Walmart’s Investment in Workers

In Still Broke: Walmart’s Remarkable Transformation and the Limits of Socially Conscious Capitalism, Rick Wartzman acknowledges some steps Walmart has taken to invest in its workforce, but concludes that Walmart still has quite a way to go to become a “just” employer. The book is off base in several important respects. And this matters precisely because Walmart is taking such important steps to invest in workers, contributing to the potential creation of a “high road” model of employment among retailers.

Wartzman tells much of the story of Walmart and highlights the company’s steps in the direction he thinks Walmart should travel. Here’s a summary from a Financial Times review of his book:

[Walmart founder Sam] Walton and his successors adapted to the digital age and changing social values — in the process being first vilified and later praised by former US president Barack Obama. They were apparently largely driven by a view that such evolutions are also good for business.

They embraced green issues after Peter Seligmann, head of environmental group Conservation International, cunningly cultivated Rob Walton, Sam’s son who succeeded him as chairman. Seligmann took him on trips from Indonesia to Costa Rica to see the damage being wrought on marine and wildlife habitats.

Over the years, they also took steps to tackle a poor record on promotion of women, offered parental leave and training, and enhanced medical support for staff — and more affordable generic medicines for Walmart’s customers.

Yet Wartzman is troubled by the level of compensation for Walmart employees. He argues that his “two-year dive into Walmart has caused [him] to reconsider” the role of government. “Yes,” he writes, “business can and should do more. Much more. But unless there is a government mandate, Walmart — and most every other company in America — will never move far enough or fast enough to provide people with a genuine living wage.” He argues that “more than anything,” the government should “require that companies pay their workers enough to live on. What this looks like,” according to Wartzman, “is not a mystery.”

This represents a common misunderstanding of how wages are determined. I have come to the view that employers do have some “market power” in setting the pay of employees — but relative to a baseline set by market forces. In the main, workers’ wages rise because their skills improve, the market demand for their skill set increases, or the supply of available workers with their skill set becomes scarcer.

In a recent paper on the determinants of wage growth among lower-wage workers, my co-author and I conclude the following:

On average from 2010 to 2019, we find that roughly 75 percent of minimum wage workers who remain employed experience a wage increase within 12 months. This fraction is higher during the later years of the sample, when the labor market has been strong, than in the earlier years. The fraction of minimum wage workers receiving wage increases is moderately higher when states enact minimum wage increases than when they do not. We also find that the fraction of minimum wage workers receiving wage increases is correlated with several measures of labor market tightness. Finally, wage gains are quite commonly associated with industry and/or occupation switches. This highlights the importance of career progression for the growth of earnings among entry-level workers. The vast majority of the wage gains realized by minimum wage workers thus appear to be driven by career progression and increases in labor demand. Minimum wage increases play a modest role as a driver of earnings trajectories beyond shaping the initial, typically short-lived, minimum wage job itself.

When the book veers into economic analysis, it often cites progressive sources that paint a distorted picture of the reality of the lower-wage labor market and of the overall economy. For example, Wartzman recounts showing Walmart CEO Doug McMillon a chart from the Economic Policy Institute that concludes that the link between worker pay and productivity was severed decades ago.

But, as I discussed in a paper for the Aspen Economic Strategy Group, when properly measured, that is not the case.

Wartzman also understates the significance of the steps Walmart has taken toward becoming a “high road” employer.

What do I mean by “high road?” The high-road hypothesis: By investing in workers, a retailer might not only be a “better” employer. Such investments might also help the company’s bottom line.

If the high-road model is shown to be a success, it would have significant implications for workers in the lower-wage labor market.

A recent Wall Street Journal article summarizes just some of the steps Walmart has taken in recent years:

Walmart wants to better use the 1.6 million U.S. employees it already has and broaden the company’s appeal to prospective job seekers. So far, that has included raising pay for thousands of workers and offering more and better opportunities for training.

Walmart leans on U.S. store managers to fuel the engine of its largest and most profitable unit. Traditionally candidates for those roles are promoted internally, working over nearly a decade to train as assistant store managers and then what Walmart calls co-managers before taking the top job.

Around 75% of Walmart managers started out as hourly workers at the company. Walmart aims to protect that pipeline by attracting more college graduates and outside hires and then fast-tracking them into managerial roles.

Walmart has also recently created innovative training programs and free college tuition for its employees.

Wartzman also gets the political economy wrong, making the same mistake that other proponents of “living wages” make. From my 2015 Washington Post op-ed on the subject:

Society should have as a goal that no one who works full time and heads a household lives in poverty. But since this is a social goal, resources from all of society should be marshaled to meet it. The argument that low-wage employers are doing wrong by paying so little that some of their workers qualify for government assistance suggests that the responsibility of ensuring an adequate standard of living for these workers falls solely on the businesses which employ them. This is a very limited vision.

McDonald’s and Wal-Mart should bear some of that responsibility, sure. But not just them. Hedge fund managers, corporate CEOs, well-to-do economists and law-firm partners should pitch in, too. Resources from all of society — including, but not limited to, low-wage employers — should be used to ensure that no one who works hard lives in poverty.