Walmart … The Company We Love to Hate

One would think that, with all the people who claim to hate Walmart, they would be out of business by now. Apparently, they are not. For the year ending July 31, 2013, Walmart reported revenues of USD 473 billion. On average, everyone on the planet spent about $80 there last year. Clearly number one on the “hated company” list. See Walmart financial data on Yahoo!.

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.