Shoppers Return and Workers Leave

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.