It’s hard to feel sorry for businesses that don’t react to
market changes in a timely manner. We have previously written about firms that
couldn’t keep up with changes in consumer tastes (Krispy Kreme), or to changes
in technology (Kodak, Borders, Best Buy). This story is a little different
because in involves the effect of consumer demand on labour markets.
A recent Bloomberg News report that we first saw on Yahoo! News confirmed by our own observations, tells about the vast empty spaces on
Walmart shelves. Unlike firms that are on the verge of bankruptcy and can’t
afford to purchase additional merchandise, Walmart’s problems are caused by
large numbers of consumers. Walmart has plenty of stock, it’s just hidden away
in the back of the stores. Walmart has a labour problem.
When the economy collapsed after the financial crisis,
household incomes fell and consumers spent less. A decline in consumption means
less revenue for firms. When revenues decline, firms have to reduce their
costs, typically by laying off workers. During the height of the recession in 2009-10,
the unemployment rate hit 8.7% in Canada and 9.7% in the US.
When there is an excess supply, there is downward pressure
on prices. Unemployment is an excess supply of labour and, during the
recession, there was downward pressure on wages. Walmart was able to capitalize
on this, not by ‘screwing workers’ as on commentator in the article put it, but
by taking advantage of market prices.
As with all previous economic downturns, the post-crisis
recession eventually ended. Consumer spending started to increase and the
demand for labour recovered. Unemployment started to fall and there was upward
pressure on wages. Walmart didn’t react. Target and Costco apparently did.
If Target raises wages and Walmart does not, we should
expect workers to leave Walmart to work for Target. Staffing levels rise at
Target and fall at Walmart. Customer service at Walmart falls because they
don’t have enough cashiers and store shelves stay empty because they can’t hire
workers to restock them.
The same commentator that accused Walmark of screwing
workers also claims that workers that are treated better are more productive.
This may not be entirely accurate. Workers at Target have to be more productive
than workers at Walmart to keep their jobs. The premium that Target pays their
workers prevents them from shirking their responsibilities. A worker that loses
their job at Target is forced to go back to work for Walmart. This is the
efficiency wage argument made by Alchian and Demsetz in their 1972 paper published in the American Economic Review.
The market for labour is not that much different from any
other commodity. When demand falls, price falls and when demand rises, price
rises. In an effort to keep costs down in a recovering economy, Walmart
management has found themselves with a shortage of workers and with employees
that are less productive than employees at their competitors.
