Summing Up
When Is It In An Employer's Self-Interest to Voluntarily Raise All Wages?
A laissez-faire approach to fixing labor market inequality has widespread appeal, judging by responses to this month's column.
For some it is an ideal, whether or not it can be achieved. As Vishwanath Pujar said, "Instead of an outside regulation, an internal governance on salary structure, which is based on a value that 'Every employee should go home with a smile on his face' will create win-win situations for employees and organizations" Allen added: "We need to get out of the 'shareholder value' mentality and get back to the 'stakeholder value' model."
Others see it as the only practical resolution of the problem of growing inequality. As Paul commented, "In the current national (U.S.) legislative arena, it's unlikely that anything other than laissez-faire will take place regarding wages …." Gerald Nanninga concluded that, "The problem with universally mandated rules of business (be it wages, hours, or whatever) is that it limits strategic options…At least with the laissez faire approach, there is room to try bold, out of the box solutions… As long as there is broad legislation to keep power in balance, you don't need to micromanage all the particulars, like individual wages." AIM expressed the opinion that "the voluntary actions of Walmart are not replicable but it is the best approach to solving systemic problems until a more permanent one can be found." This was tried by Henry Ford, Nanninga continued, "who reasoned that by paying higher wages there would be more people on the streets who could afford his products."
Others would place less reliance on a free market solution. Peter Lee commented that "(I'm) Not sure how a truly free market will work as there are no truly free markets today… Perhaps a proper study on how big money rigs and biases things in its own favour should be first carried out before deciding how this can be remedied." Ken Workman was clear about his doubts. As he put it, "This growing discrepancy (in incomes) will not fix itself, and needs yet another public/private initiative to bring our labor up to global competitiveness." John Stengrevics sounded the call for government involvement this way: Walmart's actions are not an example of 'laissez-faire at work.'" Walmart's actions, or rather reactions, are proof it is necessary for government to act if change is to be expected. "Question the value of training programs and apprenticeships? The power of the German economy is the only example one needs."
In expressing optimism about free market approaches to the challenge, Walmart's action raised an interesting question for Rod White. "When is it in an employer's self-interest to voluntarily increase the wages of (its) employees? Of course the classical economics answer is 'never.' … Admittedly (Walmart's) … will be a small contribution to closing the aggregate global production-consumption gap.
But any journey begins with one person or corporation taking the first step in the desired direction." Do you agree with White? What do you think?
Original Article
Inequality, an important issue in the world today, often brings up the subject of wage disparity, which is more a symptom than a cause of the larger problem. These discussions often elicit an observation that, in many developed economies, too many workers can't live on the money they make. For whatever reason—globalization of and competition for jobs, the decline of the bargaining power of unions, competition based on lower prices and costs, the failure of governments to take action—inequality appears to have increased over the past three decades in many parts of the world. A strong economic case can be made that consumers and investors have benefitted at the expense of labor, with Walmart being a prime example.
Three remedies are often proposed for the problem:
1. Legislated increases in the minimum wage
2. New laws that support unions and raise their bargaining power
3. Government-financed education and training programs such as an apprentice system, similar to ones in Germany and other countries.
Implicitly, there is a fourth remedy—a laissez-faire approach that encourages but does not require employers to take actions in their own interests to raise entry-level wages and improve jobs. Until recently, this last idea often evoked some eye-rolling, as if to suggest that no one should hold their breath waiting for a hands-off approach to work.But now a recent announcement by Walmart's management to raise minimum and average wages paid by the company has changed the tenor of the conversation a bit. It's an example of laissez-faire at work, although the effect of the move on Walmart's average wage levels is quite small. What is more significant is Walmart's announcement that it will provide more regular work schedules, increased opportunities for advancement, and a focus on recruiting and retaining "better talent so it can improve its business … (with) better-run stores, more satisfied customers and an increase in sales and profits," according to one report.
Investors didn't approve. As usual, they took the short-term view, immediately knocking down the price of the company's stock.
This is either pretty exciting stuff or small potatoes, depending on your point of view. Here's a management that may actually believe it can achieve wins for customers and investors by engineering a win for employees, something that several of us have written about for years. Walmart's management may also believe that higher wages (up to a point) can actually increase job openings through better service, higher sales, and more profits. Or it's a management that is sufficiently desperate for good headlines about its hiring and employment practices that it is willing to raise pay a bit to its lowest-paid workers.
It's clear that some amount of redress of the imbalance of returns to labor, capital, and consumers is needed in many parts of the world. What is the answer? Is it government action through such things as minimum wage legislation? Is it new legislation to enable labor to organize itself more effectively? Is it public sector support for worker training and education? Or is it just allowing markets for labor to function freely, for better or worse?
Can a laissez-faire approach to labor markets work? What do you think?
To Read More:
Anne D'Innocenzio, Half-million of Wal-Mart's US workers to get pay raises as part of $1B investment, Associated Press news wire as reported in US News and World Report, February 19, 2015.
Leonard A. Schlesinger and James L. Heskett, "Breaking the Cycle of Failure in Services," Sloan Management Review, Spring 1991, pp. 17-28.