This blog is not about the evil dragon, it’s about the
dragon slayer. In particular, the efforts of the Washington DC city council’s
effort to penalize the company for wanting to create 1800 jobs in their city.
In early September, the council voted to impose a minimum wage premium of 50%
on big-box retailers. This would raise the minimum wage from $8.25 per hour to
$12.50 per hour. The increase would be effective immediately for new entrants
while existing retailers would have a four-year exemption. See the Reuters
article for details.
The rationale of city council, according to Council member
Vincent Orange is that “the value of our residents’ time is greater than $8.25.
If that is true, I’m out of a job because economic theory is clearly wrong. The
supply of labour is determined by the marginal value of leisure time. If the
offered wage is greater than the value of leisure, people will sell their time.
This follows from the assumption that individuals will act rationally, at least
on average. There are people working for the minimum wage in Washington DC and
doing so willingly (since slavery was abolished a long time ago). Therefore it
is fair to assume that there are some people who value their time at less than
$8.50 per hour.
To be clear, they are not happy about it, but that is
natural. Work is bad. Play is good. That’s why we require compensation.
Backers of the bill justify the wage hike because “Walmart
can afford it”. That is not the issue though. Firms exist to make profits.
Without profits they just fade away. Where are Blockbuster, Borders and Kodak?
Reducing a company’s profit removes their incentive to create jobs. In the case
of Washington DC, Walmart could be at a disadvantage relative to Target since
Target gets 4 more years at the existing minimum wage.
If there is a demand for Walmart in the DC area, then the
optimal thing for Walmart to do is to build their stores outside the DC area as
close as possible to the border. That way, DC residents will be able to enjoy
Walmart’s low prices and cities in Virginia and Maryland can enjoy the benefits
of the tax revenues.
There is still the possibility that DC Mayor Vincent Gray
will veto the bill. Until the issue is resolved, expect Walmart to do nothing.
The people that lose in this case are the shoppers in DC and the 1800 people
that would have had jobs.
