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.
- Allen
As long as corporate incentives are wrongly linked to stock price, managers will make decisions to improve stock prices. Warren Buffett is quoted as saying that: if you manage your company well your stock price will follow. We need get out of the "shareholder value" mentality and get back to the "stakeholder value" model.- Ken Workman
- Director, Predictive Analytics
Standing on our knowledge of wealth, income, and productivity gains, the problem is screaming. Wal-mart took a bold, envisioned step that will bode well for its future performance, but the national problem remains. If Wal-mart is an indication, corporate America sees this, and accepts its responsibility to redress for its part. Nationally, that same foresight needs to address the labor skills gap that produces the perverted effect of outsourcing, tax "inverting", and collecting advice from on high to act other than in stockholders' interest. This growing discrepancy will not fix itself, and needs yet another public/private initiative to bring our labor up to global competitiveness in terms of productivity. The street fight for higher wages, railing against outsourcing, and political haranguing are the result of inaction at the core.- David Wittenberg
- CEO, The Innovation Workgroup
At the core of this debate is a clash of values. Some believe that equality of incomes is a higher value than freedom to contract, while others argue the opposite position.Government interference in markets always produces economic inefficiency. The question is one of degree: how much taxation and regulation do we want, and for what reasons.
One error is to attempt to level income in one country while ignoring the emergence of low-cost competitors. Benefits to labor in such countries have been large, but they are not sustainable indefinitely.
Likewise, in the developing world, governments like that of China, whose policies have promoted growth over income equality have seen rapid growth. Others, such as India, where I live, have grown less rapidly, but have less inequality.
If growth is the highest goal, then we must resign ourselves to greater inequality. If equality is the highest goal, then we must resign ourselves to slower growth.
- J Schmidt
- Chief People Officer, Hi-tech Company
The foundational source that made America the great productivity force in the world is the same source that makes for great companies. This source is a shared vision. A government-forced minimum wage does not take into account other important shared interests of the company and its employees to achieve employment longevity, skills development, promotions, improvements in pay and benefits, excellence in management of people and the workplace and investments in new or improved products and services that increase market share and profits. It is these shared interests that support the future of the company and its employees. Unions tend to act as adversaries to the company instead of business partners in a shared vision for building companies for long term success. The union's interests tend towards short-term dollars for members who generally receive a pittance of the share that ends up lining labor leader's pockets. One's best bet is onthose companies who have a shared vision to create the desirable outcomes for the good of the company and the employee. These are the companies that get recognized as a "Best Companies to Work For in America" and are also notable for their longevity and profitability. More and more companies like Walmart are learning from these "best companies" not from Unions or from Government mandates.
- Fred
- Associate, Page
The opinion that this is emblematic of the free market functioning, is well founded here, though I think many downplay the role of government in this decision by Walmart. What role to government you ask? Why the threat of action. Even though governments, at the state and federal level in this case are reluctant to raise the minimum wage. Walmart has seen the pressure they are under to do so. I think it is a fear of government action that has driven Walmart to act. Walmart has acted here to stave off some of the strongest arguments for government intervention. Namely, the random scheduling and denial of benefits and opportunities practices that were most offensive to free people's sensibilities. It is these practices that leave reasonable legislators questioning the sincerity of the employers and also leads low wage employees to feel most oppressed and helpess. They are the practices that strengthened the movement for an increase in the minimum wage. ( Minimum wage legislation being the easiest to understand and the best political slogan, is by no means the only issue on the table here)
The threat of intervention in unfair situations is in fact a force of the free market. Government in a democracy being eventually accountable to the people.
- Peter Lee
- Mg Consultant, RDS Remuneration Data Specialists
Not sure how a truly free market will work as there are no truly free markets today.Today in the US & practically everywhere else, big money buys influence everywhere resulting in the less paid and disadvantaged being penalised even more unfairly.
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.
- David Goodnow
- returning student, Amarillo College
I see what Wal-Mart is doing with wages through three lenses:First, potentially a return to the policies advocated by Sam Walton before his children took over the company he built and pitched his rule-book. This would be unpopular with short-term traders, but investors were certainly not diminished by his results. The children running his company have done well for short-term traders, but not well for U.S. manufacturers, global business partners, employees, and long-term investors.
