Chicago over the living-wage issue. From WMAQ: Keep reading… [...]
Shalom Robert,
Obviously I get into serious trouble when I try to make up figures for an example.
The point I was trying to make however, is the regressiveness of living wage laws when applied universally.
A small retailer has less cushion to absorb increased costs than a large/mega retailer that can take advantage of economies of scale.
B’shalom,
Jeff
Shalom Someone,
I’m sure that Wal-Mart knows this figure precisely, but I’d be curious as to what the margin difference is between Wal-Mart and those chains it perceived to be its closest competitors.
I’m sure it’s not as wide as the general population believes it to be.
Having said that, if the rule is applied across all retailers above a certain sales or personnel line, the change in competitive position would shift up without giving anyone an advantage.
B’shalom,
Jeff
Shalom Uncle Bob,
Yes. I did pull the numbers out of thin air. And that’s where I do get into trouble.
I didn’t count mom and pop in the equation because owners, in the eyes of such ordinances, don’t draw wages.
It’s times like this I wish I’d paid more attention in micro and macro economics.
I do agree with you that minimum wage laws are ultimately counter-productive. Raising the minimum wage is more about increasing the wages of those whose pay is indexed to the rate.
Having said that, I’d point to something Jeremy Rifkin discusses at length in his book The End Of Work. The single most dangerous force in History has always been large bodies of unemployed young men.
Abandoning the industrial economy and rapidly making the transition to a financial economy we are leaving a dangerously large number of young males behind.
The Chicago ordinance does not address this issue and is more of a band-aid on a much serious problem than anything else.
But even short-term actions can have positive consequences.
Henry Ford realized that if he didn’t pay a living wage to his employees, there would be no one to buy his cars.
Wal-Mart, and other large, cost-focused retailers are dangerously close to being in a place where their own employees won’t be able to shop in their stores.
B’shalom,
Jeff