Second, there is the possibility of some behind-the-scenes horse-trading that is very much opposite of laissez-faire--in this scenario, there has been a tremendous amount of pressure from progressives to get Wal-Mart's current board to stop sucking so hard at the government teat. Wal-Mart is a major U.S. employer, true, but most of those employees are receiving food stamps, government housing assistance, medicare--and Wal-Mart is exempt from providing employee medical insurance, unlike small and mid-size businesses; further, not only are a majority of its employees on food stamps but the federal government pays each store to employ people who are on food stamps, actively encouraging management to keep wages low! Wal-Mart is a huge anchor on the U.S. and global economy, at least equal to its current benefit.
Third, anyone who lives in the real world knows how little any press statement can be trusted--let's see the ledger books. What is the likelihood that this will turn out to be a confidence-booster to a large and disgruntled workforce who have consistently seen their long-term benefits cut year after year? Wal-Mart used to profit share--no more. Wal-Mart used to have decent medical with cost-sharing that employees were educated to understand was directly linked to their pay and their profit-share--no more. Wal-Mart used to be a long-term employer--no more. In trying to cater to foreign suppliers, Wal-Mart cut the throats of their U.S. suppliers, even to the extent of lobbying for reduced tariffs. In catering to a capricious and disconnected stock-market, Wal-Mart has cut the throats of its employees and long-term investors.
At this point, no one with two functioning brain cells should trust any marketing announcement by Wal-Mart's board--there is every reason for distrust--so let's see what an independent audit (say, by the SEC or IRS) of their ledger shows in a year or two.
- Aim
- Drilling Supervisor, KOC
Professor Hesket,Whatever the approach, please do not try what we do in Sukinistan (made up for anonymity):
Around every June/July period tax authorities bang on doors of small businesses to make up for shortages in tax revenues across the industries which are suffering from efficiency and productivity.
I will give you an example of an employer who wanted to hire me: This is a small time auto parts dealer who started off his business by hand carrying the metal parts, eye watering effort, in large bags in trains between one ex-Soviet satellite state and the Mother Ship, the "developed neighbor". Now an established business man, I asked him how he deals with authorities, given the endemic levels of corruption, he replied that they come regularly and ask for a very variable amount of money which is on top of taxes that he already pays yearly. His bank account statements are far from private and are visible through attorney generals to tax collectors. These are of course state controlled banks. He also added that this is a normal practice and nobody can escape it because of the top down order (it was sufficient to turn down the job for obvious reasons in an already challenged part of the world, but that's a different topic for another day).
The morale: you in that part of the world, with freedom of speech and what not, have the advantage of stating it out openly that there is inequality. Among the satellites, and various other corrupt governments around the world, not only is there a corrupt means of tax allocation starting from kindergartens (you read this right!) to large scale construction projects, mainly through graft but also forced, invisible hand reallocating the same resources right after. The result is a destroyed economy and confidence of consumers/investors and a huge brain drain.
According to methods of Albert Einstein, who spent 90% of time pondering about the problem and only devoting 5-10% of his time to the solution, you in the developed nations are already on the way of finding a solution to a jammed resource allocation post financial crisis / automation.
As for my input to the question:
Although low interest rates are helping debtors by sacrificing savors, there is still long way to go and perhaps it is best if all the parts of society cooperated together in order to re-balance the wealth distribution. Definitely the voluntary actions of Walmart are not replicate-able but is the best approach to solving systemic problems until a more permanent one can be found. Besides, this was already tried by Henry Ford who reasoned that by paying higher wages there would be more people on the streets who could afford his products.
Please do keep it up and show the rest of the world by continued example of discussing social problems openly.
Best regards,
Aim
- Rod White
- Associate Professor, Ivey Business School
Wal-Mart's actions raise an interesting question. When is it in an employer's self-interest to voluntarily increase the wages of their employees? Of course the classical economics answer is "never". This assertion is based upon the assumption that perfectly competitive markets will lead to the optimal allocation of resources within the economy. Of course labour, capital and product markets are not perfectly competitive. And Wal-Mart's actions are not without precedent.Henry Ford voluntarily agreed to pay his employees $5 a day when the prevailing wage rate was closer to $1 a day. Ford did so on the simple premise that the people producing a car should have the income and purchasing power to be able to own a car. Underlying this premise is an important truth. Within the overall economy production and consumption (aggregate supply and demand) will approximate an equilibrium. And consumption is affected by the distribution of income (or wealth). Having a broad middle class leads to the demand for goods and services which in-turn helps to create the employment and incomes that sustain and grow that middle class - a virtuous cycle.
But many fear this virtuous cycle has been interrupted. Many factors may be implicated in this change: globalization, primacy of shareholder wealth creation, changes in corporate governance and agency, move to the service economy, etc.
Wal-Mart's actions can be construed of as an attempt to redress the imbalance between the ability of the average Wal-Mart employee to purchase the average Wal-Mart product. Admittedly this 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. If other large global corporations (e.g., Foxcomm) follow Wal-Mart's lead perhaps we can broaden the global middle class and re-establish Henry Ford's virtuous cycle.
- John Stengrevics
Walmart's actions are not an example of "laissez-faire at work." It is precisely because many cities and some states have already enacted legislation to increase the minimum wage that Walmart has acted. Walmart's actions, or rather reactions, are proof positive that it is necessary for government to act if change is to be expected. And, they are getting ahead of the headlines while they still can. Not a bad move if your the management of a company as negatively reputed as Walmart.Republicans really need to think a little bit before spouting their anti-government, anti-union stuff. They need a reminder that the U.S. economy is a consumer economy. It is driven by the average person having enough money in their pocket to buy the products and services that corporate America sells. Drive the average American down and consequently the American economy will be driven down.
Question the value of training programs and apprenticeships? The power of the German economy is the only example one needs.
John Stengrevics
HBS DBA
- Kapil Kumar Sopory
- Company Secretary, SMEC(India) Private Limited
Minimum wages need to be and are fixed by the Government. However, in real terms, markets determine actual wages sought and paid. Thus, though not entirely so, some sort of laissez faire is in operation. This is a good mechanism but it need to also have limits to avoid subjectivity by awarding those who may not actually deserve.- Harlyn Sianturi MM
- Risk & Asset Manager, PT Kaltim Prima Coal
Leaving labor wages solely in the hands of todays market will most likely make it status quo or even going down and down simply because it is currently a supplier market. I would suggest an implementation of a beter legislation that is fair and just to both industries and labor themselves will produce a more promising result. Thanks.- Gerald Nanninga
- Principal Consultant, Planninga From Nanninga
The problem with universally mandated rules of business (be it wages, hours or whatever) is that it limits strategic options. In order for everyone to meet all the government requirements, they have to take similar approaches, so everything takes on a certain blandness of uncreativity.Why experiment, if your experimentation is going to take you into places blocked by universal rules of operation?
Europe's highly regulated approach to retail has stifled mass merchandising there and left them with inefficiencies and blandness.
At least with the laissez faire approach, there is room to try bold, out of the box solutions.
The Gap raised their wages months before Wal-Mart and do you know what happened? All the best employees in the mall applied to work at the Gap, so now the Gap has a competitive advantage in the mall related to service. That would have never happened if the increase was mandated to everyone. Then, all stores would still have mediocre service, only at higher prices.
It's really all about balance. All the stakeholders (employees, owners, customers, communities, suppliers) need to have some power in the game. Otherwise, some will be exploited by others.
As long as there is broad legislation to keep power in balance, you don't need to micromanage all the particulars, like individual wages. It will take care of itself. And you also get more creative strategic diversity.
- Vishwanath Pujar
- Team Lead, Altisource
Short term pain is long term gain. Organizations need to focus on employee retention at all levels and not just the creamy layer. Satisfied internal customers results in satisfied external customers. We cannot have 80% of salary distributed among 20% employees and remaining 20% salary among 80% employees. One of the solutions is to have organizations define clear rationale for every "Job Family" salary. As organizations mature, they tend to understand that stakeholders are equally important as shareholders. Instead of an outside regulation, an internal governance on salary structure, which is based on the a value that "Every employee should go home with a smile on his face" will create win-win situations for employees and organizations.- AdeloVant
- Retired, None
Jim,A nation's economic model must promote socio-economic balance or risk collapse (depressions, recessions, resource [capital, material, people ...] diaspora, and then model replacement). Walmart's recent action lessens the cost of living burden on wage-hands/slaves and offers XYZ for faux-capitalism market advocates too cheer. Governance is not "Government Intervention." Wealth disparity (US, EU, global ...) is an economic functional deficiency problem. National resources/wealth removed from circulation in an economy assures some form of capital collapse within market sectors (S&L, Tech, Housing ...). Governance is the method required to pump money into the failed economy with hope for economic stabilization that will eventually kick-start the functionally deficient economic model.
Wealth disparity caused by markets' failures in ethical governance of the economy. Governance of a functional economy, when done honestly by the markets (industry, banks, infrastructure ...), not gamed for profits/greed, will not require "Government Intervention" to govern the economy. When we cannot trust the market and corporate-stewards of the economy, then "We The People" have a Government that ethically and economically must intervene for the welfare of the Nation not just the markets a/o wealthy sectors of society.
The USA Republic initially was a timocracy-isocracy democracy mix, with a monetized agrarian-barter economy.
The USA Republic presently has a more plutocracy-timocracy democracy mix, with a flour-paper mashie economy.
The USA Republic must mature into an isocracy democracy and a capitalist meritocracy economy with the Nations' wealth circulating. IOW: All the wealth belongs to US. If you want to move to another country; PLEASE, pack your bags and go. FACT: "We The People" do not need greedy whips whining about their economic value to US.
Laissez-Faire, or Laissez D?s R?le, a/o Bonne Chance, are irrational and dysfunctional economic models that dishonestly removes resources from economic circulation into a few private hands. Capitalism must be meritocracy, not aggregation, based. Capital/resources hording has no merit in any economy, unless some folks are seeking civil unrest without consideration of historical events.
- Paul
- Citizen, MBA '71
In the current national (US) legislative arena, it's unlikely that anything other than laissez-faire will take place regarding wages, and certainly there will be no consideration of raising the minimum wage.This is a result of our election system that almost inevitably requires vast contributions before a person can effectively run for office. Once elected, that person (the newly minted politician) is beholden to donors. Once in office, politicians often focus more on raising money for reelection than on doing their job as legislators. For this we can thank the "wisdom" of the US Supreme Court.
It goes without saying that almost nobody is elected who depends on donations from those who earn the minimum wage.
That said, there is no restriction on companies paying employees more when they need to attract more or a better workforce.
Up until recently the general economic reality has been too many lower-skilled potential workers chasing too few jobs. Now that the US economy is finally adding jobs -- despite the efforts of most Republicans in Congress -- job seekers are able to quit stingy employers to accept jobs from more enlightened employers.
The fact that Walmart is offering more should be read as a realization that they need better employees; it is not that Walmart is being altruistic.
Thank goodness there are some progressive local governments, like my Seattle, leading the way in updating the local minimum wage. Gradually we will see other communities and states follow suit. Nationally, I doubt we'll see any change as long as the current "I'm-more-conservative-than-you" Republicans hold power.
- Ann Heekin
- President, Don Bosco Workers
Another issue on minimum wage is the degree to which the law is ignored. Studies show more than 60% of low income workers experience wage theft weekly. This violation of wage law not only worsens inequality for the worker, it's prevalence undermines all trust in an open labor market and enforcement's ability to keep up with violators.- Joseph Harris
- Owner, S P Publications
Depends what you mean by "lassez faire"! Walmart has been receiving bad publicity for a long time and has been shedding customers in a highly competitive period for retail.Then it depends on the quality of staff that a company decides it needs. Muppets are cheap, people who will take care and responsibility are not.
But what needs to be addressed for theories is the long period when Walmart followed a deliberate policy of destroying small retail, and employing the resulting unemployed owners and staff on low wages. This way, laissez faire [or as it is interpreted today, crack the whip] has important social consequences.
Which places the Walmart action in a wider context, and asks the question that needs to be answered before evaluating laissez faire in relation to Walmart. What objective are you pursuing?
In brief, the modern form of laissez faire is the rule of the big bully. I suspect, in the face of mean pay and mean conditions, that sub-cultures have drawn away not only customers, but staff also.
Comparisons of pay values may show that the staff still lose out, and that the company may find its goodwill has eroded, both resulting from laissez faire attitudes.
- Mathews Daniel Kapito
- DIRECTOR, Notebook Solutions
We have always encouraged innovation, yes. Being more of an entrepreneur than mare employee at our organisation.Results show that, employees who have been much more innovative and productive have had a dramatic increase in their pay over the years. This clearly show that Laissez Faire system would work for employees to set their wage. However, the global culture of management superiority and chain of command would need to be dessolved and structures will soon fail.
The reality is that, in today's dynamic and competitive labour market new tool must be put to use one of which is the system in question. To be effective, this must only be regulated and limits set supported by performance indicators that form the basis for the raise. This, in my opinion will transform the labour market and productivity while motivating employees. The question that will in the long run bring the scientific principles to life.